M-ATV Special Forces. Source: Oshkosh

Defense contractor Oshkosh's (NYSE: OSK) union workers understood they'd have to make concessions in their contract negotiations if the company was going to be competitive in bidding for new work worth some $22 billion.

Unlike their last round of talks, when the United Auto Workers union pointed to Oshkosh's profitability as a reason to be firmer in its negotiations, they realized this time that Oshkosh's promise to move jobs out of the area unless it got concessions was sincere. That's why, despite the heavy-duty maker reporting third-quarter profits nearly doubling to $148 million in July, the union ratified a five-year extension to its current agreement. Though pay raises are stretched out over the life of the contract, and members will be paying more toward their health care premiums, 2,500 jobs will remain intact.

At issue was Oshkosh's plan to be one of three defense contractors bidding on a military program to replace up to 55,000 military Humvees for the Army and Marines. Last month, Oshkosh, Lockheed Martin (NYSE:LMT), and AM General each delivered 22 JLTV prototypes for testing and evaluation, set to be completed in the first quarter of fiscal year 2015, which begins in October. AM General makes the current Humvee.

The Pentagon will award a single-source contract to the winner of the bidding process, which will receive as much as $22 billion in orders. Thus, it was imperative that Oshkosh lock in this contract extension now. Although the initial three-year contract would be for only 3,100 vehicles, it would include options for up to five additional years of full-rate production.

The three rivals beat out BAE Systems, General Dynamics (NYSE:GD), and Navistar International (NYSE:NAV), and while the 27-month technical development period is exclusive only to Oshkosh, Lockheed, and AM, the former three may still be able to backdoor their way in once the engineering, manufacturing, and development phase is complete. Navistar had complained about the review process that caused them to lose their bid, causing the military to open the door to that option.

General Dynamics is also still involved, since it has a joint venture with AM General, called General Tactical Vehicles, which developed the latter's prototype for consideration.

Yet Oshkosh already manufactures the military's M-ATV, a heavy, lumbering vehicle that was specially designed on a rush order basis to protect troops from roadside bombs in Afghanistan. While the contract envisions a vehicle that's more maneuverable than the M-ATV, Oshkosh is using that design as the basis for its entrant, which it calls the light combat tactical all-terrain vehicle, or L-ATV. It feels that similarity gives it a leg up on its rivals, as its M-ATV is already on the ground performing the duties the JLTV will be called upon to replicate.

But none of that would happen if the union hadn't agreed to the contract extension, which now gives Oshkosh the ability to foresee its costs into the longer-term future. And considering the heavy artillery its rivals bring to the game, that was a battle it couldn't afford to lose.

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