Oshkosh Corporation (OSK) Q3 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Oshkosh Corporation Reports Results for Third Quarter. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Mr. Davidson, you may begin.

Thanks, Latonya. Good morning, everybody, and thanks for joining us. Earlier today, we published our third quarter results for fiscal 2011. A copy of the release is available on our website at oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months, and please refer now to Slide 2 of that presentation. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different. These risks include, among others, matters that we have described in our Form 8-K, filed with the SEC this morning, and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all. Presenting today for Oshkosh Corporation will be Charlie Szews, President and Chief Executive Officer; and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please begin by turning to Slide 3. And I'll turn it over to you, Charlie.

Thank you, Pat. This morning we have 3 objectives. First, we will review our third quarter results; second, we will introduce qualitative guidance on fourth quarter and next fiscal year; and third, we will introduce and explain our new multiyear growth strategy, which is a culmination of a comprehensive 6-month study. This will allow us to explain to you, our shareholders, as well as our employees and customers, how we expect to drive through the uncertainties of the pending U.S. defense spending decline and slow economic recovery to deliver strong returns for shareholders, growth prospects for employees, all while delighting our customers. So let's get started on those objectives. For the quarter, our sales decreased 17% to $2 billion, leading to operating income of $126 million and EPS of $0.75. As was the case during the first 2 quarters of fiscal 2011, lower sales of M-ATVs compared to last year drove the EPS decline. Our Access Equipment segment delivered improved performance, largely due to U.S. rental customers continuing to invest in new equipment to reduce their average fleet age. In fact, JLG's sales to external customers grew 44% compared to the prior-year quarter, resulting in the segment's strongest single quarter for Access Equipment sales in several years. Last quarter, we told you that we plan to triple our daily FMTV production rate by the end of calendar 2011, while we're on track to deliver that schedule by doubling daily production from month end March to month end June to over 20 trucks and about 10 trailers per day. Our team has put forward a phenomenal effort to make this progress. Finally, our defense leadership team has visited our army customer, and it was clear that we are meeting their expectations for this production launch and are delivering an improved, high-quality vehicle to our soldiers. Now it's another good quarter for Defense orders, as we received several multiple M-ATV orders. Specifically, the U.S. has ordered 577 additional units with the Oshkosh underbody improvement kit, which provides additional protection against IED threats. We also received an order for more than 5,100 underbody improvement kits that, along with previous orders, will cover nearly every M-ATV in the U.S. fleet. And finally, we received our first long-awaited M-ATV order from an international customer. These units began to ship this month, that is July, to the UAE. There are opportunities for additional international M-ATV orders, some significant. Similar to this first order, we believe it will take time for any further orders to materialize. We're also expecting an announcement by the U.S. Army. Perhaps as early as the end of today, we will be receiving an order for approximately $900 million for the delivery of nearly 7,000 FMTV trucks and trailers. Production of these units will largely occur in our fiscal 2013. Please turn to Slide 4. JLG's Access Equipment business continue to experience strong demand for its aerial work platform and telehandler products. Much like we described to you on our last call, we are experiencing strong replacement demand in the North American market. This demand has been steady and well described by many of our larger rental customers as they work to reduce fleet age. We have also experienced some improvement in replacement demand in parts of Europe, although the European recovery still lags improvement in North America. When we evaluate the opportunities that exist in the U.S. and Europe for replacement demand, we believe there is at least another year or 2 of solid growth for purchase of aerial work platforms and telehandlers before greater nonresidential and residential construction activity will be needed to sustain market growth. There are also substantial opportunities globally in mining in countries that have significant infrastructure growth and in emerging markets as adoption rates increase. Our across-the-board price increase in this segment, that became effective in May, generally has been accepted by our customers. This has allowed us to effectively pass through price increases from our supply base. It's hard to receive any news from Washington regarding federal budget that doesn't mention expected cuts in defense spending. This has been on the radar screen for some time and shouldn't be a surprise to any of us. Two years ago, Secretary Gates was seeking $100 billion in cuts over 5 years, which he hoped to retain to limit growth in U.S. defense spending. A few months ago, President Obama asked the Department of Defense to target $400 billion in cuts over 10 years. And just recently, press reports have indicated that the target could reach double that amount, much of which will impact procurement. This is one of the reasons that we implemented a strategy to broaden our defense offering. We have been accomplishing this with our wins of FMTV, M-ATV, the LVSR, our Tactical Protector Vehicle down in Mexico and field service contracts, to name just a few of the programs where we have named the supplier. Furthermore, there are additional opportunities for Tactical Wheeled Vehicle programs over the next several years, and we are actively engaged to compete for these programs. Included in this opportunity set are the Humvee RECAP, Joint Light Tactical Vehicle and several international programs. Our considerable experience and strengths in product design and operations provide us with advantages that we can leverage in this Tactical Wheeled Vehicle competition. But the proof is in producing real game-changing vehicles, and we believe we have done that with our designs that are in company-funded testing today in preparation for the Humvee RECAP, Joint Light Tactical Vehicle and Canadian TAPV programs. Our business is at target municipalities, such as our domestic fire truck and refuse collection vehicle operations, experienced further declines in demand in the third quarter. We now don't expect them to begin rebounding until fiscal 2013. To address this challenge, we are adjusting our cost structure, expanding into international markets and introducing new products that deliver increased value for our customers. CNG-powered garbage trucks, which continue grow as a percentage of RCVs sold, are a great example of technologies that we have introduced to our markets to contribute to our growth over time. And the Pierce Fire Truck business received some great news in June when Pierce earned its Chinese CCCF certification, which allows us to deliver our vehicles to municipalities throughout China. This is an important piece to our global expansion plans. Lastly, domestic concrete mixer market remain at extremely depressed level, as residential construction levels remain very weak despite a recent uptick in housing starts. Let's turn to Slide 5, and we'll provide an update on our operations initiatives. As I mentioned earlier, we have made significant progress with the ramp-up of the FMTV production. Our army customer is very pleased with the quality of the vehicles that Oshkosh is delivering. To prepare our facilities to increase FMTV production, we have moved production of our -- of most of our heavy-payload vehicles from our South Plant factory to our Harrison Street facility. Several of you on the call today have seen this as you made the trip to visit our company over the past several months. While we are delivering FMTVs to our customers desired schedule and quality, we're still incurring costs that are impacting our ability to earn a profit on this program. Specifically, we need to make further changes to our e-coating facility to bring in households e-coating. We are also modifying processes to allow us to insource certain work and reduce rework. And we're continuing to work with our supply base to lower material cost among other activities. We still don't expect FMTV sales to be profitable during fiscal 2011. And we now expect that the FMTV program will begin to be profitable in the second quarter of fiscal 2012, not during the first quarter, as we have previously discussed, as it will take longer to insource much of this work. Turning to the Access Equipment segment, we are experiencing parts availability challenges from our supply base, which has struggled to keep pace with growing demand at JLG. This has impacted our ability to respond to incremental demand and cost and production inefficiencies. Our supply chain and operations teams, along with our suppliers, are working extremely hard to mitigate the situation, but we believe supplier capacity constraints will continue to impact both our sales and costs into fiscal 2012. The integration of ambulance and mobile medical vehicle production into our Florida facility continues to move forward and we anticipate that these operations will provide solid earnings leverage for our Fire & Emergency businesses in fiscal 2012 and beyond after we get through our production learning curve. Finally, we are on track with the consolidation of certain Belgium Access Equipment facilities into our Romania facility. This operational leverage will start to benefit JLG later in fiscal 2012. Okay. Let's turn to Slide 6, and Dave will take us through a brief discussion of our financial performance for the quarter, our expectations for the remainder of fiscal 2011 and fiscal 2012. Then I will address our multiyear growth plan.

