# OSHKOSH CORP (OSK) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OSHKOSH CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/775158/000156459021057221/osk-10k_20210930.htm
Accession: 0001564590-21-057221
Filing date: 2021-11-16
Report date: 2021-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OSK/
All MD&A years: /company/OSK/mda/
Next year: /company/OSK/mda/fy2022/ (FY 2022)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is a leading innovator, manufacturer and marketer of a wide range of essential specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire & emergency vehicles, refuse collection vehicles and concrete mixers. The Company is a leading global designer and manufacturer of aerial work platforms under the “JLG” brand name. The Company is among the worldwide leaders in the design and manufacturing of telehandlers under the “JLG” and “SkyTrak” brand names. Under the “Jerr-Dan” brand name, the Company is a leading domestic designer and manufacturer and marketer of towing and recovery equipment. The Company manufactures defense trucks under the “Oshkosh” brand name and is a leading designer and manufacturer of severe-duty, tactical wheeled vehicles for the U.S. Department of Defense (DoD). The Company also designs and manufactures delivery vehicles for the United States Postal Service (USPS) and airport snow removal vehicles under the “Oshkosh” brand name. Under the “Pierce” brand name, the Company is among the leading global designers and manufacturers of fire trucks assembled on both custom and commercial chassis. Under the “Frontline” brand name, the Company is a leading domestic designer, manufacturer and marketer of broadcast and command vehicles. The Company designs and manufactures Aircraft Rescue and Firefighting (ARFF) vehicles under the “Oshkosh” brand name. Under the “McNeilus” brand name, the Company designs and manufactures a wide range of automated, rear, front, side and top loading refuse collection vehicles. Under the “McNeilus,” “Oshkosh,” and “London” brand names, the Company designs and manufactures rear- and front-discharge concrete mixers. Under the “IMT” brand name, the Company is a leading domestic designer and manufacturer of field service vehicles and truck-mounted cranes.

Major products manufactured and marketed by each of the Company’s business segments are as follows:

Access Equipment — aerial work platforms and telehandlers used in a wide variety of construction, industrial, institutional and general maintenance applications to position workers and materials at elevated heights, as well as carriers and wreckers. Access Equipment customers include equipment rental companies, construction contractors, manufacturing companies, home improvement centers and towing companies.

Defense — tactical vehicles, trailers, weapons system integration and supply parts and services sold to the U.S. military and to other militaries around the world, delivery vehicles for the USPS, and snow removal vehicles for military and civilian airports.

Fire & Emergency — custom and commercial firefighting vehicles and equipment, ARFF vehicles, simulators, mobile command and control vehicles and other emergency vehicles primarily sold to fire departments, airports and other governmental units, as well as broadcast vehicles sold to broadcasters and TV stations.

Commercial — refuse collection vehicles sold to commercial and municipal waste haulers, concrete mixers sold to ready-mix companies and field service vehicles and truck-mounted cranes sold to mining, construction and other companies.

All estimates referred to in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refer to the Company’s estimates as of November 16, 2021.

In October 2021, the Company’s Board of Directors approved a change in the Company’s fiscal year end from September 30 to December 31. Accordingly, the Company will report a transition quarter that runs from October 1, 2021 through December 31, 2021 (Stub Period). The Company’s next full fiscal year will run from January 1, 2022 through December 31, 2022. As a result, all references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to a quarter or year are to the Company’s historical fiscal quarter or fiscal year unless stated otherwise.

32

OVERVIEW

The Company entered fiscal 2021 in the midst of the COVID-19 pandemic, which negatively impacted its sales in the first half of the year, particularly in the Access Equipment segment. As a result of the reduction in demand, the Access Equipment segment implemented production shutdowns of two weeks per month in the first quarter of fiscal 2021 and one week per month in the second quarter of fiscal 2021. Higher COVID-19 infection rates also resulted in production challenges in both the Defense and Fire & Emergency segments in the first half of fiscal 2021. During the second quarter of fiscal 2021, positive vaccination progress, and the confidence that brought to the marketplace, caused the U.S. economy to begin to rebound. As a result of the improving economy, the Company experienced a strong return in demand for many of its products. This rapid rebound has coincided with significant supply chain and logistics disruptions across the globe, which in turn have led to labor inefficiencies within the Company’s production facilities and higher freight costs to expedite parts. The rapid increase in business activity across the globe has also caused the Company to experience significant inflation in materials, freight and labor costs. The Company increased prices multiple times during fiscal 2021 in its non-Defense segments in an effort to offset the higher input costs, but the realization of the price increases is delayed due to existing backlog at the time the price increases were implemented.

Consolidated net sales in fiscal 2021 increased $880.5 million, or 12.8%, to $7.74 billion compared to fiscal 2020 primarily as a result of an increase in sales in the Access Equipment segment in the second half of fiscal 2021 as the COVID-19 pandemic significantly impacted demand in this segment in the third and fourth quarters of fiscal 2020. Higher Joint Light Tactical Vehicle (JLTV) production in the Defense segment and increased deliveries in the Fire & Emergency segment, including the recognition of several multi-unit international deliveries, also favorably impacted sales in fiscal 2021.

Consolidated operating income was $544.7 million, or 7.0% of sales, in fiscal 2021, an increase of 11.5% compared to fiscal 2020. The increase in consolidated operating income was primarily due to the impact of higher gross margin associated with higher sales volume, offset in part by higher material & freight costs and higher incentive compensation expense.

