OSHKOSH CORP (OSK) FY 2023 MD&A

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

GENERAL

Oshkosh Corporation is an innovative industrial company focused on the design, development and manufacture of purpose-built vehicles and equipment that enhance safety, maximize productivity, lower total cost of ownership and simplify fleet management to support those who perform some of the most difficult jobs in the world. 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 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) and other militaries. The Company also designs and manufactures delivery vehicles for the United States Postal Service (USPS) 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 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 “Oshkosh” brand name, the Company designs and manufactures 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. Under the “Jetway,” brand name, the Company is one of the leading global designers and manufacturers of aircraft passenger boarding bridges. Under the “Commander,” “LEKTRO” and "Tempest" brand names, the Company is one of the leading global designers and manufacturers of airport ground support equipment.

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

Access — 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 products are sold to 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 and delivery vehicles for the USPS.

Vocational — custom and commercial firefighting vehicles and equipment, aircraft rescue and firefighting (ARFF) vehicles, simulators, mobile command and control vehicles and other emergency vehicles primarily sold to fire departments, airports and other governmental units. Refuse collection vehicles sold to commercial and municipal waste haulers. Aviation ground support products, gate equipment and airport services provided to commercial airlines, airports, air-freight carriers, ground handling customers and the military. Front-discharge concrete mixers sold to ready-mix companies. 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 29, 2024.

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 2021 relates to the year ended September 30, 2021. Fiscal 2022 and 2023 relate to the years ended December 31, 2022 and December 31, 2023, respectively.

OVERVIEW

Fiscal 2023 was a very successful year for the Company, with growth in revenue, operating income and diluted earnings per share. Results for fiscal 2023 significantly exceeded our initial expectations for the year as the Company's initial guidance reflected modest supply chain improvements, which were expected to limit revenues and contribute to production

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inefficiencies. Continued improvements in supply chain conditions, actions the Company has taken to improve production resiliency in a constrained supply environment, improved sales mix and disciplined pricing helped the Company achieve the improved performance. The Company also completed the strategic acquisitions of JBT AeroTech (AeroTech) and Hinowa S.p.A. (Hinowa). These acquisitions advance our purpose — to make a difference in the lives of those who build, serve and protect communities across the globe. Our acquisitions also broaden the end markets that we serve. In particular, we have increased our participation in the attractive air transportation support market with the AeroTech acquisition, an industry with strong secular growth projections. The Company has also made targeted investments in manufacturing capacity in order to meet the growing needs of our customers in the future. During the year, we made significant progress in preparing for the start of production of the Next Generation Delivery Vehicles (NGDV) for the USPS in April 2024.

The Company grew revenues 16.6% in fiscal 2023 compared to fiscal 2022, resulting in diluted earnings per share of $9.08. Earnings per share were significantly higher than earnings per share of $2.63 in fiscal 2022 largely due to improved price/cost dynamics, the impact of higher gross margin associated with higher sales volume, improved mix, favorable cumulative catch-up adjustments in the Defense segment on contracts in fiscal 2023 compared to unfavorable adjustments in fiscal 2022, the absence of a charge of $31.3 million associated with foreign anti-hybrid tax legislation due to comments made by taxing authorities of the applicable jurisdiction in 2022 and the absence of a loss on the settlement of a frozen defined benefit pension plan, offset in part by higher incentive compensation costs and increased operating expenses to support higher sales levels.

Fiscal 2023 results included amortization of intangible assets of $41.7 million, costs related to the acquisition of AeroTech of $12.9 million, a loss on the sale of an equity method investment of $7.8 million, amortization of inventory fair value step-up associated with the AeroTech acquisition of $7.1 million, net gains and losses on the sale of businesses of $5.3 million and restructuring costs of $4.4 million, offset in part by a gain on a settlement with the Company's pension advisor of $4.7 million. In aggregate, these items accounted for a net after-tax charge of $59.2 million, or $0.90 per share, in fiscal 2023. Fiscal 2022 results included a loss of $33.6 million for the settlement of the frozen pension plan, a charge of $18.1 million associated with foreign anti-hybrid tax legislation, amortization of intangible assets of $11.6 million, a charge of $7.7 million for the impairment of intangible assets and a charge of $4.6 million for the release of cumulative translation adjustment losses. In aggregate, these items accounted for a net after-tax charge of $63.7 million, or $0.96 per share, in fiscal 2022.

The Company announced an increase in its quarterly dividend rate of 12.2%, to $0.46 per share, beginning in February 2024. This was the Company’s tenth straight year of a double-digit percentage increase to its dividend rate.