Thanks, Charlie. Consolidated net sales for our third fiscal quarter were $2.0 billion, a 17.1% decrease compared with the same quarter last year. Lower M-ATV-related sales, again, were the largest driver of the decrease, declining $884 million from the prior-year quarter. Partially offsetting this decline were higher FMTV sales, as we continue to ramp up for this program. FMTV sales were more than 15% of Defense segment sales in the quarter. Sales to external customers were up 44% in our Access Equipment segment compared to the third quarter fiscal of 2010. Orders from external customers in this segment were up more than 50% and backlog more than tripled compared to the prior-year quarter. Sales in our Fire & Emergency and Commercial segments were both little changed from prior-year levels. Operating income for the quarter was $126 million or 6.2% of sales compared with $340.5 million or 14% of sales in the prior-year quarter. Lower M-ATV-related sales volume in the Defense segment was the largest driver of the decrease in operating income. FMTV program ramp-up costs, which continued at an unacceptable rate during the quarter and resulted in a larger-than-expected loss on this program of approximately $22 million, also contributed to the lower consolidated operating income. We have dedicated teams and plans to take costs out of this program and believe FMTV sales will be profitable in fiscal 2012. However, if we're not successful in significantly reducing the continued ramp-up-related costs that are driving the current losses, or we do not deliver the targeted material cost savings that we have identified, we may be required to record a material charge for future losses under this program. Results for the quarter also included $5.1 million of restructuring-related expenses in the Access equipment segment, and $3.5 million in the Fire & Emergency segment related to previously announced restructuring actions. Our tax rate in the quarter was 34.8%, as we benefited from improvements and profitability at foreign locations. Earnings per share for the quarter was $0.75 compared to $2.31 in the third quarter of fiscal 2010. The decrease in earnings per share was largely the result of lower M-ATV volume in the current-year quarter. And we paid down an additional $25 million of debt in the quarter, bringing year-to-date debt reduction to slightly more than $190 million. Please turn to Slide 7 for a discussion of our outlook for the remainder of fiscal 2011. Let me premise my remarks that follow on our fourth quarter expectations by noting that our U.S. government customer recently made us aware that a number of orders for military vehicle, including orders received by Oshkosh for M-ATV UIK kits will likely cause a constraint in the supply of a certain size and specification of tire. We use these same tires on many of our heavy tactical vehicles. We expect insufficient supplier capacity to accommodate this spike in demand will cause the government to use its sovereign authority to direct tires currently scheduled for delivery to us for FHTV production to be rerouted for use on contracts with the DX designation, which essentially is a process that enables the DoD to prioritize use of materials for our national defense. We believe this action has the potential to negatively impact the timing of our production and delivery schedules for the next 6 to 9 months. We are currently assessing the matter and working to minimize any impact this situation may have on our operations and fourth quarter results. We are unable to develop an alternative solution, we believe expected operating results for the fourth fiscal quarter -- fourth quarter of fiscal 2011 discussed below could be adversely impacted by as much as $125 million in sales and up to $25 million of operating income, with such sales and operating income moving into fiscal 2012. We expect we would be reimbursed by our customer for any additional costs that we incur due to the redirection of these specialty tires. So subject to the impact of the tire issue, which is difficult to estimate today, we expect Defense sales to be relatively flat with the third quarter of fiscal 2011, as higher FMTV sales are expected to be offset by lower FHTV sales. You'll recall that earlier this year, we stated that the continuing resolution with respect to the fiscal 2011 U.S. federal budget would push some FHTV sales into fiscal 2012. That push out impacts our fourth quarter. We believe continued losses on the FMTV program, combined with a higher percentage of FMTV sales and an adverse product mix, will result in operating income margins of less than 5% in the fourth quarter in this segment. The result is a low-double-digit margins in the Defense segment for full year fiscal 2011, consistent with our estimates for the last several quarters. We expect Access Equipment segment sales to be modestly higher than the fourth quarter of the prior year, as significantly higher sales to external customers, driven by a strong backlog and order rates, will be partially offset by a significantly lower intersegment M-ATV-related sales. We believe Access Equipment segment operating income margins will be in the mid-single digits, including restructuring-related costs of approximately $4 million associated with previously announced restructuring actions. We believe Fire & Emergency segment sales will be modestly lower than the prior-year fourth quarter, with lower fire apparatus sales comprising almost all of the decrease. We expect that segment operating income margins will remain significantly lower than the prior year. Included in this estimate is approximately $4 million of expected costs in the quarter related to the ongoing restructuring activities in this segment. We expect Commercial segment sales to be modestly lower than the fourth quarter fiscal 2010, with lower RCV sales and lower sales of components to the Defense segment. We expect operating income margins in this segment to be in the low-single digits. We expect corporate cost for the fourth quarter of fiscal 2011 to be higher than the prior year, due mostly to people-related costs, and interest expense to be similar to third quarter levels. We expect our tax rate for the full fiscal 2011 will be approximately 34% to 35%. We expect capital expenditures to be approximately $90 million to $100 million for the full year, and we believe that we will continue to pay down debt in the fourth quarter. Please turn to Slide 8 for a discussion of our initial outlook for fiscal 2012. Similar