The increase in operating income, along with a significant tax benefit associated with the carryback of a U.S. net operating loss to prior years, resulted in diluted earnings per share of $6.83 in fiscal 2021, up significantly from $4.72 in fiscal 2020.

Fiscal 2021 results included a $75.3 million tax benefit associated with the carryback of the U.S. net operating loss to prior years and an $11.7 million tax benefit associated with the release of a valuation allowance on deferred tax assets in Europe, offset in part by after-tax charges of $11.7 million associated with restructuring actions in the Access Equipment segment and $0.8 million associated with business acquisition costs in the Defense segment. In the aggregate, these items accounted for a net $74.5 million, or $1.08 per share, benefit in fiscal 2021. Fiscal 2020 results included after-tax charges related to restructuring actions of $17.9 million, the establishment of a valuation allowance on deferred tax assets in Europe of $11.4 million, an after-tax charge of $6.5 million associated with debt extinguishment costs incurred in connection with the refinancing of the Company’s senior notes, offset in part by a $14.2 million after-tax gain on a property and business interruption insurance recovery, an after-tax gain of $3.2 million on an arbitration settlement in the Defense segment and an after-tax gain of $2.8 million on the sale of a business in the Commercial segment. In the aggregate, these items accounted for a net $15.6 million, or $0.22 per share, charge in fiscal 2020.

In January 2021, the Company acquired Pratt & Miller Engineering & Fabrications, LLC (Pratt Miller), an advanced engineering, technology and innovation provider for motorsports and multiple ground vehicle markets, for $111 million.

In February 2021, the Company was notified that the USPS selected the Company to build its Next Generation Delivery Vehicle (NGDV). The indefinite delivery, indefinite quantity (IDIQ) contract allows the USPS to purchase between 50,000 and 165,000 units over 10 years. The NGDV provides the USPS the ability to significantly modernize its delivery fleet with improved safety, reliability, sustainability and cost-efficiency while providing a much better working experience for the nation’s postal carriers. The Company’s offering provides the USPS with both zero-emission battery electric vehicles (BEV) and fuel efficient, low emission internal combustion engine (ICE) vehicles. The vehicle design also provides the USPS with the flexibility of converting ICE units to BEV in the future. The initial $482 million contract provides for engineering to

33

finalize the production vehicle design, and for tooling and factory build-out activities that are necessary prior to vehicle production. The Company expects to begin delivering production vehicles in the second half of calendar 2023.

In June 2021, the U.S. Army awarded the Company a 6-year contract worth up to $943 million for the Stryker Medium Caliber Weapons System, representing an important new adjacency for the Defense segment. In June 2021, the Company also announced that Madison, Wisconsin is operating the Company’s revolutionary new electric fire truck, the Pierce Volterra. The Volterra is a significant step forward for electric vehicles and is another milestone in Oshkosh’s two decade-plus history of electrifying products.

Demand for the Company’s products has been robust. Backlog is up significantly in all segments, leading to consolidated backlog of $8.08 billion at September 30, 2021. However, the current supply chain and logistics disruptions are making it difficult to forecast sales volume. While the Company’s backlogs support a 10% to 15% increase in sales in the Stub Period compared to the first quarter of fiscal 2021, the Company expects parts availability to constrain its ability to deliver higher sales. As a result of this uncertainty, the Company is unable to provide quantitative expectations for the Stub Period. The Company expects that Stub Period earnings per share will be significantly lower than the first quarter of fiscal 2021 and may approach break-even levels.

The Company expects that unfavorable price/cost dynamics will be a $75 million to $85 million headwind in the Stub Period versus the first quarter of fiscal 2021. Steel and other component costs have continued to increase. The Company has taken multiple pricing actions in its non-Defense businesses over the past several quarters, and in many cases, prices are now greater than 10% above early fiscal 2021 levels. The Company expects these price increases to enable it to achieve price/cost equilibrium based on the cost escalation that it has seen to date. However, the Company still needs to work through large backlogs, so the Company anticipates it will take until the end of the second quarter of calendar 2022 for these pricing actions to largely catch up with costs. If costs escalate further, the Company expects to take additional pricing actions.

The Company also expects higher spending levels in the Stub Period versus the first quarter of fiscal 2021. COVID-19 infection rates spiked early in the first quarter of fiscal 2021 and the Company’s spending levels remained low. Since then, spending levels have begun to normalize to pre-COVID-19 levels. The Company also expects that parts availability constraints will continue to drive labor inefficiencies.

The Company continued to execute its disciplined capital allocation strategy in fiscal 2021. The Company returned $198.2 million of cash to shareholders through the repurchase of 927,934 shares of stock and payment of quarterly dividends. In addition, the Company recently announced an increase in its quarterly dividend rate of 12%, to $0.37, per share beginning in November 2021. This was the Company’s eighth straight year of a double-digit percentage increase in its dividend rate.

