OSHKOSH CORP (OSK) FY 2022 MD&A

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

GENERAL

The Company is an industrial technology company and manufacturer that innovates purpose-built vehicles and equipment for the access, defense, fire & emergency, refuse collection and concrete placement markets. 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” and "Maxi-Metal" brand names, 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 parts 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 February 21, 2023.

BASIS OF PRESENTATION

In October 2021, the Company’s changed its fiscal year end from September 30 to December 31. Accordingly, the Company reported a transition quarter that ran from October 1, 2021 through December 31, 2021. Fiscal 2020 and Fiscal 2021 relate to the years ended September 30, 2020 and September 30, 2021, respectively. Fiscal 2022 relates to the year ended December 31, 2022. The Company has presented the unaudited Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows for the year ended December 31, 2021 at the end of the “Results of Operations” section below for reference in the comparisons to fiscal 2022. The Company has presented the year ended December 31, 2021 as a comparison to its results for fiscal 2022 as it believes this comparison is more meaningful to a reader’s understanding of its fiscal 2022 results of operations than a comparison to fiscal 2021.

Effective October 1, 2022, the Company changed its method of accounting for certain inventory in the United States from the Last-in, First-Out (LIFO) method to the First-In, First-Out (FIFO) method. The FIFO method of accounting for inventory is preferable because it more accurately reflects the current value and physical flow of inventory, it improves comparability with

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the Company’s peers and it harmonizes the accounting method for all of the Company’s inventories. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in this Annual Report, including Management’s Discussion and Analysis. Refer to Note 2 of the consolidated financial statements in Part II Item 8 of this Annual Report on Form 10-K for further information related to the change in accounting method.

OVERVIEW

The Company entered 2021 in the midst of the COVID-19 pandemic, which negatively impacted its sales at the start of 2021, particularly in the Access Equipment segment. Higher COVID-19 infection rates also resulted in production challenges in both the Defense and Fire & Emergency segments in the first quarter of 2021. Toward the end of the first quarter of 2021, positive vaccination progress, and the confidence that brought to the marketplace, caused the U.S. economy to begin to rebound. As a result, the Company experienced a strong return in demand for many of its products. This rapid rebound coincided with significant supply chain and logistics disruptions across the globe, which in turn led to labor inefficiencies within the Company’s production facilities and higher freight costs to expedite parts. The rapid increase in business activity also caused the Company to experience significant inflation in materials, freight and labor costs. These global supply chain bottlenecks and inflationary conditions continued throughout fiscal 2022. The Company increased prices multiple times in its non-Defense segments in an effort to offset the higher input costs, but the realization of the price increases was not immediate due to existing backlog at the time the price increases were implemented. The difference in the timing of the realization of our price increases as compared to the impact of cost increases adversely impacted price/cost dynamics of the Company, particularly during the first half of fiscal 2022. Realized price increases largely caught up to cost increases in the back half of fiscal 2022, particularly in the Access Equipment and Commercial segments. The time to achieve price-cost neutrality in the Fire & Emergency segment is longer due to the nature of bonded orders for municipal customers.

The Company grew revenues 4.1% in fiscal 2022 compared to the year ended December 31, 2021, resulting in diluted earnings per share of $2.63. Earnings per share were lower than earnings per share of $6.68 for the year ended December 31, 2021 largely due to manufacturing inefficiencies associated with supply chain disruptions, the absence of a carryback of a U.S. net operating loss to previous tax years, unfavorable cumulative catch-up adjustments in the Defense segment, a loss on the settlement of a frozen pension plan and higher new product development spending.

Fiscal 2022 results included an after-tax charge of $25.7 million for the settlement of a frozen pension plan, a charge of $18.1 million associated with foreign anti-hybrid tax legislation, an after-tax charge $6.4 million for the impairment of intangible assets and an after-tax charge of $4.6 million for the release of cumulative translation adjustment losses. In aggregate, these items accounted for a net $54.8 million, or $0.83 per share, charge in fiscal 2022. Results for the year ended December 31, 2021 included a $75.3 million tax benefit associated with the carryback of a 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 an after-tax charge of $3.9 million associated with restructuring actions in the Access Equipment segment and an after-tax charge of $0.2 million associated with business acquisition costs in the Defense segment. In aggregate, these items accounted for a net $82.9 million, $1.20 per share, benefit for the year ended December 31, 2021.