to the outlook for the fourth quarter of fiscal 2011, the outlook for fiscal 2012 excludes any impact of the tire constraint issue discussed earlier. We would expect that any fourth quarter fiscal 2011 earnings shortfall from this issue would be recovered in fiscal 2012, probably beginning in the second fiscal quarter. We view fiscal 2012 as a transitional year, characterized by a continued rebound in our Access Equipment segment, along with the significant sales mix shift in our Defense segment toward a higher percentage of FMTV sales, which we believe will result in significantly lower EPS compared to fiscal 2011. Specifically, our outlook for the Defense segment calls for modestly lower sales compared to fiscal 2011. However, we expect to experience a significant sales mix shift, as noted earlier, with FMTV sales making up approximately 40% of segment sales as we reach full rate FMTV production by December 2011. Additionally, we expect FHTV sales to decline versus fiscal 2011 due to lower funding levels as our customer nears its authorized acquisition objective quantities for a number of FHTV variance. We are currently in discussions with the U.S. Army regarding an FHTV bridge contract that would extend production under this program. This process is likely to conclude in fiscal 2012. We also expect aftermarket parts and service sales to decline in fiscal 2012, due largely to a significant amount of M-ATV initial parts provisioning sales occurring in fiscal 2011. We currently believe Defense segment margins will be in the mid-single-digit range, but higher than fourth quarter fiscal 2011 levels, driven by the expected significant change in sales mix between and within our different programs. Charlie noted earlier, we don't expect the FMTV program to be profitable until the second quarter of fiscal 2011. We believe full-year FMTV margins will be slightly above breakeven, reflecting the reduction of ramp-up costs, insourcing of work and implementation of material cost reductions, but at a slower pace than we previously believed. We also now believe that FMTV margins beyond fiscal 2012 will be in the low-single digits. We previously expected that we would achieve higher margins for the FMTV program. We also previously believed that we could have meaningful quantities of international M-ATV sales in fiscal 2012. We still believe that there are opportunities for such significant international M-ATV sales, but this fiscal 2012 outlook excludes any foreign sales of M-ATVs. Given the significant amount of time it took to receive an order for our first international M-ATV sale, it's more likely that any further significant global sales of M-ATVs that we may receive would move into fiscal 2013. Together, these items would have allowed us to expect Defense segment operating income margins much closer to double digits in fiscal 2012. We believe our Access Equipment segment will experience sales growth in fiscal 2012 of approximately 25%, or maybe a little more, compared to fiscal 2011. We expect sales growth to be driven by continued fleet replacement activity in North America as rental companies remain committed to lowering average fleet ages. In addition, we expect improved replacement demand in parts of Europe, and continued sales growth in emerging markets to contribute to sales growth in this segment. We believe Access Equipment segment operating income margins will be in the mid- to upper-single digits in fiscal 2012, depending on the speed with which we are able to execute our cost-reduction initiatives. Higher new product development related costs and the net benefits from restructuring actions undertaken in fiscal 2011 are reflected in this estimate. We expect sales in the Fire & Emergency segment to decline slightly in fiscal 2012 compared to fiscal 2011, driven by lower fire apparatus sales as a result of continued municipal spending weakness. We expect sales of other products in this segment to remain relatively flat compared to fiscal 2011. We believe Fire & Emergency segment operating income margins will improve in fiscal 2012 compared to fiscal 2011, but still remain in the low-single-digit range. We expect benefits from previously announced restructuring actions and reduced restructuring-related costs to offset the negative impact of lower sales volume. Turning to the Commercial segment, we believe fiscal 2012 sales will be flat to slightly higher compared to fiscal 2011. We expect weakness in the domestic concrete mixer market to continue well into fiscal 2012, as we believe housing starts and other construction levels will remain weak for much of the fiscal year. We believe the RCV market will be flat to slightly higher, supported by some front-end loading during the fiscal year due to bonus depreciation-driven demand. We expect operating income margins in this segment will be similar to fiscal 2011 margins. We are expecting modestly lower corporate expenses in fiscal 2012, as we balance cost reductions with the need to support business initiatives to sustain long-term growth. We also expect modestly lower interest expense reflecting fiscal 2011 debt reduction and the expiration of our interest rate swap in December 2011, and we believe that our fiscal 2012 effective tax rate will approximate 36% to 38%. Turning to the balance sheet and cash flows. We believe that we will experience a modest use of cash in fiscal 2012. We expect the cash usage will be largely driven by lower earnings, lower performance-based payments from the U.S. government as a result of unexpected continued decline in Defense segment sales and higher working capital requirements based on an expectation that sales to external customers will continue to rebound in the Access Equipment segment. We are also currently anticipating capital expenditures in fiscal 2012 of $85 million to $95 million. Approximately $65 million of the spend represents maintenance spending, and the balance is targeted to cost reduction projects. Upsides to this outlook principally involve the potential for higher M-ATV sales to international customers; higher Defense sales due to battle damage and repair; a quicker, more robust economic recovery; and accelerated cost reduction. Downsides to this outlook principally involve risks to estimated FMTV margins, the impact of any form of U.S. federal defense budget negotiations on our Defense business and a weaker-than-anticipated economic recovery. I'll turn it back over to Charlie for a discussion of our long-term opportunities. Please turn to Slide 9.