FISCAL 2024 OUTLOOK

The Company estimates consolidated net sales will be in the range of $10.4 billion in fiscal 2024, compared to $9.7 billion in fiscal 2023. The Company expects consolidated operating income will be in the range of $925 million, resulting in diluted earnings per share in the range of $9.45. Included in the Company's expectations is amortization of intangible assets of approximately $65 million, or $0.80 per share. Excluding amortization of intangible assets, the Company expects adjusted diluted earnings per share to be in the range of $10.25.

Demand for the Company's products has remained strong as indicated by order intake of $3.5 billion in the fourth quarter of fiscal 2023, leading to the Company’s record backlog of $16.8 billion on December 31, 2023. The Company’s guidance reflects the full year benefits of the Company's acquisitions completed in 2023, its pricing actions, its investments in growing capacity and incremental supply chain improvements, offset in part by lower JLTV sales and costs associated with preparing for the start of NGDV production.

The Company believes Access segment net sales will be in the range of $5.2 billion in fiscal 2024, a 4% increase compared to fiscal 2023 net sales. The Company experienced order growth in fiscal 2023 that resulted in the Access segment exiting the year largely booked for fiscal 2024. With strong market dynamics and continued normalization of supply chains, the Company expects operating margin in the Access segment in fiscal 2024 will be in the range of 14.8%, consistent with fiscal 2023. Fiscal 2024 operating margin expectation for the Access segment includes an approximate $20 million increase in new product development costs.

The Company expects Defense segment net sales will be in the range of $2.1 billion in fiscal 2024, which is consistent with fiscal 2023 net sales. The Company's expectation reflects lower JLTV volumes, offset by higher Family of Medium Tactical Vehicle

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and Family of Heavy Tactical Vehicle volumes. The Company expects Defense segment operating margin will be in the range of 2.1% in fiscal 2024, down from 4.4% in fiscal 2023. The Company expects unfavorable product mix and NGDV-related start-up costs to account for the lower operating margin in fiscal 2024 as compared to fiscal 2023. The Company expects NGDV first year production start-up costs combined with increased new product development will reduce operating income in the Defense segment by approximately $35 million in fiscal 2024 as compared to fiscal 2023.

The Company expects Vocational segment net sales will be in the range of $3.1 billion in fiscal 2024, an increase of 20% compared to the fiscal 2023 net sales. The Company’s expectation reflects the full year benefit of the AeroTech acquisition, which is expected to contribute approximately $420 million of incremental sales versus fiscal 2023. The Company expects Vocational segment operating margin in fiscal 2024 will be in the range of 9.4% as compared to 7.2% in fiscal 2023. The segment's operating income margin is expected to increase in 2024 as municipal customer orders in backlog for delivery in fiscal 2024 were booked at significantly higher prices.

The Company estimates corporate expenses in fiscal 2024 will be approximately $180 million, with higher new product development investments expected to largely offset lower incentive compensation costs. The Company estimates net interest expense will be approximately $90 million in fiscal 2024 as compared to $53.8 million in fiscal 2023. The Company estimates the tax rate for fiscal 2024 will be approximately 24.5% and the average share count will be approximately 66.2 million shares.

The Company expects consolidated net sales in the first quarter of fiscal 2024 to be in the range of $2.5 billion, consistent with the fourth quarter of fiscal 2023. The Company expects sequential growth in sales and operating income margins in the Access and Vocational segments to be offset by lower Defense sales and operating income margins. The Company expects earnings per share in the first quarter of fiscal 2024 will be in the range of $2.05, reflecting the lower sales and unfavorable mix in the Defense segment, offset in part by the return of incentive compensation costs to target levels.

RESULTS OF OPERATIONS- FISCAL 2023 COMPARED WITH FISCAL 2022

CONSOLIDATED RESULTS

The following table presents consolidated results (in millions):

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

Consolidated net sales increased as a result of higher consolidated volume ($630 million), higher pricing in response to higher input costs ($401 million) and the inclusion of sales related to acquisitions ($365 million).

The increase in consolidated gross margin was due to improved pricing (320 basis points) and improved sales mix (120 basis points).

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The increase in consolidated selling, general and administrative expenses was generally a result of higher incentive compensation costs ($68 million), operating costs related to acquired businesses ($32 million), increased information technology costs ($15 million), acquisition costs related to AeroTech ($13 million) and increased advertising costs ($11 million).

The increase in consolidated amortization relates to the acquisitions of AeroTech and Hinowa during fiscal 2023.