RESULTS OF OPERATIONS – FISCAL 2021 COMPARED WITH FISCAL 2020

CONSOLIDATED RESULTS

The following table presents consolidated results (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","7,737.3","","","$","6,856.8","","","$","880.5","","","","12.8","%"],["Cost of sales","","","6,516.5","","","","5,736.5","","","","780.0","","","","13.6","%"],["Gross income","","","1,220.8","","","","1,120.3","","","","100.5","","","","9.0","%"],["% of sales","","","15.8","%","","","16.3","%","","","-0.5","%"],["SG&A expenses","","","666.5","","","","620.6","","","","45.9","","","","7.4","%"],["Amortization","","","9.6","","","","11.0","","","","(1.4",")","","","-12.7","%"],["Operating income","","","544.7","","","","488.7","","","","56.0","","","","11.5","%"],["% of sales","","","7.0","%","","","7.1","%","","","-0.1","%"]]
[[/GREPCENT_TABLE]]

34

The following table presents net sales by geographic region based on product shipment destination (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["North America","","$","6,748.5","","","$","6,023.7","","","$","724.8","","","","12.0","%"],["Europe, Africa and Middle East","","","504.8","","","","413.7","","","","91.1","","","","22.0","%"],["Rest of the world","","","484.0","","","","419.4","","","","64.6","","","","15.4","%"],["","","$","7,737.3","","","$","6,856.8","","","$","880.5","","","","12.8","%"]]
[[/GREPCENT_TABLE]]

Net sales increased as a result of higher Access Equipment segment sales, largely as a result of the impact of the COVID-19 pandemic on its markets in fiscal 2020. Additionally, Defense segment sales improved on increased JLTV production, and Fire & Emergency segment sales were up on higher deliveries, including higher multi-unit international deliveries.

The decrease in gross margin was due to higher material costs (130 basis points), offset in part by improved manufacturing absorption as a result of higher production volume (50 basis points) and lower engineering & product development costs (40 basis points).

The increase in selling, general and administrative expenses was generally a result of higher incentive compensation costs.

The increase in operating income was primarily due to the higher gross margin associated with higher consolidated sales volume ($180 million), favorable mix ($20 million), improved manufacturing absorption as a result of higher production volume ($13 million) and lower restructuring-related costs ($12 million), offset in part by unfavorable material costs ($97 million), higher incentive compensation costs ($62 million) and higher product liability activity ($12 million).

The following table presents consolidated non-operating changes (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Interest expense, net of interest income","","$","(44.7",")","","$","(51.8",")","","$","7.1","","","","-13.7","%"],["Miscellaneous income (expense)","","","(2.1",")","","","2.2","","","","(4.3",")","","","-195.5","%"],["Provision for income taxes","","","25.2","","","","112.8","","","","(87.6",")","","","-77.7","%"],["Effective tax rate","","","5.1","%","","","25.7","%","","","-20.6","%"],["Losses of unconsolidated affiliates","","$","\u2014","","","$","(1.8",")","","$","1.8","","","","-100.0","%"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense net of interest income was due to the absence of debt extinguishment costs. Fiscal 2020 included $8.5 million of debt extinguishment costs incurred in connection with refinancing the Company’s senior notes partially offset by $3.3 million of interest income related to a favorable arbitration settlement in the Defense segment.

Other miscellaneous income (expense) primarily related to gains and losses on investments, net foreign currency transaction gains and losses, and non-service costs of the Company’s pension plans. Fiscal 2020 also included $6.2 million of income on an insurance recovery at the Commercial segment.

Income tax expense in fiscal 2021 included discrete tax benefits of $96.0 million, primarily related to the carryback of the net operating loss to previous tax years with higher federal statutory tax rates ($75.3 million) and the reversal of a tax valuation allowance recorded against certain foreign net deferred tax assets in Europe ($11.7 million). Fiscal 2020 results were adversely impacted by discrete tax charges of $8.0 million, including tax valuation reserves recorded against certain foreign net deferred tax assets in Europe ($11.4 million). See Note 6 of the Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate compared to the U.S. statutory tax rate.

35

Losses of unconsolidated affiliates primarily represented the Company’s equity interest in a commercial entity in Mexico.

SEGMENT RESULTS

Access Equipment

The following table presents the Access Equipment segment results (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","3,072.1","","","$","2,515.1","","","$","557.0","","","","22.1","%"],["Cost of sales","","","2,599.1","","","","2,090.6","","","","508.5","","","","24.3","%"],["Gross income","","","473.0","","","","424.5","","","","48.5","","","","11.4","%"],["% of sales","","","15.4","%","","","16.9","%","","","-1.5","%"],["Operating expenses","","","223.9","","","","225.9","","","","(2.0",")","","","-0.9","%"],["Operating income","","","249.1","","","","198.6","","","","50.5","","","","25.4","%"],["% of sales","","","8.1","%","","","7.9","%","","","0.2","%"]]
[[/GREPCENT_TABLE]]

Segment net sales increased as a result of improved market demand, led by North America. The third and fourth quarters of fiscal 2020 were impacted by lower market demand due in large part to the economic downturn as a result of the COVID-19 pandemic.

The decrease in segment gross margin was due to unfavorable material & logistics costs (190 basis points), unfavorable product and customer mix (60 basis points) and product liability activity (50 basis points), offset in part by favorable fixed manufacturing absorption as a result of higher production volume (160 basis points).

The increase in segment operating income was primarily due to the impact of higher gross margin associated with higher sales volume ($135 million) and favorable fixed manufacturing absorption as a result of higher production volume ($25 million), offset in part by unfavorable material and logistics costs ($56 million), higher incentive compensation costs ($34 million) and higher product liability activity ($17 million).

