24.09.2008

Oshkosh sued

The Iron Workers Local No. 25 Pension Fund has filed a class action lawsuit against Oshkosh, the parent company of JLG and its chief executive Robert Bohn, for violation of federal securities laws.

The suit, which was filed in the Eastern District of Wisconsin federal court, is on behalf of everyone, apart from Oshkosh directors, who purchased Oshkosh stock between November 1 2007 and June 28th 2008.

The complaint claims that Oshkosh officials knowingly misrepresented the costs of restructuring the company’s European refuse group, Geesink-Norba Group, and also misrepresented the anticipated growth in sales of JLG during this period.

On June 26, the company announced that it was de-valuing the Geesink-Norba assets by $175 million and adjusted its earnings forecasts downwards for the financial year ending Sept. 30th, 2008. The latter as a result of factors that included "a decline in sales at JLG related to drop in commercial construction in the United States."

Oshkosh shares dropped by over 33 percent the following day, falling from $33.51 on June 25 to $22.29 on June 26, the day the revised outlook was announced.

The suit suggests that Oshkosh deliberately talked up JLG’s prospects for 2008 while exaggerating potential synergy gains and downplaying the challenges in its European refuse truck business. It also claims that Robert Bohn sold a large amount of Oshkosh stock on February 20th 2008 at a high point in the stocks value.

Vertikal Comment

There is little that we can say about this matter at this time, however, a large part of the issue here is that the fall in the access market appears to have caught JLG and Oshkosh by surprise, they were not the only ones of course.

The problem was that in May signs were indicating just a steady slow down in business which was buoyed up by ongoing commercial construction and infrastructure development, together with rapidly growing markets in Eastern Europe.

However by early June, the general economic mood was deteriorating fast as more and more bad news surfaced, causing a great deal of concern and anxiety among rental companies, which coupled with rapidly improving delivery times for new equipment, caused many of them to scale back or postpone capital expenditures.

This apparently rapid change in outlook is the main point triggering claims such as the one above, as professional investors seem unable to understand how quickly the market for new equipment and the size of a company's backlog can change.

With over 75 percent of all aerial lifts purchased by rental companies the manufacturers are vulnerable to sudden order cancellations and a drop off in sales as rental companies put all equipment renewals and expansions on hold, while they gauge where the market is going.

This sudden swing caught many producers out as seemingly large order books quickly evaporated. It is not the first time this has happened and it surely will not be the last. The worst of it this time was that as orders began to slow up and volumes slipped, the cost of materials began to rise at breakneck speed cutting into profitability.

This suit is unlikely to uncover any case of malicious fraud. At worst the hearing might be able to point the finger at a touch of over optimism and naivety, but let the person who has never been caught out by such things in the past, cast the first stone.

The fact is that life goes on and demand for aerial lifts is still there, the market over the mid-term will grow above recednt highs and will settle down once buyers feel they have seen the bottom of the current economic cylce, the same is true for telehandlers.

The challenge for Oshkosh and thus JLG is to continue to develop the business over the next couple of years while markets remain uncertain. An additional problem at Oshkosh will be how it handles the high debt levels that it took on to acquire JLG, which effectively doubled the size of the company overnight. Ideally it needs to renegotiate the terns of its debt in order to provide some 'elbow room'. Not an easy task in the current climate.