-- 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
-- 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
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.
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
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
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
-- 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 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
-- 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
-- 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
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.)
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
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 Affirmed; Outlook To Positive
Corporate Credit Rating BB/Positive/-- BB/Stable/--
Senior Secured BBB-
Recovery Rating 1
Senior Unsecured BB
Recovery Rating 3