The increase in consolidated operating income was primarily due to improved price ($401 million), the impact of higher gross margin associated with higher sales volume ($138 million), improved sales mix ($112 million) and the absence of unfavorable cumulative catch-up adjustments on contracts in the Defense segment ($45 million), offset in part by higher incentive compensation costs ($110 million), higher manufacturing costs ($49 million) and increased operating expenses to support higher sales levels in the Access segment ($38 million).

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

Interest expense, net of interest income increased in fiscal 2023 due to increased borrowings on the Company's revolving credit facility and lower cash holdings as a result of the acquisition of AeroTech.

Miscellaneous, net includes gains and losses on investments, net foreign currency transaction gains and losses, and non-service costs of the Company’s pension plans. Miscellaneous income, net in fiscal 2023 included a gain on a settlement with the Company's pension advisor ($5 million) and gains on foreign currency transactions ($5 million). Miscellaneous expense, net in fiscal 2022 included a loss on the settlement of a frozen pension plan ($34 million), unrealized loss on an investment ($10 million) and losses on foreign currency transactions ($7 million).

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. See Note 7 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. During the first quarter of fiscal 2023, the Company wrote down its investment in an equity interest in an entity in Mexico by $6 million based on the estimated fair market value of the entity. The Company completed the sale of its interest in the entity during the third quarter of fiscal 2023, resulting in an additional loss of $2 million.

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SEGMENT RESULTS

Access

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

Access segment net sales increased as a result of improved sales volume ($703 million) as supply chain improvements supported higher production levels, higher pricing in response to higher input costs ($239 million) and the inclusion of sales related to the Hinowa acquisition ($73 million).

The increase in Access segment gross margin was due to improved pricing (360 basis points), lower material & logistics costs (150 basis points), improved sales mix (140 basis points) and favorable manufacturing absorption (100 basis points), offset in part by higher incentive compensation costs (50 basis points).

The increase in Access segment selling, general and administrative expenses was generally a result of higher incentive compensation costs ($25 million), increased information technology costs ($13 million), higher product liability costs ($10 million), increased advertising costs ($8 million) and the inclusion of operating costs related to Hinowa ($4 million).

The increase in Access segment operating income was primarily due to improved pricing ($239 million), the impact of higher gross margin associated with higher sales volume ($181 million), improved sales mix ($65 million) and lower material & logistics costs ($30 million), offset in part by higher incentive compensation costs ($49 million) and increased operating expenses to support higher sales levels ($38 million).

Defense

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

Defense segment net sales decreased due to lower volume ($95 million) due to lower customer requirements for the Company's JLTV, offset in part by favorable cumulative catch-up adjustments in fiscal 2023 compared to unfavorable cumulative catch-up adjustments in fiscal 2022 ($50 million). The U.S. Army, which purchased Government Purpose Rights to the Oshkosh JLTV design, conducted a full and open competition for follow-on JLTV production in which Oshkosh Defense participated. In February 2023, the DoD awarded the JLTV follow on contract to another company. JLTV accounted for sales of $0.98 billion in fiscal 2023.

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The increase in gross margin in the Defense segment was due to changes in cumulative catch-up adjustments on contracts (200 basis points) and lower new product development expenses (80 basis points), offset in part by higher inventory obsolescence reserves (40 basis points).

The decrease in Defense segment selling, general and administrative expenses was primarily due to a gain on the sale of the Company's snow removal apparatus business ($8 million), offset in part by higher incentive compensation costs ($6 million).

The increase in operating income in the Defense segment was primarily a result of the absence of unfavorable cumulative catch-up adjustments on contract margins ($45 million), lower new product development expense ($17 million) and a gain on the sale of the Company's snow removal apparatus business ($8 million), offset in part by lower gross margin associated with lower sales volume ($12 million), higher incentive compensation costs ($11 million) and higher inventory obsolescence reserves ($9 million). Changes in estimates on contracts accounted for under the cost-to-cost method resulted in cumulative catch-up adjustments on contract margins that increased Defense segment operating income by $5.2 million in fiscal 2023. 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.

Vocational

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

Vocational segment net sales increased as a result of the inclusion of sales related to acquisitions ($292 million) and higher pricing in response to higher input costs ($161 million), offset in part by the impact of the sale of the rear discharge concrete mixer business in the first quarter of fiscal 2023 ($79 million).

The increase in gross margin in the Vocational segment was primarily attributable to improved pricing (480 basis points), offset in part by higher material costs (270 basis points) and higher production costs (80 basis points).