Defense

The following table presents the Defense segment results (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","2,525.6","","","$","2,311.5","","","$","214.1","","","","9.3","%"],["Cost of sales","","","2,199.1","","","","2,017.5","","","","181.6","","","","9.0","%"],["Gross income","","","326.5","","","","294.0","","","","32.5","","","","11.1","%"],["% of sales","","","12.9","%","","","12.7","%","","","0.2","%"],["Operating expenses","","","128.7","","","","105.9","","","","22.8","","","","21.5","%"],["Operating income","","","197.8","","","","188.1","","","","9.7","","","","5.2","%"],["% of sales","","","7.8","%","","","8.1","%","","","-0.3","%"]]
[[/GREPCENT_TABLE]]

Segment net sales increased as a result of higher JLTV and Family of Heavy Tactical Vehicles (FHTV) program volumes and sales of Pratt Miller ($64 million) after its acquisition in January 2021, offset in part by lower Family of Medium Tactical Vehicles (FMTV) program volume. The Company expects domestic JLTV sales will decrease after fiscal 2021.

The increase in segment gross margin was due to lower engineering & product development costs (50 basis points) and improved product mix (30 basis points), offset in part by production inefficiencies (60 basis points).

36

The increase in segment operating income was primarily a result of the impact of higher gross margin associated with higher sales volume ($28 million), lower engineering & product development costs ($9 million) and favorable mix ($9 million), offset by production inefficiencies ($16 million), higher warranty costs ($6 million), higher incentive compensation costs ($5 million), higher material costs ($4 million) and the amortization of intangibles associated with the Pratt Miller acquisition ($4 million). Changes in estimates on contracts accounted for under the cost-to-cost method increased operating income by $19.4 million and $16.2 million in fiscal 2021 and 2020, respectively.

Fire & Emergency

The following table presents the Fire & Emergency segment results (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","1,226.6","","","$","1,107.0","","","$","119.6","","","","10.8","%"],["Cost of sales","","","959.7","","","","874.3","","","","85.4","","","","9.8","%"],["Gross income","","","266.9","","","","232.7","","","","34.2","","","","14.7","%"],["% of sales","","","21.8","%","","","21.0","%","","","0.8","%"],["Operating expenses","","","92.7","","","","86.2","","","","6.5","","","","7.5","%"],["Operating income","","","174.2","","","","146.5","","","","27.7","","","","18.9","%"],["% of sales","","","14.2","%","","","13.2","%","","","1.0","%"]]
[[/GREPCENT_TABLE]]

Segment net sales increased due to higher ARFF vehicle volume ($54 million) as a number of multi-unit awards were recognized in fiscal 2021, higher fire truck sales volume ($50 million) and improved pricing ($18 million). Fire truck deliveries in fiscal 2020 were negatively impacted by workforce availability constraints resulting from the COVID-19 pandemic and delivery delays resulting from COVID-19 related travel restrictions that prevented customers from inspecting and accepting trucks.

The increase in segment gross margin was primarily attributable to improved pricing (90 basis points) and favorable product mix (40 basis points), offset in part by higher material costs (60 basis points).

The increase in segment operating income was largely a result of the impact of higher gross margin associated with higher sales volume ($27 million), improved pricing ($18 million), offset in part by higher material costs ($9 million) and higher incentive compensation costs ($7 million).

Commercial

The following table presents the Commercial segment results (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","937.6","","","$","957.8","","","$","(20.2",")","","","-2.1","%"],["Cost of sales","","","782.8","","","","788.5","","","","(5.7",")","","","-0.7","%"],["Gross income","","","154.8","","","","169.3","","","","(14.5",")","","","-8.6","%"],["% of sales","","","16.5","%","","","17.7","%","","","-1.2","%"],["Operating expenses","","","83.8","","","","88.1","","","","(4.3",")","","","-4.9","%"],["Operating income","","","71.0","","","","81.2","","","","(10.2",")","","","-12.6","%"],["% of sales","","","7.6","%","","","8.5","%","","","-0.9","%"]]
[[/GREPCENT_TABLE]]

Segment net sales decreased as a result of the sale of the concrete batch plant business in the fourth quarter of fiscal 2020 ($35 million) and lower package sales, which include both a third-party chassis and a body ($26 million), offset in part by improved refuse collection vehicle ($29 million) and concrete mixer ($20 million) sales. Front-discharge concrete mixer volume was low in fiscal 2020 as a result of the ramp-up of production to a new model. Fiscal 2020 was also impacted by lower market demand due in large part to the economic downturn as a result of the COVID-19 pandemic.

37

The decrease in gross margin was primarily attributable to unfavorable material & logistics costs (290 basis points) and the absence of a business interruption insurance recovery (130 basis points), offset in part by favorable product mix (160 basis points), lower product liability costs (40 basis points), lower engineering spending (40 basis points) and the absence of restructuring costs (40 basis points).

The decrease in segment operating income was primarily due to unfavorable material costs ($27 million) and the absence of the business interruption insurance recovery ($12 million), offset in part by favorable product mix ($8 million), the absence of restructuring costs ($6 million), lower engineering costs ($5 million), improved pricing ($5 million) and lower product liability costs ($4 million).

Corporate and Intersegment eliminations

The following table presents the corporate costs and intersegment eliminations (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","","2020","","","Change","","","% Change"],["Net sales","","$","(24.6",")","","$","(34.6",")","","$","10.0","","","","-28.9","%"],["Cost of sales","","","(24.2",")","","","(34.4",")","","","10.2","","","","-29.7","%"],["Gross income","","","(0.4",")","","","(0.2",")","","","(0.2",")","","","100.0","%"],["Operating expenses","","","147.0","","","","125.5","","","","21.5","","","","17.1","%"],["Operating income","","","(147.4",")","","","(125.7",")","","","(21.7",")","","","17.3","%"]]
[[/GREPCENT_TABLE]]

Corporate operating expenses increased as a result of higher incentive compensation costs ($15 million) and the return of spending related to temporary cost reductions in fiscal 2020 in response to the COVID-19 pandemic ($5 million).

