Oshkosh Activist Situation Report


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Oshkosh Activist Situation Report

  1. 1. The Shareholder Communication Strategists For a more detailed discussion of our analysis, please contact Waheed Hassan, CFA at whassan@allianceadvisorsllc.com or 202-549-8399. Summary  The proxy fight for board seats at Oshkosh Corporation (“OSK” or “the Company”) is in the initial stages. Both sides have yet to present detailed arguments to shareholders in support of their nominees. Our assessment of OSK’s performance and corporate governance practices suggest that while shareholders may conclude that change is be warranted, investors are unlikely to support all six of the Activist’s nominees.  The fact that four of the six dissident nominees have direct ties to Icahn Associates (“Icahn” or “the Activist”) raises questions about their ability to represent the interest of all shareholders. Additionally, and perhaps more importantly, shareholders could question the benefit of having several Icahn nominees on the board, especially since most of them have similar backgrounds.  OSK shareholders are also likely to be suspicious of the underlying motivation of Icahn to gain board representation, given its recent settlement agreement with OSK’s competitor Navistar International (NAV).  It is quite plausible that the dissident will modify its messaging and begin to target the long-tenured incumbent nominees. Five of the thirteen OSK nominees for 2012 (excluding the CEO) have served on the board for over 10 years, with one of the OSK directors going into his 36th year of service. Institutional investors and the proxy advisory firms tend to question the ability of incumbent directors with long tenures to remain independent. Analytical Framework We utilize the same two-pronged analytical framework that Institutional Shareholder Services (“ISS”) and institutional investors use when evaluating contested solicitation efforts. As Icahn is seeking minority board representation – one board seat shy of control – the dissident must prove that: 1. Board change is preferable to the status quo; and 2. That the dissident slate will add value to board deliberations including by, among other factors, considering issues from a different viewpoint than the current board members. Target: Oshkosh Corporation (NYSE:OSK) Activist/Dissident: Icahn Associates (9.5% holder) At stake: 6 seats on a 13-member board Board composition: Annually elected board with all 13 seats up for election Meeting date: 2012 meeting date yet to be disclosed Last shareholder meeting was held on February 1, 2011 November 29, 2011
  2. 2. The Shareholder Communication Strategists 2 Question 1 – Is Change Needed? In determining whether change is needed at the board level, some of the performance factors that shareholders are likely to focus on include Total Shareholder Return (“TSR”), operating performance, corporate governance practices, and management’s current operating plan. If shareholders conclude that change is needed, the second prong of this analytical framework would then apply – can the dissident slate add value to the board? Total Shareholder Return  OSK has underperformed its peer group, benchmark indices and its closest comparable peer, Navistar International Corp. (NYSE: NAV), over 1-year and 5-year periods.  That said, the Company is likely to assert that a typical comparable analysis is not reasonable as unlike other truck/machinery manufacturers, OSK has a significantly greater exposure to defense/military contracts. For instance, defense related sales accounted for 57% of OSK’s FY11 revenue (period ending 30 Sept. 2011) compared to approximately 14% for NAV’s FY11 expected revenue (period ending 31 Oct. 2011).  Since shareholders are impacted most by share price, OSK’s long term relative underperformance could support the Activist’s case for change. Relative TSR Performance Source: Thomson Reuters. Peer group comprised of AGCO, CMI, DHR, DOV, GR, LLL, NC, PCAR, PCP, TEX, and TRN Total Shareholder Return (11/25/2011) 1-year 3-year 5-year Peer Mean -10.5% 26.0% 2.1% Peer Median -10.8% 21.6% 1.7% S&P 400 INDEX - MIDCAP -6.0% 18.9% 0.0% S&P 500 -3.3% 10.6% -3.7% OSHKOSH CORPORATION -38.0% 53.1% -16.9%
