Oshkosh Corporation’s aggressive drive to become the biggest supplier of wheeled vehicles to the U.S. Army appears to have hit a rough patch. R. Andrew Hove, the president of Oshkosh’s defense unit, left the company “to seek other business opportunities” last week, and now the company appears to be removing many of his subordinates in an effort to hold down costs in the unit. The changes are probably related to performance problems on the Army’s Family of Medium Tactical Vehicles (FMTV), a huge truck program that Oshkosh wrested away from 17-year incumbent BAE Systems in 2009 by bidding 30 percent below the then-prevailing price for the trucks.
Numerous observers at the time, myself included, questioned how Oshkosh could possibly make a profit by bidding so low on the program. Not only would many of the production inputs have to come from the same suppliers that BAE Systems used, but the incumbent had a proprietary design for the truck’s armored cab that Oshkosh would have to replace fast if it was to meet contract commitments. Local media in Oshkosh’s home state of Wisconsin subsequently reported that the company had bid a razor-thin one-percent profit margin dependent on state and local aid to win the program, raising the specter of significant losses on the program if the company’s planning assumptions proved too optimistic. Now it appears that is coming true, with Hove’s team being forced out as overhead costs on FMTV balloon.
FMTV was one of two big Army programs the company won in 2009 that averted insolvency for the construction and specialty vehicle maker in the aftermath of the meltdown in the residential real-estate market. Oshkosh had acquired industry-darling JLG Industries, a builder of lift equipment, at the height of the sub-prime boom, only to see demand plummet for all types of construction equipment. The sub-prime crisis then hit municipal finances, impacting demand for Oshkosh’s emergency vehicles. By 2009 its finances had weakened considerably, which is why it bid so aggressively for armored truck and tactical vehicle business from the Army. When it secured two billion-dollar contracts in rapid succession, its business outlook brightened and the stock soared.
Mr. Hove joined Oshkosh from competitor BAE Systems only months before the first big contract was awarded. Hove has always insisted there was no connection between his move to Oshkosh and the pending competitions. Maybe not, but there probably is a connection between his recent departure and how the FMTV program is faring. Oshkosh has received several big orders for the trucks, including one for 2,634 vehicles and 404 trailers in May of 2010, and another for 2,060 vehicles in September of that year. Each of these orders was worth hundreds of millions of dollars, which means there is considerable upside or downside potential depending on how well the company performs. The company has also encountered problems on another $255 million contract awarded late last year for a battlefield-ambulance version of the mine-protected all-terrain vehicle that first kicked off its winning streak with the Army in 2009. An early version of the ambulance did not fare well in survivability testing, leading to a stop-work order from the Army customer.
It’s hard to gauge how serious the problems are facing Oshkosh Defense, but demand for the company’s non-military construction and emergency vehicles can’t be strong given the state of the housing market and municipal finances. One of the issues I raised when Oshkosh won the FMTV program by bidding so low in 2009 was whether the company had the financial strength to cope with setbacks in its newly-won Army business. Andrew Hove’s departure suggests that we may now get a definitive answer to that question.
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