FISCAL 2020 COMPARED WITH FISCAL 2019

The comparison of the fiscal 2020 results with the fiscal 2019 results can be found in the “Management’s Discussion and Analysis” section in the Company’s fiscal 2020 Annual Report on Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

The Company generates significant capital resources from operating activities, which is the expected primary source of funding for the Company. In addition to cash generated from operations, the Company had other sources of liquidity available at September 30, 2021, including $1.38 billion of cash and cash equivalents and $832.8 million of unused available capacity under the Revolving Credit Facility (as defined in “Liquidity”). Borrowings under the Revolving Credit Facility could, as discussed below, be limited by the financial covenants contained in the Credit Agreement (as defined in “Liquidity”). The Company was in compliance and expects to remain in compliance with all financial covenants contained in the Credit Agreement.

The Company continues to actively monitor its liquidity position and working capital needs and prioritizes capital expenditures related to capacity and strategic investments. The Company remains in a stable overall capital resources and liquidity position that is adequate to meet its projected needs. In March 2020, the Company suspended its share repurchase program in response to business uncertainty resulting from the COVID-19 pandemic. During June 2021, the Company reinitiated the share repurchase program and repurchased over $100 million in shares during the remainder of fiscal 2021. As of September 30, 2021, the Company had approximately 6.5 million shares of Common Stock remaining under the repurchase authorization.

38

Financial Condition at September 30, 2021

The Company’s capitalization was as follows (in millions):

[[GREPCENT_TABLE]]
[["","","September 30,"],["","","2021","","","2020"],["Cash and cash equivalents","","$","1,375.8","","","$","582.9"],["Total debt","","","818.8","","","","823.1"],["Total shareholders\u2019 equity","","","3,247.8","","","","2,850.7"],["Total capitalization (debt plus equity)","","","4,066.6","","","","3,673.8"],["Debt to total capitalization","","","20.1","%","","","22.4","%"]]
[[/GREPCENT_TABLE]]

The Company’s ratio of debt to total capitalization of 20.1% at September 30, 2021 remained within its targeted range. The Company’s goal is to maintain an investment-grade credit rating. The rating agencies periodically update the Company’s credit ratings as events or changes in economic conditions occur. At September 30, 2021, the long-term credit ratings assigned to the Company’s senior debt securities by the credit rating agencies engaged by the Company were as follows:

[[GREPCENT_TABLE]]
[["Rating Agency","","Rating"],["Fitch Ratings","","BBB-"],["Moody\u2019s Investor Services, Inc.","","Baa3"],["Standards & Poor\u2019s","","BBB"]]
[[/GREPCENT_TABLE]]

Consolidated days sales outstanding (defined as “Trade Receivables” at quarter end divided by “Net Sales” for the most recent quarter multiplied by 90 days) was 42 days at September 30, 2021, up slightly from 41 days at September 30, 2020. Days sales outstanding for segments other than the Defense segment was 51 days at September 30, 2021, up slightly from 50 days at September 30, 2020. Consolidated inventory turns (defined as “Cost of Sales” on an annualized basis, divided by the average “Inventory” at the past five quarter end periods) increased from 3.8 times at September 30, 2020 to 4.7 times at September 30, 2021 primarily as a result of lower inventory levels in the Access Equipment segment. Inventories in the Access Equipment segment were elevated in fiscal 2020 due to the sudden decrease in customer demand as a result of the COVID-19 pandemic.

Operating Cash Flows

Operating activities provided $1.22 billion of cash during fiscal 2021 compared to $327.3 million during fiscal 2020. The increase in cash provided by operating activities in fiscal 2021 compared to fiscal 2020 was due to the timing of year-end within the COVID-19 pandemic. Sales declined significantly during the third and fourth quarters of fiscal 2020, which drove up finished goods inventory and reduced accounts receivable outstanding at September 30, 2020. At the same time, the Company reduced production at its manufacturing plants, which drove down accounts payable at September 30, 2020. Demand increased significantly in the third and fourth quarter of fiscal 2021, which allowed the Company to reduce finished goods inventory levels while at the same time increasing production. The higher sales and production resulted in an increase in accounts receivable and accounts payable levels at September 30, 2021. Altogether, inventory, accounts receivable and accounts payable provided $573 million more cash in fiscal 2021 than in fiscal 2020. Improved results coming out of the COVID-19 pandemic also resulted in an increase in consolidated net income of $148 million.

Investing Cash Flows

Investing activities used cash of $245.6 million during fiscal 2021 compared to $77.6 million in fiscal 2020. Additions to property, plant and equipment of $104.4 million in fiscal 2021 was generally consistent with fiscal 2020. The Company anticipates that it will spend $275 million on capital expenditures over the twelve month period ended September 30, 2021. The expected increase in capital spending over the next twelve months reflects the set-up of the NGDV manufacturing plant in Spartanburg, SC, for which the Company will receive customer advances. The Company used available cash to fund the acquisition of Pratt Miller in the second quarter of fiscal 2021 and increased its investments in affiliates by $38 million in fiscal 2021. In addition, a customer in the Access Equipment segment purchased a large amount

39

of equipment in the first quarter of fiscal 2020 that the customer was previously renting. This transaction increased proceeds received from the sale of equipment held for rental by $26.8 million in fiscal 2020 as compared to fiscal 2021.