So what should show as we expect beyond fiscal year 12? Well, we're a company of market-leading brands and people driven to serve our customers as well as deliver value for shareholders. That said, we are operating in a very challenging environment. The significant decline anticipated in U.S. defense spending, further decline in municipal spending in fiscal 2011 and projected again for fiscal 2012, combined with a slow recovery in our later-cycle businesses are just too big to overcome in a short period of time. As pressure on the U.S. defense spending intensified during fiscal 2011, and municipal spending continued its downward trend, we launched a strategic study that allowed us to comprehensively challenge all of our operating assumptions and identify opportunities to increase earnings and grow shareholder value. That study confirmed the value of our family of strong brands and validated our strengths in new product development, operations and distribution across specialty vehicle markets. We currently believe that fiscal 2012 will represent a trough earnings year, and the study provides us with a strong roadmap to drive improved operational performance beyond fiscal 2012. It all starts with our purpose. At Oshkosh, we our mission-driven, to move the world at work. This is a simple and succinct representation of our mission statement to serve and delight our customers, as well as to drive superior returns for shareholders. We have 4 primary strategies to support our mission. We characterize them with the word "move." M for market recovery and growth; O for optimize our cost and capital structure; V for valuing innovation; and E for emerging market expansion. Let's start with market recovery and growth. We believe many of our nondefense markets will be in recovery mode after fiscal 2012. Capturing our portion of a realistic market recovery is a large contributor to our improved earnings roadmap. As you know, just getting back to average and, in some cases, prior peak industry volumes, in markets that have been down anywhere from 40% to 90-plus percent for a multiyear period can provide significant earnings leverage for our leading brands. We are improving our processes and disciplines to execute effectively when the economic recovery occurs in each of our markets, and we continue to believe that we can sustain a $2 billion to $2.5 billion defense business at the bottom of the Defense cycle. Next up is optimizing our cost and capital structure with urgency. By aggressively attacking our operating and product cost, we expect to realize substantial savings. We have been or are in the process of consolidating many of our operations, and we see additional opportunities to further reduce our footprint and cost. In fiscal 2011, we've closed about a dozen small- or medium-size facilities that are expected to contribute annualized cost savings of about $35 million. We discussed this during our last quarterly conference call, and we are still on track with this plan. Additionally, we have been extending the Oshkosh operating system which we expect, along with improving our cost structure, to drive significant earnings. And finally, we have opportunities to realize further operating synergies across these businesses which we must pursue and capture. We have strengthened our balance sheet immensely over the past several years with net debt reduction of more than $2 billion since the recession first impacted the global economy. We will continue to focus on optimizing our capital structure to contribute to EPS growth and to create options to improve our profitability. Value innovation is the next thrust [ph]. This has been our primary growth driver over the last 15 years, and we'll continue to emphasize innovation. For example, our TAK-4 independent suspension has been a key to winning new contracts and is used across multiple product lines, not just defense. Additionally, we expect recent new product offerings in multiple markets such as JLG's 150-foot Ultra Boom, and Pierce's revolutionary Dash CF fire truck to drive new revenues. These products are the result of our multigenerational product plan which incorporate our newest technologies and drive our ability to benefit both our customers and our performance. And finally, we remain committed to emerging market expansion. Compared with our other leading industrial companies, our international revenues are disproportionately lower. We have tremendous headroom for an international growth and are targeting revenues from outside the U.S. to grow to about 30% of sales over the next several years, up from about 10% today. By executing on these 4 strategies, we are positioning Oshkosh to achieve consolidated operating income margins of 10% and returns on invested capital of 15% or more. We are excited to implement our move strategies, these move plans provide us with the framework for achieving success in markets that are currently more challenging and more competitive than they have ever been. We have a strong leadership, great brands and a solid plan to achieve our strategic goal to deliver strong returns for our shareholders. At this time, I'll turn it back over to Pat and the operator to begin the Q&A.