The Company announced an increase in its quarterly dividend rate of 10.8%, to $0.41 per share, beginning in February 2023. This was the Company’s ninth straight year of a double-digit percentage increase to its dividend rate.

Effective January 31, 2023, the Company combined its Fire & Emergency and Commercial segment businesses into a new reporting segment called Vocational as all of the businesses design, develop and manufacture purpose-built vocational vehicles for people in communities around the world who do tough work. By combining these segments, the Company expects to drive enhanced efficiencies across the board, while better leveraging its scale in technology development at an accelerated pace. The Company believes the Vocational segment also serves as a platform for further organic and inorganic growth opportunities in several important end markets. The Company expects that the Vocational segment will initially generate annual revenues of over $2 billion with the opportunity to grow organically at a high single digit compound annual growth rate to nearly $3 billion with 12% plus operating margins over the next few years. The Company has also announced that it has entered into a definitive agreement to sell its rear discharge concrete mixer business, which is expected to occur by the end of the first quarter of fiscal 2023. The Company expects this will enable it to focus on attractive end markets that value technology and innovation that it believes will drive higher margins.

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FISCAL 2023 OUTLOOK

The Company estimates consolidated net sales will be in the range of $8.4 billion in fiscal 2023, compared to $8.3 billion in fiscal 2022. The Company expects consolidated operating income will be in the range of $530 million, resulting in diluted earnings per share in the range of $5.50. The fiscal 2023 estimate assumes an average share count of 65.7 million shares. Included in the Company’s expectations is the adverse impact of approximately $0.80 per share related to incentive compensation costs returning to typical levels and increased new product development investments of approximately $0.30 per share.

Demand remains strong as indicated by order intake of $3.3 billion in the fourth quarter of fiscal 2022, leading to the Company’s record backlog of $14.1 billion on December 31, 2022. The Company’s guidance reflects modest supply chain improvements in fiscal 2023, but the Company expects that supply chain impacts will continue to limit the Company’s revenues and contribute to production inefficiencies in fiscal 2023.

The Company believes Access segment net sales will be in the range of $4.2 billion in fiscal 2023, a 6% increase compared to fiscal 2022 net sales. The Company’s estimates reflect expectations of improved pricing and a modest volume increase. Supply chain dynamics are expected to remain the limiting factor for more significant revenue growth as demand remains very robust. The Company expects operating margin in the Access segment in fiscal 2023 will be in the range of 11%. The Company expects the 310 basis point improvement in operating margin compared to fiscal 2022 will be driven by the full year benefit of improved pricing and improved absorption.

The Company expects Defense segment net sales will be in the range of $2.0 billion in fiscal 2023, approximately $140 million lower than fiscal 2022. The Company expects that revenue will begin to grow in fiscal 2024 as the USPS NGDV production begins to ramp up. The Company expects Defense segment operating margin will be in the range of 4% in fiscal 2023. The Company expects unfavorable product mix and NGDV-related pre-production operating expenses to account for the mid-single digit operating margin. The Company expects margins will improve as new programs ramp up in fiscal 2024.

The Company expects Vocational segment net sales will be in the range of $2.2 billion in fiscal 2023, roughly flat to the fiscal 2022 combined revenue for the Fire & Emergency and Commercial segments. The Company’s guidance for the Vocational segment reflects modest volume increases, offset in part by the impact of the planned divestiture of the rear discharge concrete mixer business which is expected to occur during the first quarter of fiscal 2023. Similar to the Access segment, demand remains very strong, but the Company’s revenues are expected to be constrained in fiscal 2023 by supply chain dynamics.