Financing Cash Flows

Financing activities used cash of $180.4 million in fiscal 2021 compared to $115.5 million in fiscal 2020. The increase in cash utilized for financing activities was due to an increase in Common Stock repurchases under the authorization approved by the Company’s Board of Directors as the Company paused repurchases in fiscal 2020 to preserve liquidity when the COVID-19 pandemic struck. In fiscal 2021, the Company repurchased 927,934 shares of its Common Stock at an aggregate cost of $107.8 million. In fiscal 2020, the Company repurchased 550,853 shares of its Common Stock at an aggregate cost of $40.8 million.

Liquidity

Senior Credit Agreement

In April 2018, the Company entered into a Second Amended and Restated Credit Agreement with various lenders (the “Credit Agreement”). The Credit Agreement provides for (i) an unsecured revolving credit facility (the “Revolving Credit Facility”) that matures in April 2023 with an initial maximum aggregate amount of availability of $850 million and (ii) an unsecured $325 million term loan (the “Term Loan”) due in quarterly principal installments of $4.1 million commencing as of September 30, 2019 with a balloon payment of $264.1 million due at maturity in April 2023. As of September 30, 2021, the Company has prepaid all required quarterly principal installments and $39.1 million of the balloon payment on the Term Loan. At September 30, 2021, outstanding letters of credit of $17.2 million reduced available capacity under the Revolving Credit Facility to $832.8 million.

Under the Credit Agreement, the Company is obligated to pay (i) an unused commitment fee ranging from 0.125% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement and (ii) a fee ranging from 0.563% to 1.75% per annum of the maximum amount available to be drawn for each letter of credit issued and outstanding under the Credit Agreement.

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied, or (ii) for dollar-denominated loans only, the base rate (which is the highest of (a) the administrative agent’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied.

Covenant Compliance

The Credit Agreement contains various restrictions and covenants, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions, subject to certain exceptions, on the ability of the Company and certain of its subsidiaries to consolidate or merge, create liens, incur additional indebtedness, and dispose of substantially all assets. The Company was in compliance with the financial covenants contained in the Credit Agreement as of September 30, 2021 and expects to be able to meet the financial covenants contained in the Credit Agreement over the next twelve months.

Senior Notes

In May 2018, the Company issued $300.0 million of 4.600% unsecured senior notes due May 15, 2028 (the “2028 Senior Notes”). In February 2020, the Company issued $300.0 million of 3.100% unsecured senior notes due March 1, 2030 (the “2030 Senior Notes”) at a discount of $1.2 million. The Company recognized an approximately $8.5 million loss associated with the issuance of the 2030 Senior Notes in fiscal 2020. The 2028 Senior Notes and the 2030 Senior Notes were issued pursuant to an indenture (the “Indenture”) between the Company and a trustee. The Indenture contains customary affirmative and negative covenants. The Company has the option to redeem the 2028 and 2030 Senior Notes at any time for a premium.

40

Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s debt as of September 30, 2021.

Contractual Obligations

The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $52.4 million as of September 30, 2021. Payment of these obligations would result from settlements with tax authorities. Due to the difficulty in determining the timing of the settlement, these obligations are not included in the summary of the Company’s fixed contractual obligations. See Note 6 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s unrecognized tax benefits as of September 30, 2021. Following is a summary of the Company’s contractual obligations and payments due by period following September 30, 2021 (in millions):

[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","","","","","Less Than","","","","","","","","","","","More Than"],["","","Total","","","1 Year","","","1-3 Years","","","3-5 Years","","","5 Years"],["Long-term debt (including interest)(1)","","$","1,000.8","","","$","26.3","","","$","274.2","","","$","46.2","","","$","654.1"],["Lease obligations","","","249.7","","","","52.1","","","","72.8","","","","41.6","","","","83.2"],["Purchase obligations(2)","","","2,020.5","","","","1,946.7","","","","73.8","","","","\u2014","","","","\u2014"],["Other long-term liabilities(3)","","","734.9","","","","51.0","","","","91.5","","","","58.3","","","","534.1"],["","","$","4,005.9","","","$","2,076.1","","","$","512.3","","","$","146.1","","","$","1,271.4"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Interest was calculated based upon the interest rate in effect on September 30, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","The amounts for purchase obligations included above represent all obligations to purchase goods or services under agreements that are enforceable and legally binding and that specify all significant terms."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Represents other long-term liabilities on the Company\u2019s Consolidated Balance Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based on management\u2019s estimates, which are based largely on historical experience. This amount also includes all liabilities under the Company\u2019s pension and other postretirement benefit plans. See Note 5 of the Notes to Consolidated Financial Statements for information regarding these liabilities and the plan assets available to satisfy them."]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements. The Company considers the following policy to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s financial condition, results of operations and cash flows.

Revenue Recognition. The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Accordingly, revenue is recognized when control of the goods or services promised under a contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as the Company performs under the contract) in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. The Company accounts for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. If collectability is not probable, the sale is deferred until collection becomes probable or payment is received. In fiscal 2021, approximately 38% of the Company’s revenues were recognized under the percentage-of-completion accounting method.

Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration (e.g., the transaction price) is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation, which is determinable based on observable standalone selling prices or is estimated using an expected cost plus a margin approach. Revenue is then recognized for the transaction price allocated to the performance

41

obligation when control of the promised goods or services underlying the performance obligation is transferred. When the amount of consideration allocated to a performance obligation through this process differs from the invoiced amount, it results in a contract asset or liability. The identification of performance obligations within a contract requires significant judgment.

The following is a description of the primary activities from which the Company generates revenue.