Thanks, Charlie. [Operator Instructions] Latonya, please begin the question-and-answer period of this call.

[Operator Instructions] Our first question comes from Charlie Brady with BMO Capital Markets.

On the JLG commentary, on the margin impact from production inefficiencies and supply constraints, can you quantify what the margin hit to that is?

Charlie, it was probably a little bit more than 50 basis points on the quarter, from what we saw in the supply constraints. And as Charlie noted, we did have a number of challenges with that during the quarter, and I guess I would just like to acknowledge the effort by the team at JLG, as well as our global supply chain group in dealing with that. They did a really tremendous job of working through those issues during the quarter, but it did present some challenges.

Just to pick up on that, we had welders on layoff from other segments at our supply base to help them buttress their ability to deliver. So it has been a struggle for component suppliers generally to ramp up for the recovery.

All right. And then on FMTV, you talked about your -- some of the issues with the cost you're in outsourcing, can you quantify the level of outsourcing that's going on there, and kind of where and when you expect to bring it. And then I guess your confidence, what gives you the confidence, you've pushed out the profitability out a quarter, and what gives you the confidence that Q2 is going to be the turn to profitability on that program?

Okay. Today, as we've said on the call, we're still e-coating some items on the outside. We do need to bring that in-house because of long lead times and some of the components to that process. It's going to take us couple of quarters to bring all the e-coating in. We have certain predelivery inspection work that we do on the outside today. We set up a facility on July 11 at Oakland, and that facility is ramping up and will be bringing in in-house more work, and that should occur over the next 1 or 2 quarters. So we have pretty solid plans in place to insource to work. We're making great progress every day, and today, we believe that we will turn this contract to profitability. We have 11 teams working on cost reduction, and we're going to get the job done.

Can you help me understand why production of e-coating is outsourced? Is just the current facility is running full out, or why is it being outsourced?

For one we -- just to give you one example because there are a couple. The iron removal system in this e-coat facility was undersized, and we are waiting for some parts to be able to upgrade that.

Our next question comes from Jamie Cook with Crédit Suisse. Jamie Cook - Crédit Suisse AG: A couple of questions with regards to Defense. One, I mean, you talked about in your commentary, if you're unsuccessful in taking out the cost that you sort of talked about, you talked about taking a material charge for this contract. Can you just talk about the time frame or how we think about the materiality of the charge? And then last, you also talked about still being committed to the Defense business being like a $2 billion, $2.5 billion sort of sustainable revenue business. How should structurally we think about margins longer term given now where FMTV is going? I mean is this -- I guess I was surprised by that mid-single-digit margins in Defense. I mean is getting back to double-digit margins not realistic, I guess, in the next sort of 2 or 3 years? And then I'll get back in queue.