The Company expects operating margin in the Vocational segment will be in the range of 7.5%, reflecting the impact of constrained output and manufacturing inefficiencies due to supply chain dynamics and the impact of price-protected orders. Vocational segment operating income margins are expected to grow beyond fiscal 2023 as municipal customer orders in backlog for delivery in fiscal 2024 were booked at significantly higher prices and the Company expects margin benefit over time from the integration of the two segments.

The Company estimates corporate expenses in fiscal 2023 will be approximately $170 million, approximately $29 million higher than fiscal 2022 driven by a return of incentive compensation to typical levels and increased investments in growth initiatives and new product development. The Company estimates the tax rate for fiscal 2023 will be approximately 25%.

The Company expects consolidated net sales in the first quarter of fiscal 2023 to be in the range of $2.1 billion, down approximately $100 million versus the fourth quarter of fiscal 2022. The Company expects the lower revenue to be driven by the timing of deliveries in the Access and Vocational segments as well as lower sales in the Defense segment. The Company expects earnings per share in the first quarter of fiscal 2023 will be in the range of $1.00, reflecting the lower sales, unfavorable order mix in the Defense segment and the return of incentive compensation costs to typical levels. Based on these factors, the Company expects that the first quarter will be the lowest quarter of fiscal 2023 for diluted earnings per share.

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RESULTS OF OPERATIONS

CONSOLIDATED RESULTS - YEAR ENDED DECEMBER 31, 2022

The following table presents consolidated results (in millions):

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Consolidated net sales increased as a result of improved pricing ($467 million), offset in part by the unfavorable impact of foreign currency exchange rates ($57 million), lower consolidated volume ($52 million) and unfavorable cumulative catch-up adjustments on contracts in the Defense segment ($27 million).

The decrease in consolidated gross margin was due to higher material & logistics costs (580 basis points) and higher manufacturing costs (130 basis points) largely as a result of supply chain disruptions, offset in part by improved pricing (430 basis points).

The decrease in consolidated selling, general and administrative expenses was generally a result of lower incentive compensation costs ($46 million), offset in part by higher salaries ($11 million), higher reserves for credit losses ($10 million), higher software costs ($9 million) and increased travel ($5 million).

The decrease in consolidated operating income was primarily due to unfavorable material & logistics costs ($482 million), manufacturing inefficiencies ($119 million) associated with supply chain disruptions, unfavorable cumulative catch-up adjustments on contracts in the Defense segment ($42 million), higher engineering and new product development spending ($32 million) and higher operating expenses ($28 million), offset in part by improved pricing ($467 million) and lower incentive compensation costs ($58 million).

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

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 2022 results included a charge of $33.6 million for the settlement of a frozen pension plan. Foreign currency transactions resulted in losses of $6.9 million in fiscal 2022 and gains of $4.9 million for the year ended December 31, 2021. Results included an unrealized loss on an investment of $10.3 million in fiscal 2022 and $10.8 million for the year ended December 31, 2021.

Income tax expense in fiscal 2022 included a charge of $31.3 million as the Company revised its interpretation of certain foreign anti-hybrid tax legislation based upon comments from the corresponding taxing authorities. Results for the year ended December 31, 2021 included discrete tax benefits of $91.3 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). 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.

Gains and losses of unconsolidated affiliates primarily represented changes in the Company’s equity method investments.

SEGMENT RESULTS

Access Equipment

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Access Equipment segment net sales increased as a result of higher pricing ($348 million) in response to higher input costs and increased volume ($337 million). Access Equipment sales for fiscal 2022 were unfavorably impacted by $53 million from changes in foreign currency exchange rates.

The decrease in Access Equipment segment gross margin was due to higher material & logistics costs (900 basis points), offset in part by improved pricing (650 basis points) and lower product liability costs (40 basis points).

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The increase in Access Equipment segment operating income was primarily due to improved pricing ($348 million), the impact of higher gross margin associated with higher sales volume ($84 million) and lower incentive compensation costs ($27 million), offset in part by higher material & logistics costs ($372 million) and higher manufacturing costs ($63 million).

