10-Q 1 sdc418.txt FORM 10-Q 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 ========= ======== ========= 12 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