Jamie, it's Dave. I'll start with the question on the FMTV, specifically. That's something that we look at quarterly, and it will really be dependent on the amount of progress that we are making in reducing the costs on that program. So it's premature to say if we needed to take a charge, how much that charge would be. But as Charlie indicated, we are very focused on reducing those costs and believe that we will be profitable in 2012. Jamie Cook - Crédit Suisse AG: But would this be a charge -- I mean, we would know within the next 2 quarters, or what's the timing?

It really again depends. It's something that you look at every quarter. For example, at the end of the third quarter, as we looked ahead, we believe we'll be profitable on it and a charge was not necessary. We'll take a look again every quarter going forward, like we do -- it's really normal course that we do that.

In terms of the margin outlook overall, most defense contractors, their margins are in the high-single digits. Our target will remain to be double-digit in terms of margins, but until we -- in terms of FMTV, the profitability that's going to be the challenge. And then we're going to need to get FMTV up to higher margins. Over time, we are able to do that with the MTVR, the LVSR and other programs, but it didn't happen overnight, it took some effort. I firmly believe we have a team that can get us there over time, and I can tell you that it's our number one priority in the company.

Our next question comes from Jerry Revich with Goldman Sachs.

Charlie, can you talk about your military margin outlook for next year? You've delivered north of 20% margins on M-ATV parts and north of 10% margins on FHTV. So I guess I'm having trouble getting to mid-single-digit margins for this segment if FMTV doesn't lose money next year. Can you help us just bridge the gap there?

Well, we did say in our prepared remarks that FMTV is going to be roughly 40% of sales next year, so that's significant percentage that offsets any other improvements that we have. We also have an adequate mix among different variance of our trucks that we're building next year. So just to take -- give an example, a record margin might have a little different margin than a cargo body type truck, so all of that is kind of in play here.

And, Jerry, we're also seeing mix shift within our aftermarket parts, or at least we expect to see a mix shift there and we have differing margins on those products as well.

Okay. And can you talk about what it would take for the military to let you reengineer parts of the truck to make it more production-friendly? Is that something that might be possible in 2013? Just step us through how those discussions are going, please.

I wouldn't expect that we would have any big opportunities to reengineer the trucks that are going to make a significant difference. Will there be opportunities to make singles or bunts [ph], maybe multiple bunts [ph], to be able to impact our cost structure? Yes, but given the kind of budget issues that the Department of Defense is facing, these bunts [ph] are going to be have to be the type that it's good for Oshkosh, and it's good for the government as well. So we just don't have kind of a budget scenario I think where the government is going to allow major changes to the truck.

And lastly, your Access Equipment customers are getting excellent pricing at this point. I think your guidance assumes relatively muted pricing next year. Can you just talk about what it would take for you to get more aggressive on price increases?

Well, in fact, our price increases went in effect in May in this segment, and we are realizing them today. So I can tell you this, is we're going to continue to watch our cost structure. If there is any escalations in steel or in other costs, we will seek to raise prices to deliver, to toss out at our cost structure. When we are in an environment where we're really constrained in sales by our supply base, I think it poses an environment where we can increase prices as needed.

Our next question comes from Pete Skibitski with SunTrust.

Sensitive area, but can you tell us if you've had talks with Carl Icahn's group at this point?

We really can't comment on that. Of course, we have discussions with shareholders every day, and those are really private discussions, and we don't comment on that.

Is there any intention at this time to study strategic options for the company?

Well, as we said in our remarks, we just spent the last 6 months developing our move plan, our strategy. It was a comprehensive analysis. We looked at every conceivable action that we could take, and we developed a move plan, which we think will deliver shareholder value over time.

Got it. Okay. And just wanted to understand a little bit better on FHTV. Can you tell us how much FHTV is in backlog, and maybe just your revenue expectations for fiscal '12?

Boy, you're going to have to give us a little bit of time here, Pete, on the backlog question. In terms of revenue for next year, we, as indicated in the prepared remarks, we do expect that to decline. We really don't want to get into a program-by-program detail of the build-up right now, but it's a meaningful decline compared to fiscal 2011.

Okay. And do you have the same expectations just kind of overall for your Defense aftermarket volume in fiscal '12?

Yes, Defense aftermarket volume will be down next year, or when I say next year, FY '12 as well. And again, if you recall, we had very significant M-ATV parts sales in the first half of the fiscal year as we were working to complete the original provisioning orders under that program.

Our next question is from Ann Doogan (sic) [Ann Duignan] with JPMorgan. Ann Duignan - JP Morgan Chase & Co: It's Ann Duignan. My first question is around your assumptions that municipal spending or Fire & Emergency and some of the Commercial segments will start to recover in fiscal '13. What gives you confidence that municipalities are going to settle their coffers and indeed start spending on some discretionary items like fire trucks again as soon as '13?