Defense

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Defense segment net sales decreased as U.S. Government funding for the Company’s tactical wheeled vehicle programs has decreased in recent years.

The decrease in gross margin in the Defense segment was due to unfavorable cumulative catch-up adjustments on contracts (180 basis points) and unfavorable product mix (120 basis points).

The decrease in operating income in the Defense segment was primarily a result of the impact of lower gross margin associated with lower sales volume ($54 million), unfavorable cumulative catch-up adjustments on contracts ($42 million) and unfavorable product mix ($26 million), offset in part by lower warranty costs ($14 million). Changes in estimates on contracts accounted for under the cost-to-cost method resulted in cumulative catch-up adjustments on contract margins that decreased Defense segment operating income by $44.9 million in fiscal 2022 primarily as a result of higher material and logistics costs. Changes in estimates on contracts accounted for under the cost-to-cost method decreased Defense segment operating income by $3.3 million in the year ended December 31, 2021.

Fire & Emergency

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Fire & Emergency segment net sales decreased due to lower ARFF vehicle volume ($53 million) and lower fire truck volume ($41 million) as a result of supply chain disruptions, offset in part by improved pricing ($32 million).

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The decrease in gross margin in the Fire & Emergency segment was primarily attributable to higher material & logistics costs (320 basis points), manufacturing inefficiencies (270 basis points) largely associated with parts shortages and labor availability and adverse product mix (100 basis points), offset in part by improved pricing (210 basis points).

The decrease in operating income in the Fire & Emergency segment was largely a result of higher material & logistics costs ($36 million), higher manufacturing inefficiencies ($29 million), the impact of lower gross margin associated with lower sales volume ($25 million) and adverse product mix ($11 million), offset in part by improved pricing ($32 million) and lower incentive compensation costs ($6 million).

Commercial

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Commercial segment net sales increased as a result of higher pricing ($87 million) in response to higher input costs and favorable product mix primarily due to a greater percentage of sales that included a third-party chassis ($37 million).

The decrease in gross margin in the Commercial segment was primarily attributable to unfavorable material & logistics costs (680 basis points) and higher manufacturing costs (150 basis points), offset in part by improved pricing (600 basis points).

The decrease in operating income in the Commercial segment was primarily due to higher material & logistics costs ($72 million), higher manufacturing costs ($24 million), higher engineering and new product development spending ($10 million) and higher warranty costs ($4 million), offset in part by improved pricing ($87 million) and favorable product mix ($14 million).

Corporate and Intersegment eliminations

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

Fiscal 2022 Compared to Year Ended December 31, 2021 (unaudited)

Corporate operating expenses decreased as a result of lower incentive compensation costs ($16 million), offset in part by higher engineering and new product development spending ($7 million).

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THREE MONTHS ENDED DECEMBER 31, 2021 COMPARED WITH THE THREE MONTHS ENDED DECEMBER 31, 2020

The comparison of the results for the three months ended December 31, 2021 with the results for the three months ended December 31, 2020 can be found in the “Management’s Discussion and Analysis” section in the Company’s Transition Report on Form 10-Q for the transition period from October 1, 2021 to December 31, 2021.

FISCAL 2021 COMPARED WITH FISCAL 2020

The comparison of the fiscal 2021 results with the fiscal 2020 results can be found in the “Management’s Discussion and Analysis” section in the Company’s fiscal 2021 Annual Report on Form 10-K.