Access Equipment, Fire & Emergency and Commercial segments revenue

The Company derives revenue in the Access Equipment, Fire & Emergency and Commercial segments (non-defense segments) through the sale of machinery, vehicles and related aftermarket parts and services. Customers include distributors and end-users. Contracts with customers generally exist upon the approval of a quote and/or purchase order by the Company and customer. Each contract is also assessed at inception to determine whether it is necessary to combine the contract with other contracts.

The Company’s non-defense segments offer various customer incentives within contracts, such as sales and marketing rebates, volume discounts and interest subsidies, some of which are variable and therefore must be estimated by the Company. Transaction prices may also be impacted by rights of return, primarily within the aftermarket parts business, which requires the Company to record a liability and asset representing its rights and obligations in the event a return occurs. The estimated return liability is based on historical experience rates.

Revenue for performance obligations consisting of machinery, vehicles and aftermarket parts (together, “product”) is recognized when the customer obtains control of the product, which typically occurs at a point in time, based on the shipping terms within the contract. In the Commercial segment, concrete mixer and refuse collection products are sold on both Company owned chassis and customer owned chassis. When performing work on a customer owned chassis, revenue is recognized over time based on the cost-to-cost method, as the Company is enhancing a customer owned asset.

All non-defense segments offer aftermarket services related to their respective products such as repair, refurbishment and maintenance (together, “services”). The Company generally recognizes revenue on service performance obligations over time using the method that results in the most faithful depiction of transfer of control to the customer. Non-defense segments also offer extended warranty coverage as an option on most products. The Company considers extended warranties to be service-type warranties and therefore a performance obligation. Service-type warranties differ from the Company’s standard, or assurance-type warranties, as they are generally separately priced and negotiated as part of the contract and/or provide additional coverage beyond what the customer or customer group that purchases the product would receive under the Company’s standard assurance-type warranty. The Company has concluded that its extended warranties are stand-ready obligations to perform and therefore recognizes revenue ratably over the coverage period.

Defense segment revenue

The majority of the Company’s Defense segment net sales are derived through long-term contracts with the U.S. government to design, develop, manufacture or modify defense products. These contracts, which also include those under the U.S. Government-sponsored Foreign Military Sales (FMS) program, accounted for approximately 95% of Defense segment revenue in fiscal 2021. Contracts with Defense segment customers are generally fixed-price or cost-reimbursement type contracts. Under fixed-price contracts, the price paid to the Company is generally not adjusted to reflect the Company’s actual costs except for costs incurred as a result of contract modifications. Certain fixed-price contracts include an incentive component under which the price paid to the Company is subject to adjustment based on the actual costs incurred. Under cost-reimbursement contracts, the price paid to the Company is determined based on the allowable costs incurred to perform plus a fee. The fee component of cost-reimbursement contracts can be fixed based on negotiations at contract inception or can vary based on performance against target costs established at the time of contract inception. The Company also designs, develops, manufactures or modifies defense products for international customers through Direct Commercial Sale contracts. The Defense segment supports its products through the sale of aftermarket parts and services. Aftermarket contracts can range from long-term supply agreements to ad hoc purchase orders for replacement parts.

42

The Company evaluates the promised goods and services within Defense segment contracts at inception to identify performance obligations. The goods and services in Defense segment contracts are typically not distinct from one another as they are generally customized and have complex inter-relationships and the Company is responsible for overall management of the contract. As a result, Defense segment contracts are typically accounted for as a single performance obligation. The Defense segment provides standard warranties for its products for periods that typically range from one to two years. These assurance-type warranties typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.

The Company determines the transaction price for each contract at inception based on the consideration that it expects to receive for the goods and services promised under the contract. This determination is made based on the Company’s current rights, excluding the impact of any subsequent contract modifications (including unexercised options) until they become legally enforceable. Contract modifications frequently occur within the Defense segment. The Company evaluates each modification to identify changes that impact price or scope of its contracts, which are then assessed to determine if the modification should be accounted for as an adjustment to an existing contract or as a separate contract. Contract modifications within the Defense segment are generally accounted for as a cumulative effect adjustment to existing contracts as they are not distinct from the goods and services within the existing contract.

For Defense segment contracts that include a variable component of the sale price, the Company estimates variable consideration. Variable consideration is included within the contract’s transaction price to the extent it is probable that a significant reversal of revenue will not occur. The Company evaluates its estimates of variable consideration on an ongoing basis and any adjustments are accounted for as changes in estimates in the period identified. Common forms of variable consideration within Defense segment contracts include cost reimbursement contracts that contain incentives, customer reimbursement rights and regulatory or customer negotiated penalties tied to contract performance.

The Company recognizes revenue on Defense segment contracts as performance obligations are satisfied and control of the underlying goods and services is transferred to the customer. In making this evaluation, the Defense segment considers contract terms, payment terms and whether there is an alternative future use for the good or service. Through this process the Company has concluded that substantially all of the Defense segment’s performance obligations, including a majority of performance obligations for aftermarket goods and services, transfer control to the customer over time. For U.S. government and FMS program contracts, this determination is supported by the inclusion of clauses within contracts that allow the customer to terminate a contract at its convenience. When the clause is present, the Company is entitled to compensation for the work performed through the date of notification at a price that reflects actual costs plus a reasonable margin in exchange for transferring its work in process to the customer. For contracts that do not contain termination for convenience provisions, the Company is generally able to support the over time transfer of control determination as a result of the customized nature of its goods and services, which create assets without an alternative use and contractual rights.