That's a good question. As you can imagine, and during our strategic study, we looked at projections from multiple sources and how the economy would recover. And we've generally adopted a slow recovery scenario in terms of our most likely scenario for the economy. And we just believe that by fiscal year '13 that the municipal coffers will improve enough and the age of their fleet will be long enough that there will be some recovery in the market. Now we didn't say it will be robust in '13. We'll tell you July or August of next year what we think about fiscal year '13, but at this point, we would expect some recovery in our municipal markets by then. Ann Duignan - JP Morgan Chase & Co: Okay. So some slight recovery off of a very low base as opposed to broad-based municipal spending on fire trucks. Is that the way to think about this?

Well, we think there will be some recovery. I can't tell you today if it's slight, modest or significant, but we do think there will be some recovery in FY '13. Ann Duignan - JP Morgan Chase & Co: Yes, because most of our work shows that municipal spending lags actually tax receipt, so they'd have to have a year of better tax receipts first and then start spending a year later.

Yes, we agree. Ann Duignan - JP Morgan Chase & Co: Okay. And secondly, as part of the strategic review, you did say that you explored all options. As I take a step back and I look at things like your SG&A as a percent of sales versus some investments [ph] in plants like PACCAR. You got 150 bps higher of SG&A than, okay, larger scale organizations. Do you really look at a strategic alternative including the sale of the business to larger operators who could bring scale to the business?

Let me first of all comment on SG&A. We have businesses that have SG&A percentages of as low as 2% and then, obviously, some that are higher. So we're overall lean, but when you look at a business that's down 95%, for example, in our concrete mixer business, at some point you have to really struggle to take your SG&A down any lower. And I would argue that we don't have a peer that has some of those kind of downturns they have to contend with. So I think if you look at us over the cycle, our SG&A reach are clearly on the low end across any kind of comparable period that we have, and we still have people today on furloughs, pay cuts. I don't think people comprehend some of the kinds of cuts that we've taken. Having said that, we did say in our remarks that we do expect our costs to be down next year in SG&A at corporate, and we're going to look aggressively at any costs in the company. As far as you talk about options about selling the company, we really don't comment on questions like that. It is our practice to regularly review our businesses and operations to determine how we can drive the most value for our shareholders, but of course, our focus, as always, is doing what's best for shareholders, and we really can't speculate on hypotheticals like that.

Our next question comes from David Raso with ISI Group.

Question on the sequential third to fourth quarter Defense margin. When I think of the FHTV business you thought you're going to have in the fourth quarter, and it's not there, before last quarter we spoke of taking revenues down by $300 million for the whole business, $200 million of which was FHTV. So for the fourth quarter, even if I did give you the $200 million of FHTV, let's say, a 15% margin, and then tacked on another $100 million, maybe there's other FHTV you're going to ship, that would still imply the fourth quarter margins of only 6.7% from 10.2%. I guess if those numbers are close to correct, is the FMTV loss getting a lot greater in the fourth quarter than the third quarter?

No, David. Similar to '12, we are seeing some movement around the makeup of the sales, for example, within the FHTV program in the fourth quarter. As Charlie mentioned, depending on the type of variant, we will have different margins. So from quarter-to-quarter, that may shift some. We're also seeing a different mix in our aftermarket than the third quarter. At least that's what we're expecting today. Those are the other pieces to the puzzle that I think you need to take a look at.

But to be real clear, our per-unit loss in the fourth fiscal quarter, we are projecting it to be lower than in the third quarter.

Just you're making more of a money-losing truck to the absolute dollar; correct?

Well, per truck, we'll do better in the fourth quarter on FMTV than we did in the third quarter.

And what is the sequential production for the whole third quarter versus what you're expecting for the fourth quarter for FMTV?

We expect that it will continue to ramp up in the fourth quarter. I don't have that number right at my fingertips.

Well, in Q3, it's what, a little more than 15% we said; right?

Yes, it will be more, obviously with the movement in FHTV and the increased FMTV volume, it will be a larger percentage of the sales in the fourth quarter.

Right, because for the full year, we've talked about sort of that kind of 10% to 15% range, and we didn't have any in Q1, so there will be some more in Q4.

And just to be clear, you ended the quarter at 20 per day?

We are building a little over 20 per day and about 10 trailers per day.

Our next question comes from Robert McCarthy with Robert W. Baird. Robert McCarthy - Robert W. Baird & Co. Incorporated: I wonder if you could help us non-defense analysts out here understand why you would be potentially faced with booking a charge on the FMTV program? And does that mean -- I mean, if you're forced to recognize some kind of losses upfront capitalize them, does that then mean that from that point forward you'd be reporting a profitable program? Can you help us understand what exactly we're reserving for?

Rob, it's nothing that is Defense contracting specific. It would be similar to any project or long-term contract where you would -- are required to evaluate it to determine whether as you look forward you will be making money on that program. And in the event that our view was such that we did not believe that we would make money, we would take a charge that would, in effect, recognize the loss that we expected to incur over the remaining life of the program. We would record that as we believed that was the case, and then going forward, theoretically, all sales under that program would be at 0 margin. Robert McCarthy - Robert W. Baird & Co. Incorporated: 0 margin. That's very helpful. The other question I wanted to ask has to do with, Charlie, your comments around the international demand for the M-ATV. I understand the timing issue, but you used the word significant as to measure the potential from other international customers. Relative to the UAE order, for example, can you give us an idea of what you mean with what the word "significant"?