PRO-FORMA FINANCIAL STATEMENTS

The Condensed Consolidated Statement of Income for fiscal 2022 is presented below for reference in comparison to the year ended December 31, 2021 (in millions):

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The Condensed Consolidated Statement of Cash Flows for fiscal 2022 is presented below for reference in comparison to the year ended December 31, 2021 (in millions):

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LIQUIDITY AND CAPITAL RESOURCES

The Company generates significant capital resources from operating activities, which is the expected primary source of funding for the Company. The Company expects cash flow from operations of approximately $650 million in fiscal 2023. In addition to cash generated from operations, the Company had other sources of liquidity available at December 31, 2022, including $805.9 million of cash and cash equivalents and $1.08 billion 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 a financial covenant contained in the Credit Agreement (as defined in “Liquidity”). The Company was in compliance and expects to remain in compliance with the financial covenant 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 the Company believes is adequate to meet its projected needs. Other uses of cash include the repayment of debt and the repurchase of the Company’s Common Stock. In fiscal 2022, the Company used available cash to repay $225.0 million of debt and repurchase $155.0 million of its Common Stock.

Financial Condition at December 31, 2022

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

The Company’s ratio of debt to total capitalization of 16.0% at December 31, 2022 remained within its targeted range. Debt to total capitalization decreased in fiscal 2022 due to the repayment of remaining amounts due under the Company's term loan during the year. 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 December 31, 2022, 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:

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 45 days at December 31, 2022, down slightly from 46 days at December 31, 2021. Days sales outstanding for segments other than the Defense segment was 49 days at December 31, 2022, down from 53 days at December 31, 2021 on quicker cash collections at the Access Equipment segment. Consolidated inventory turns (defined as “Cost of Sales” on an annualized basis, divided by the average “Inventory” at the past five quarter end periods) decreased from 4.3 times at December 31, 2021 to 4.1 times at December 31, 2022 primarily as a result of higher inventory levels in the Defense segment. Consolidated days payables outstanding (defined as “Accounts Payable” at quarter end divided by material costs of sales for the most recent quarter multiplied by 90 days) was 66 days, up from 55 days at December 31, 2021 due to the timing of payments near year end and significant non-inventory payables related to construction projects.

Operating Cash Flows

Operating activities provided $601.3 million of cash in fiscal 2022 compared to $690.4 million during the year ended December 31, 2021. The decrease in cash provided by operating activities in fiscal 2022 compared to the year ended December 31, 2021 was due to the lower net income generated during the year, a significant increase in inventory due to global supply chain challenges that have delayed the Company’s ability to complete units and lower incentive compensation accruals, offset in part by higher customer advances in the Fire & Emergency and Defense segments.

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Investing Cash Flows

Investing activities used cash of $300.4 million in fiscal 2022 compared to $251.0 million during the year ended December 31, 2021. Additions to property, plant and equipment of $269.5 million in fiscal 2022 increased $147.3 million from the year ended December 31, 2021 driven by capital spending to set up the NGDV manufacturing plant in Spartanburg, SC. The Company anticipates that it will spend $350 million on capital expenditures in fiscal 2023 as the Company completes the NGDV facility in South Carolina and invests in manufacturing capacity in the Access and Vocational segments. During the first quarter of fiscal 2023, the Company utilized approximately $200 million of cash to fund the acquisition of Hinowa S.p.A., an Italian manufacturer of compact crawler booms and other tracked equipment.

Financing Cash Flows

Financing activities used cash of $485.0 million in fiscal 2022 compared to $334.4 million during the year ended December 31, 2021. The increase in cash utilized for financing activities was due to the repayment of the Company’s $225 million term loan, offset in part by a decrease in Common Stock repurchases under authorizations approved by the Company’s Board of Directors. In fiscal 2022, the Company repurchased 1,508,467 shares of its Common Stock at an aggregate cost of $155.0 million. During the year ended December 31, 2021, the Company repurchased 2,290,765 shares of its Common Stock at an aggregate cost of $257.8 million. The Company’s Board of Directors increased the Company’s repurchase authorization to 12 million shares on May 3, 2022. As of December 31, 2022, the Company had approximately 11.6 million shares of Common Stock remaining under its repurchase authorization.

Liquidity

Senior Credit Agreement

On March 23, 2022, the Company entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for an unsecured revolving credit facility (the “Revolving Credit Facility”) that matures in March 2027 with an initial maximum aggregate amount of availability of $1.1 billion.