The increase in Vocational segment selling, general and administrative expenses was generally a result of the inclusion of operating costs related to AeroTech ($27 million), the loss on the sale of the rear discharge concrete mixer business ($13 million), acquisition costs related to AeroTech ($13 million) and higher incentive compensation costs ($11 million).

The increase in operating income in the Vocational segment was primarily due to improved pricing ($161 million), offset in part by higher material costs ($69 million), higher incentive compensation costs ($21 million), higher production costs ($21 million), the loss on the sale of the rear discharge concrete mixer business ($13 million) and acquisition costs related to AeroTech ($13 million).

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Corporate and Intersegment eliminations

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

Corporate cost of sales increased primarily as a result of higher engineering and new product development costs ($5 million) and higher incentive compensation costs ($4 million).

Corporate operating expenses increased primarily as a result of higher incentive compensation costs ($24 million).

FISCAL 2022 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2021

The comparison of the fiscal 2022 results with the year ended December 31, 2021 results can be found in the “Management’s Discussion and Analysis” section in the Company’s fiscal 2022 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. The Company expects cash flow from operations of approximately $725 million in fiscal 2024. In addition to cash generated from operations, the Company had other sources of liquidity available at December 31, 2023, including $125.4 million of cash and cash equivalents and $909.2 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 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 debt repayment, 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 repurchase of the Company’s Common Stock. In fiscal 2023, the Company used available cash to repurchase 265,795 shares of Common Stock ($22.5 million).

Financial Condition at December 31, 2023

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

The Company’s ratio of debt to total capitalization of 17.3% at December 31, 2023 remained within its targeted range. The increase in the debt to total capitalization compared to December 31, 2022 was primarily due to the acquisition of AeroTech and corresponding borrowings on the Revolving Credit Facility.

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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, 2023, 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 44 days at December 31, 2023, down slightly from 45 days at December 31, 2022. Days sales outstanding for segments other than the Defense segment was 49 days at both December 31, 2023 and 2022. 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 slightly from 4.1 times at December 31, 2022 to 4.2 times at December 31, 2023. 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 72 days, up from 66 days at December 31, 2022, primarily due to the timing of cash disbursements.

Operating Cash Flows

Operating activities provided $599.6 million of cash in fiscal 2023 compared to $601.3 million in fiscal 2022. Net cash provided by operating activities remained relatively consistent between fiscal 2023 and 2022 as the increase in net income in 2023 was offset by lower cash generation from working capital. Customer advances generated $157.0 million of cash in fiscal 2023 versus $819.3 million in fiscal 2022. Cash generated from customer advances in fiscal 2022 included advances related to NGDV in the Defense segment of $302.1 million compared to $134.4 million in fiscal 2023. Additionally, fewer customers within the Vocational segment provided advance payments in fiscal 2023 than fiscal 2022.

Investing Cash Flows

Investing activities used cash of $1,285.6 million in fiscal 2023 compared to $300.4 million in fiscal 2022. The Company completed the acquisitions of AeroTech and Hinowa for $995.8 million in fiscal 2023. Additions to property, plant and equipment of $325.3 million in fiscal 2023 increased $55.8 million from fiscal 2022, driven by capital spending to expand capacity in the Access and Vocational segments and set up the NGDV manufacturing plant in Spartanburg, SC. The Company anticipates that it will spend $300 million on capital expenditures in fiscal 2024 as the Company completes its facilities in Tennessee and South Carolina.

Financing Cash Flows

Financing activities provided cash of $3.4 million in fiscal 2023 compared to the use of cash of $485.0 million in fiscal 2022. The change in cash use/generation was primarily due to changes in debt and lower share repurchases in fiscal 2023 as compared to fiscal 2022. The Company borrowed approximately $575 million to fund the acquisition of AeroTech in the third quarter of fiscal 2023. Subsequent to the acquisition, the Company used cash flow from operations to repay approximately $400 million of those borrowings. The Company repaid its $225 million term loan in the second quarter of fiscal 2022. In fiscal 2023, the Company repurchased 265,795 shares of its Common Stock at an aggregate cost of $22.5 million. The Company's Board of Directors authorized the repurchase of 12 million shares in May 2022, of which approximately 11.3 million shares remained as of December 31, 2023. In fiscal 2022, the Company repurchased 1,508,467 shares at an aggregate cost of $155.0 million.

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. At December 31, 2023, borrowings under the

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Revolving Credit Facility of $175.0 million and outstanding letters of credit of $15.8 million reduced available capacity under the Revolving Credit Facility to $909.2 million.