Certainly, Rob. We are tracking opportunities that would exceed $1 billion in sales for the M-ATV, but this process is so long and it has so many potential roadblocks in it that we don't have it in our guidance for FY '12. It is possible some could slip into FY '12. It is more likely that if we are able to close on these sales that it would be FY '13.

Our next question comes from Andrew Obin with Bank of America.

Just a clarification, I've seen in your prepared remarks you said that you're committed to $2 billion, $2.5 billion run rate for the Defense business. Can you give us a sense prior to, Iraq and Afghanistan, this business ran at 9% to 10% margin, then it ran in mid-teens now you're telling us mid-single digits. What margin should I apply to this $2 billion, $2.5 billion as I think about it long term?

Well, that's a great question. We're certainly going to target double-digit margins, but as we said before we need to get the FMTV profitable and then we need to raise the margin on that. We're going to be in an interesting environment the next several years, where there are going to be many contractors chasing fewer business opportunities that could impact pricing. Where we feel good is that we do have purchasing power in this space. We have design power in the space and teams dedicated to taking margins up. We have been there before, so all I can say is that it will remain a target.

But is it fair to say that we should expect at least a performance that we've had before, sort of 9%, 10%, is that a fair way of thinking about it?

We're not going to comment anymore than what we've said. It's a target, and we'll just have to let this play out over the next couple of years.

Let me ask another question. How do you guys think about this disconnect, particularly post the strategic review between what seems to be the underlying value of the assets that you have in the company and the stock valuation? And to follow up, what do you guys think you can do near term, you hear about breaking [ph] up the company, to enhance shareholder value?

Well, we're not going to talk about valuation here, but our clear plan is the move plan that we outlined here. First and foremost, the market recovery is significant. We have so many businesses down 40%, others down 90%, 95%. The earnings leverage is significant. The cost takeout that we have opportunities in front of us are also significant. We're going to tackle those with urgency. You have seen a number of actions this year. We were slowed a little bit with the FMTV launch, of really getting after everything we wanted to accomplish, but as we ramp up production and our success, with that we'll have more time and attention to these other cost reduction initiatives. And again, we're going to continue to innovate and go global. So that's where we are.

Our next question comes from Josephine Millward with The Benchmark.

Charlie, can you remind us the FMTV production target rate you're targeting by calendar year end? And how long do you think you'll be producing FMTV at the full rate, full production rate?

Okay. Our target is to be at just below 40 trucks per day and 16 trailers a day by the end of the calendar year. And how long? Well, I think there's a big budget debate occurring right now that's going to determine how long that will be, but it is for a period of time.

Okay. And do you view the Army's MRAP logistics and maintenance contract as an opportunity? Do you have that reflected in your outlook for next year?

Certainly, we see sustainment funding, repairs and maintenance, OLMA [ph] money, all of those are opportunities for us. We are actively engaged in a number of contracts to pursue that. So that clearly is part of our move strategy.

And last question. Can you talk about whether there is a difference in margin in building new heavies versus RECAP since that's how your business is going to be shifting in the coming years?

Historically, our remanufacturing margins have been quite good comparable to our new truck margins.

Our next question will be from Walt Liptak with Barrington Research.

I wanted to ask about the FHTV bridge contract. Can you help me understand the timing of the bridge contract, the dollar amount that you're thinking off and the impacts for 2013?

As we said in our prepared remarks, we don't expect FHTV bridge contract to be finally negotiated and signed until fiscal year '12. It's just a long process particularly with all the things that the Pentagon is working on today. It's difficult to get some of these things finalized, but we do expect that it'll be done. In terms of the size of that contract, it is baked into our overall view of fiscal year '12 sales that we provided to you.

Okay. And, Dave, I wonder you've given more guidance I guess on this call especially on 2012 than you have in the past, I wonder if you could talk a little bit about your cash flow expectations? What kind of debt level you would end the year at?

As we said in our prepared remarks, Walt, that we do anticipate that we will use a modest amount of cash in the next fiscal year. We still are in the budgeting process and won't complete that until -- in the next several months. So until we know or we get through that process, our view right now is just modest cash usage.

Okay. Well, thank you very much for everyone's attention on our call today. We appreciate your participation. America is facing some historic forces. We have the massive federal deficits leading to budget debate, which is out of our control and challenging America's defense industrial base. We do have strapped municipal and state budgets and a slow recovering economy. Oshkosh, those confronting those market for us as much like we did in 1996 and in 2008, 2009 when we powered through the great recession. We dug deep and we delivered. We have leading brands in virtually every business with generally leading margins and growing market shares. We got a great team focused on the right few initiatives to navigate these historic forces. Our move plan focused on significant cost take out, emerging market expansion and innovation to power us through these historic forces until market recovery provides us lift that our entire country seeks. So thank you very much for your support.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.