When transfer of control is not determined to be continuous over the term of the contract, the Company initially defers contract costs that relate to the contract or anticipated contract, as they generate or enhance assets that will be utilized to satisfy performance obligations in the future and are expected to be recovered. Deferred contract costs are subsequently amortized on a systematic basis consistent with the pattern of transfer of the goods and services to which they relate. Unlike the JLTV and FMTV A2 contracts, for which the Company has concluded control of the performance obligations transfers continuously over the contract terms, the Company has concluded that control of the performance obligation for the USPS contract transfers during the production phase of the contract. As a result, the Company has recognized $34.8 million of deferred contract costs related to the USPS contract at September 30, 2021 consisting of engineering costs, setup costs and tooling costs. The Company anticipates the production phase of the contract will begin in 2023. The USPS contract contains milestone billings provisions, under which the Company billed and received $39.6 million of advance payments from the customer as of September 30, 2021.

CRITICAL ACCOUNTING ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company’s Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). The preparation of financial statements in accordance with U.S. GAAP requires

43

management to make estimates and judgments that affect reported amounts and related disclosures. On an ongoing basis, management evaluates and updates its estimates. Management employs judgment in making its estimates but they are based on historical experience and currently available information and various other assumptions that the Company believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results could differ from those estimates.

Management believes that its judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented.

Estimate-at-Completion (EAC). The Company has concluded that control of substantially all of the Defense segment’s performance obligations transfers to the customer continuously and therefore revenue is recognized over time. The Defense segment recognizes revenue on its performance obligations that are satisfied over time by measuring progress using the cost-to-cost method of percentage-of-completion because it best depicts the transfer of control to the customer. Under the cost-to-cost method of percentage-of-completion, the Defense segment measures progress based on the ratio of costs incurred to date to total estimated costs for the performance obligations. Due to the size and nature of these contracts, the estimation of total revenues and costs is highly complicated and judgmental. The Company must make assumptions regarding expected increases in wages and employee benefits, productivity and availability of labor, material costs and allocated fixed costs. Each contract is evaluated at contract inception to identify risks and estimate revenue and costs. In performing this evaluation, the Defense segment considers risks of contract performance such as technical requirements, schedule, duration and key contract dependencies. These considerations are then factored into the Company’s estimated revenue and costs. If a loss is expected on a performance obligation, the complete estimated loss is recorded in the period in which the loss is identified. Preliminary contract estimates are subject to change throughout the duration of the contract as additional information becomes available that impacts risks and estimated revenue and costs. Changes to production costs, overhead rates, learning curve and/or supplier performance can also impact these estimates. These estimates are highly judgmental, particularly the non-production costs on the JLTV and FMTV A2 contracts. The Company recognizes changes in estimated sales or costs and the resulting profit or loss on a cumulative basis. In addition, as contract modifications (e.g., new orders) are received, they are evaluated to determine if they represent a separate contract or the impact on the existing contract. As of September 30, 2021, the estimated remaining costs on the JLTV and FMTV A2 contracts represent the majority of the total estimated costs to complete in the Defense segment.

Changes in estimates on contracts accounted for under the cost-to-cost method on prior year revenues increased Defense segment operating income by $19.4 million in fiscal 2021 and $16.2 million in fiscal 2020.

NEW ACCOUNTING STANDARDS

See Note 2 of the Notes to Consolidated Financial Statements for a discussion of the impact of new accounting standards on the Company’s consolidated financial statements.

CUSTOMERS AND BACKLOG

Sales to the U.S. government comprised approximately 33% of the Company’s net sales in fiscal 2021. No other single customer accounted for more than 10% of the Company’s net sales for this period. A substantial majority of the Company’s net sales are derived from the fulfillment of customer orders that are received prior to commencing production.

The Company’s backlog as of September 30, 2021 increased 76.4% to $8.08 billion compared to $4.58 billion at September 30, 2020. Access Equipment segment backlog increased 652.1% to $2.76 billion at September 30, 2021 compared to $366.7 million at September 30, 2020 as demand rebounded following the re-opening of economies and as a result of elevated customer fleet ages. The Access Equipment segment also faced significant supply chain disruptions as the economy rebounded from the COVID-19 pandemic, which limited production in the second half of fiscal 2021 and contributed to the higher backlog. Defense segment backlog increased 18.3% to $3.36 billion at September 30, 2021 compared to $2.84 billion at September 30, 2020 primarily due to the initial order from the USPS for the NGDV program, offset in part by shipments under the JLTV contract. Fire & Emergency segment backlog increased 27.6% to $1.39 billion at September 30, 2021 compared to $1.09 billion at September 30, 2020 due to strong demand for fire trucks coming out of

44

the COVID-19 pandemic as municipal budgets have been more resilient than the Company previously expected. Although Fire & Emergency segment backlog remained strong, orders softened for ARFF vehicles due to the impact of the COVID-19 pandemic on airport budgets. Commercial segment backlog increased 101.1% to $569.4 million at September 30, 2021 compared to $283.1 million at September 30, 2020 due to high demand for the Company’s new front-discharge concrete mixer and improved market demand for refuse collection vehicles and concrete mixers as demand returned coming out of the COVID- 19 pandemic.

Reported backlog excludes purchase options and announced orders for which definitive contracts have not been executed. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of the Company’s future sales to the DoD versus its sales to other customers. Approximately 24% of the Company’s September 30, 2021 backlog is not expected to be filled in the twelve months ended September 30, 2022.