Under the Credit Agreement, the Company is obligated to pay (i) an unused commitment fee ranging from 0.080% to 0.225% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement and (ii) a fee ranging from 0.4375% to 1.500% per annum of the maximum amount available to be drawn for each letter of credit issued and outstanding under the Credit Agreement.

Covenant Compliance

The Credit Agreement contains various restrictions and covenants, including a requirement that the Company maintain a leverage ratio at certain levels, subject to certain exceptions, restrictions on the ability of the Company and certain of its subsidiaries to consolidate or merge, create liens, incur additional subsidiary indebtedness and consummate acquisitions and a restriction on the disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole. The Company was in compliance with the financial covenant contained in the Credit Agreement as of December 31, 2022 and expects to be able to meet the financial covenant 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”). 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 Senior Notes and 2030 Senior Notes at any time for a premium.

Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s debt as of December 31, 2022.

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Contractual Obligations

The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $103.8 million as of December 31, 2022. 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 December 31, 2022. Following is a summary of the Company’s contractual obligations and payments due by period following December 31, 2022 (in millions):

(1)
Interest was calculated based upon the interest rate in effect on December 31, 2022.

(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.

(3)
Represents other long-term liabilities on the Company’s Consolidated Balance Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based on management’s estimates, which are based largely on historical experience. This amount also includes all liabilities under the Company’s 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.

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 Accounting Standards Codification 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 2022, approximately 30% 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 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.

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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 and other specialty vehicles. 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 2022. 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.

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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 the 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 catch-up 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 $387.4 million of deferred contract costs related to the USPS contract at December 31, 2022 consisting of engineering costs, setup costs and tooling costs. The Company anticipates the production phase of the contract will begin in 2024. The USPS contract contains milestone billings provisions, under which the Company received $342 million of advance payments from the customer as of December 31, 2022.

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 management to make estimates and judgments that affect reported amounts and related disclosures. On an ongoing basis,

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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 December 31, 2022, 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 decreased Defense segment operating income by $44.9 million in fiscal 2022.

NEW ACCOUNTING STANDARDS

See Note 2 of the Notes to Consolidated Financial Statements regarding the impact or potential impact of recent accounting pronouncements on the Company’s consolidated financial statements.

CUSTOMERS AND BACKLOG

Sales to the U.S. government comprised approximately 25% of the Company’s net sales in fiscal 2022. 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 December 31, 2022 increased 52.3% to $14.1 billion compared to $9.3 billion at December 31, 2021. Access Equipment segment backlog increased 22.1% to $4.4 billion at December 31, 2022 compared to $3.6 billion at December 31, 2021 as the re-opening of economies coming out of the pandemic and elevated customer fleet ages drove higher demand. Defense segment backlog increased 78.1% to $6.3 billion at December 31, 2022 compared to $3.5 billion at December 31, 2021 primarily due to the initial order from the USPS for the NGDV program. Fire & Emergency segment backlog increased 85.4% to $2.9 billion at December 31, 2022 compared to $1.5 billion at December 31, 2021 due to strong demand for fire trucks coming out of the COVID-19 pandemic. Commercial segment backlog decreased 4.3% to $581.2 million at December 31, 2022 compared to $607.0 million at December 31, 2021 due to management of the order book for mixers to finalize orders closer to the delivery date, offset in part by improved market demand for refuse collection vehicles as demand rebounded following the re-opening of economies. Global supply chain challenges and the associated delays in production are also contributing to higher backlogs in all segments.

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Backlog represents the dollar amount of revenues that the Company anticipates from customer contracts that have been awarded and/or are in progress. Reported backlog includes the original contract amount and any contract modifications that have been agreed upon. Reported backlog excludes purchase options, announced orders for which definitive contracts have not been executed and any potential future contract modifications. Backlog is comprised of fixed and variable priced contracts that may be canceled, modified or otherwise changed in the future. As a result, backlog may not be indicative of future operating results. 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 49% of the Company’s December 31, 2022 backlog is not expected to be filled in fiscal 2023.