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, 2023 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 and 2030 Senior Notes at any time for a premium.

Refer to Note 16 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s debt as of December 31, 2023.

Contractual Obligations

The total amount of gross unrecognized tax benefits, including interest, for uncertain tax positions was $73.6 million as of December 31, 2023. 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 7 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s unrecognized tax benefits as of December 31, 2023. Following is a summary of the Company’s contractual obligations and payments due by period following December 31, 2023 (in millions):

(1)
Interest was calculated based upon the interest rate in effect on December 31, 2023.

(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 6 of the Notes to Consolidated Financial Statements for information regarding these liabilities and the plan assets available to satisfy them.

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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 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. In fiscal 2023, approximately 28% of the Company’s revenues were recognized using an over time 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.

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

Access and Vocational segments revenue

The Company derives revenue in the Access and Vocational 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 Vocational segment, refuse collection vehicles 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. Jet bridges are designed to customer specification. Revenue related to jet bridges is recognized over time based on the cost-to-cost method as the Company's performance does not create an asset with an alternative use and the Company has an enforceable right to payment for its performance completed to date.

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

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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 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 84% of Defense segment revenue in fiscal 2023. 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.

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.

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.

The Company defers contract costs that relate to a contract prior to transfer of control or to an 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

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Company has recognized $689.1 million of deferred contract costs related to the USPS contract at December 31, 2023 consisting of engineering costs, setup costs and tooling costs. The Company anticipates the production phase of the contract will begin in 2024.

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, 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 a modification of the existing contract. As of December 31, 2023, the estimated remaining costs on the NGDV and JLTV 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 resulted in cumulative catch-up adjustments on contract margins that increased Defense segment operating income by $5.2 million in fiscal 2023 and decreased Defense segment operating income by $44.9 million in fiscal 2022.

Fair Value of Intangible Assets. The Company makes strategic acquisitions that may have a material impact on its consolidated results of operations or financial position. The purchase price of acquired businesses is allocated to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of the Company's acquisitions, can be complex and requires the use of significant judgment with regard to (i) the fair value and (ii) the period and the method by which the intangible assets will be amortized. Management uses information available to make fair value determinations and engages independent valuation specialists, when necessary, to assist in the fair value determination of acquired intangibles.

The fair value of acquisition-related intangible assets is estimated principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses, which include estimates of discount rates, revenue growth rates, EBITDA, royalty rates, customer attrition rates and technology obsolescence rates. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. Although management believes the projections, assumptions and estimates made were reasonable and appropriate, these estimates require significant judgment, are inherently

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uncertain and are subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments subsequent to the measurement period are recorded to the consolidated statements of income. See Note 3 to Consolidated Financial Statements for additional information regarding acquisitions.

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 19% of the Company’s net sales in fiscal 2023. 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, 2023 increased 18.8% to $16.8 billion compared to $14.1 billion at December 31, 2022. Access segment backlog increased 3.9% to $4.5 billion at December 31, 2023, compared to $4.4 billion at December 31, 2022, primarily due to higher pricing. The Access segment is largely booked for fiscal 2024 and the Company expects ordering patterns to normalize due to improvements in supply chains and product availability. Defense segment backlog increased 7.5% to $6.8 billion at December 31, 2023, compared to $6.3 billion at December 31, 2022, primarily due to the USPS increasing the mix of battery-electric vehicles ordered for the NGDV program. Vocational segment backlog increased 58.4% to $5.5 billion at December 31, 2023, compared to $3.5 billion at December 31, 2022, due to strong demand for fire apparatus coming out of the COVID-19 pandemic, increased pricing and the inclusion of AeroTech backlog of $775.5 million. Fire apparatus backlog increased 42.1% to $4.0 billion at December 31, 2023, compared to $2.8 billion at December 31, 2022. Refuse collection equipment backlog increased 19.1% to $352.0 million at December 31, 2023, compared to $295.5 million at December 31, 2022.

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. Approximately 50% of the Company’s December 31, 2023 backlog is not expected to be filled in fiscal 2024.

NON-GAAP FINANCIAL MEASURES

The Company is forecasting earnings per share excluding items that affect comparability. When the Company forecasts earnings per share, excluding items, this is considered a non-GAAP financial measure. The Company believes excluding the impact of these items is useful to investors to allow a more accurate comparison of the Company’s operating performance to prior year results. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s results or forecasts prepared in accordance with GAAP. The table below presents a reconciliation of the Company’s presented non-GAAP measure to the most directly comparable GAAP measure: