TEXT - S&P revises Oshkosh Corp outlook to positive

Wed Jan 2, 2013 4:12pm EST

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Overview
     -- Oshkosh Corp. has maintained solid credit measures, and we
believe it has the potential to offset weak prospects in the defense market with
better profitability performance in its other businesses.
     -- We are affirming our ratings and revising the outlook to positive from 
stable.
     -- The positive outlook reflects a potential upgrade if Oshkosh maintains 
funds from operations to total debt of about 30% and adjusted debt to EBITDA 
remains less than 2.5x in the context of an economic backdrop that is 
gradually recovering. 

Rating Action
On Jan. 2, 2013, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'BB' corporate credit rating, on Oshkosh Wis.-based Oshkosh 
Corp. and revised the outlook to positive from stable. At the same time, we 
revised the recovery rating on the company's senior unsecured notes to '3' 
from '4', to indicate our expectation of meaningful (50%-70%) recovery for 
lenders in the event of payment default. 

Rationale
The outlook revision reflects the potential for an upgrade if the company 
maintains its good credit measures and continues to pursue a moderate 
financial policy, including targeted reported debt to EBITDA of 1x-2x, despite 
challenging circumstances in some of its segments. We expect the company's 
fire and emergency unit will continue to suffer from weak municipal spending 
this year while the defense segment is likely to further decline as a result 
of declining government defense spending. Still, very good performance in the 
access equipment segment and improving conditions in the commercial segment, 
combined with meaningful debt reduction over the past several years, have 
allowed Oshkosh to maintain credit measures that could support a higher 
rating. 

The ratings assume that future acquisition activity may transpire but is 
unlikely to be financed in the aggressive manner comparable with the company's 
access equipment acquisition in 2006. For a higher rating we would expect 
Oshkosh to maintain funds from operations (FFO) of about 30% over the 
operating cycle and debt to EBITDA of about 3x. The revision of the recovery 
rating on the senior unsecured notes to '3' from '4' reflects a later year in 
our simulated default scenario where less secured debt exists, thereby 
increasing residual value for the unsecured noteholders.

The ratings on specialty vehicle maker Oshkosh reflect its "satisfactory" 
business risk profile and "significant" financial risk profile. Activist 
investor Carl Icahn dropped a tender offer for the company in December 2012, 
which we believe reduces the likelihood that the company's financial policy 
will become more aggressive in the near term. We removed the ratings from 
CreditWatch with negative implications after Icahn's tender offer did not meet 
the 25% threshold he had set. We score Oshkosh's management and governance as 
"satisfactory." 

The company's announcement on Nov. 16, 2012, that it plans to repurchase up to 
$300 million of common stock over the next 12 to 18 months does not have an 
immediate effect on our assessment of the company's financial risk profile, 
which we describe as "significant." The company's large cash balances (more 
than $500 million), good credit measures, and anticipated positive free cash 
flow generation provide some capacity for the share repurchase activity.

We assess the company's business risk profile as "satisfactory." We expect 
Oshkosh to maintain its leading positions in key segments of the cyclical 
specialty vehicle market--such as being the No. 1 global provider of aerial 
work platforms--and its good product and end-market diversity, which its four 
reporting segments prove. Despite the diversity, results have been extremely 
cyclical. The downturns in the formerly more stable fire and emergency segment 
over the past several years and the massive declines in the aerial work 
platform and commercial segments in the 2009 timeframe are indicative of this. 
The company's defense segment faces budget pressure from the federal 
government that is likely to reduce its contribution to the topline over the 
coming years to about $2 billion or less from nearly $4 billion in 2012. 
Still, the company's diversified product portfolio is a supporting factor in 
our business risk profile assessment and its defense segment provided an 
important offset to the decline of its other segments within 2009-2010. Our 
base-case expectations include:
     -- A continuation of the slow global economic recovery;
     -- A continued recovery in the access equipment in fiscal 2013 at a 
slower pace than in fiscal 2012;
     -- Lower sales and profits at its defense segment in each of the next 
several years, as Oshkosh transitions away from large domestic contracts;
     -- Fire and emergency results to deteriorate in 2013, given pressures on 
municipal budgets;
     -- Commercial segment revenue and profitability to benefit from the 
improving outlook for residential construction spending; and
     -- Positive free cash flow generation.

Barring any sizable acquisitions or other strategic shifts, we expect debt to 
EBITDA to remain close to 2x and FFO to total debt to exceed 30% in 2013. 
These measures provide some cushion for risks to the company's defense segment 
performance or a general economic slowdown. At the current ratings, we expect 
Oshkosh to maintain total debt to EBITDA of about 3.5x and FFO to total debt 
of about 20% to 25% over the cycle, understanding these measures will be 
better in periods of recovery such as the one we are seeing now.

Liquidity
Liquidity is "adequate." Our assessment of the company's liquidity profile 
incorporates the following expectations and assumptions:
     -- We project sources of funds to be more than 1.2x uses over the next 
year.
     -- We expect net sources of funds to remain positive and for there to be 
sufficient headroom under covenants, even in the event that EBITDA declines by 
15%.
     -- We believe the company has generally prudent financial risk management 
and sound relationships with banks.

We expect Oshkosh to maintain ample availability under its $525 million 
revolving credit facility due October 2015. It had good cash balances of more 
than $500 million as of Sept. 30, 2012. The company's $650 million senior 
secured term loan amortizes at about 10% annually and matures in October 2015. 
Given Oshkosh's cash flow generation capability, we consider its maturities to 
be manageable.

Recovery analysis
We rate the company's secured debt 'BBB-' (two notches higher than the 
corporate credit rating) with a recovery rating of '1', indicating our 
expectation of very high (90% to 100%) recovery in a payment default scenario. 
We rate the senior unsecured notes 'BB' with a recovery rating of '3', 
indicating our expectation for a meaningful (50% to 70%) recovery in a payment 
default scenario. (See our recovery report on Oshkosh Corp., to be published 
later on RatingsDirect.) 

Outlook
The outlook is positive. We believe Oshkosh may maintain credit measures that 
are consistent with a one-notch higher rating. We could raise the ratings if 
the company maintains FFO at about 30% and debt to EBITDA is less than 2.5x in 
a decent general operating environment for its nondefense businesses. We could 
revise the outlook to stable if weak results or a debt-financed acquisition 
causes weaker credit measures--for example, if adjusted debt to EBITDA exceeds 
3x. For instance, this could occur if a weaker economy pressures equipment 
spending, which supports the company's nondefense segments, resulting in a 
double-digit topline decline and an operating margin deterioration of more 
than 1.5%.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; Outlook To Positive
                                        To                 From
Oshkosh Corp.
 Corporate Credit Rating                BB/Positive/--     BB/Stable/--

Ratings Affirmed

Oshkosh Corp.
 Senior Secured                         BBB-               
   Recovery Rating                      1                  
 Senior Unsecured                       BB                 
   Recovery Rating                      3
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