  3. 3. The Shareholder Communication Strategists 3 5-Year TSR Source: Thomson Reuters. Peer group comprised of AGCO, CMI, DHR, DOV, GR, LLL, NC, PCAR, PCP, TEX, and TRN. Operating Performance  Over the last five years, OSK’s aggregate revenue and margins have been impacted significantly by variability in the Defense and Access Equipment segments. Moreover, growth in Defense-related revenue has been offset by declines in both the Fire & Emergency division and Commercial segments.  The company’s Defense division has shown significant growth since 2007. That said, Defense revenue benefited from almost $4.5 billion of M-ATV-related sales in FY2010. As M-ATV production and shipments were scheduled to conclude in the first quarter of FY2011, the subsequent decline in FY2011 revenue was largely expected. Interestingly, revenue growth has not translated into Adjusted EBITDA margin improvement – which fell to 13.1% in FY2011 from 17.7% in FY2007. [We computed Adjusted EBITDA by adding depreciation and write-offs/impairment charges to segment operating profit].  OSK acquired the Access Equipment business (JLG acquisition) in Oct. 2006 for $3.1 billion in cash. At the time of acquisition, OSK expected 20-25% revenue growth in 2007 and $75 million in annualized pre-tax synergies within 3 years. Since 2007, the Access Equipment segment has shown very high revenue variability, with Adjusted EBITDA margin falling from 13.6% in FY2007 to 7.3% in FY2011.  The Activist is likely to argue that both management and the incumbent board have failed to develop and execute a sustainable growth plan for the four business segments. The variability in top line growth has been accompanied by failure to manage the JLG acquisition. For example, it appears 0 50 100 150 200 250 300 27-Nov-06 27-Jan-07 27-Mar-07 27-May-07 27-Jul-07 27-Sep-07 27-Nov-07 27-Jan-08 27-Mar-08 27-May-08 27-Jul-08 27-Sep-08 27-Nov-08 27-Jan-09 27-Mar-09 27-May-09 27-Jul-09 27-Sep-09 27-Nov-09 27-Jan-10 27-Mar-10 27-May-10 27-Jul-10 27-Sep-10 27-Nov-10 27-Jan-11 27-Mar-11 27-May-11 27-Jul-11 27-Sep-11 5-year Relative TSR Performance (period ending 25 Nov. 2011) OSK NAV Peer median S&P 500 S&P 400 INDEX - MIDCAP
  4. 4. The Shareholder Communication Strategists 4 that OSK has yet to fully realize the $75 million pre-tax synergies it expected from the 2006 JLG acquisition, considering that the current operating/EBITDA margins are lower than their 2007 levels. Furthermore, the fact that OSK took a $942 million write-off for the Access Equipment business in FY2009 suggests that the company overpaid for the acquisition. Segment Operating Performance Source: Thomson Reuters, SEC filings. Normalized EBITDA Margin Source: Thomson Reuters. Note: 2011 represents LTM data for companies that have yet to announce FY11 results. Peer group comprised of AGCO, CMI, DHR, DOV, GR, LLL, NC, PCAR, PCP, TEX, and TRN Revenue in US$ millions 2007 2008 2009 2010 2011 Defense Total Revenue $1421 $1892 $2595 $7162 $4365 Operating Margin 17.2% 14.0% 15.5% 18.4% 12.4% Adjusted EBITDA margin 17.7% 14.6% 16.0% 18.7% 13.1% Access Equipments Total Revenue $2540 $3213 $1226 $3012 $2052 Operating Margin 10.6% 11.3% -94.6% 3.2% 3.2% Adjusted EBITDA margin 13.6% 14.2% -10.3% 6.4% 7.3% Fire and Emergency Total Revenue $1128 $1009 $1042 $916 $800 Operating Margin 9.7% 9.3% 4.9% 6.3% -1.0% Adjusted EBITDA margin 11.2% 10.9% 12.5% 10.6% 1.2% Commercial Total Revenue $1080 $835 $590 $622 $565 Operating Margin 7.1% 0.6% -31.1% 3.1% 0.7% Adjusted EBITDA margin 9.1% 3.7% 3.5% 5.9% 3.4% Source: Thomson Reuters, SEC filings 12.0% 11.0% 6.6% 16.0% 8.7% 5.8% 9.1% 8.6% 7.4% 5.8% 13.0% 12.7% 10.8% 12.5% 12.4% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 2007 2008 2009 2010 2011 Normalized EBITDA Margin OSK NAV Peer Median
  5. 5. The Shareholder Communication Strategists 5 Management’s Plan  OSK completed a comprehensive strategic planning process in fiscal 2011. The review process culminated in the creation of the company’s roadmap (called “MOVE”), which consists of four key strategies: 1. Market Recovery and Growth: OSK believes that many of its non-defense markets will begin to recover after fiscal 2012. The Company plans to capture and improve its historic share of a market recovery. 2. Optimize Cost and Capital Structure: OSK plans to optimize its cost and capital structure to provide value for customers and shareholders by aggressively attacking its product and operating costs. 3. Value Innovation: OSK intends to maintain its emphasis on new product development as it seeks to expand sales and margins by leading its core markets in the introduction of new or improved products and new technologies. 4. Emerging Market Expansion: OSK plans to continue its expansion into those specialty vehicle and vehicle body markets globally where it has or can acquire strong market positions over time and where it believes it can leverage synergies in purchasing, manufacturing, technology and distribution to increase sales and profitability. After the Company accomplishes its plan to further reduce its debt, it would also consider selectively pursuing strategic acquisitions, primarily internationally, to enhance the Company’s product offerings and expand its international presence in specialty vehicle and vehicle body markets.  The Activist is likely to argue that the board’s plan to restore/enhance shareholder value is in direct response to shareholder pressure and that it lacks specific milestones by which shareholders can gauge management’s performance.  Based on analysts’ estimates and management’s outlook for FY2012, the MOVE strategy is unlikely to drive any significant top-line or earnings growth over next couple of years – lending further credence of potential Activist contentions that the MOVE is unlikely to drive shareholder value growth. Consensus estimates suggest a significant drop in operating profit and EPS in FY12. More importantly, revenue, operating profit and EPS are all expected to remain below FY11 levels over next three years. OSK Management’s Outlook for FY2012 Source: Oshkosh Presentation for 4th quarter FY2011 results (dated 1 Nov. 2011).
  6. 6. The Shareholder Communication Strategists 6 Consensus Analyst Estimates (Mean) Source: Thompson Reuters mean estimates. Corporate Governance  OSK has a number of good corporate governance practices: o Annually elected board; o Chairman of the board is an independent director; o Plurality vote standard to elect directors with resignation policy; o Directors may be removed with or without cause by a majority of the shares entitled to vote; o Vacancies on the board created by resignation or an enlargement of the board are filled by remaining directors, except vacancies as a result of removal by shareholders, which are to be filled by shareholders; o Special meetings can only be called by shareholders holding at least 10% of the voting power; o Double trigger change in control agreements; and o No poison pill.  The Activist is unlikely to focus on governance issues at the company. Question 2 – Can the activist nominees effect change?  With four of the six Activist nominees related to Icahn Associates, OSK shareholders are likely to raise some questions about their independence and objectivity.  It is quite plausible that the Activist will modify its proxy statement to target the long-tenured incumbent nominees. Since Oct. 2010, OSK has brought in five new directors (including John Shiely who is yet to be elected to the board). That still leaves five directors (excluding the CEO) with terms longer than ten years who would be vulnerable to the Activist’s attack. In US$ millions except EPS FY11A FY12E FY13E FY14E Revenue $7585 $7347 $7182 $6901 - growth -3.1% -2.3% -3.9% Operating Profit 511.70 283.91 356.06 465.17 - growth -44.5% 25.4% 30.6% EBITDA 656.10 442.87 516.82 545.38 - growth -32.5% 16.7% 5.5% EPS 3.19 1.44 2.03 2.47 - growth -54.9% 41.0% 21.7% Source: Thomson Reuters. Mean estimates