Oshkosh Corp: Form 10-Q for the period ended Sep 30, 2023

Cautionary Statement About Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q contain statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding the Company’s future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations, including those under the caption “Overview” are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond the Company’s control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the cyclical nature of the Company’s access equipment, fire apparatus, refuse collection and air transportation equipment markets, which are particularly impacted by the strength of U.S. and European economies and construction seasons; the Company’s estimates of access equipment demand which, among other factors, is influenced by historical customer buying patterns and rental company fleet replacement strategies; the impact of orders and costs on the U.S. Postal Service contract; the impact of severe weather, war, natural disasters or pandemics that may affect the Company, its suppliers or its customers; the Company’s ability to increase prices or impose surcharges to raise margins or to offset higher input costs, including increased raw material, labor, freight and overhead costs; the Company's ability to accurately predict future input costs associated with Defense contracts; the Company’s ability to attract and retain production labor in a timely manner; the Company's ability to successfully integrate the AeroTech acquisition and to realize the anticipated benefits associated with the same; the strength of the U.S. dollar and its impact on Company exports, translation of foreign sales and the cost of purchased materials; the Company’s ability to predict the level and timing of orders for indefinite delivery/indefinite quantity contracts with the U.S. federal government; budget uncertainty for the U.S. federal government, including risks of future budget cuts, the impact of continuing resolution funding mechanisms and the potential for shutdowns; the impact of any U.S. Department of Defense solicitation for competition for future contracts to produce military vehicles; risks related to the collectability of receivables, particularly for those businesses with exposure to construction markets; the cost of any warranty campaigns related to the Company’s products; risks associated with international operations and sales, including compliance with the Foreign Corrupt Practices Act; risks that a trade war and related tariffs could reduce the competitiveness of the Company’s products; the Company’s ability to comply with complex laws and regulations applicable to U.S. government contractors; cybersecurity risks and costs of defending against, mitigating and responding to data security threats and breaches impacting the Company; the Company’s ability to successfully identify, complete and integrate other acquisitions and to realize the anticipated benefits associated with the same; and risks related to the Company’s ability to successfully execute on its strategic road map and meet its long-term financial goals. Additional information concerning these and other factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Company’s U.S. Securities and Exchange Commission (SEC) filings, including, but not limited to, the Company’s Current Report on Form 8-K filed with the SEC on October 26, 2023 and Item 1A. of Part II of this Quarterly Report on Form 10-Q.

All forward-looking statements, including those under the caption “Overview,” speak only as of the date the Company files this Quarterly Report on Form 10-Q with the SEC. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q. Investors should be aware that the Company may not update such information until the Company’s next quarterly earnings conference call, if at all.

All references herein to earnings per share refer to earnings per share assuming dilution.

General

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 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 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.

Overview

The Company reported strong results in the third quarter of fiscal 2023 with significant growth in net sales, operating income and earnings per share compared to the third quarter of fiscal 2022. The year over year improvement stemmed from strong demand for the Company's products, improved supply chain conditions and the benefit of actions implemented over the past several quarters to improve production resiliency in a constrained supply chain environment.

Consolidated net sales in the third quarter of fiscal 2023 increased $443.2 million, or 21.4%, to $2.51 billion compared to the third quarter of fiscal 2022 primarily due to the impact of higher gross margin associated with higher sales volume, inclusion of sales related to acquisitions and realization of price increases implemented to offset the rise in costs over the last several years. While still off of historical norms, supply chain conditions continued to improve, allowing the Company to increase its output to meet demand.

Consolidated operating income increased 118.9% to $256.5 million, or 10.2% of sales, in the third quarter of fiscal 2023 compared to $117.2 million, or 5.7% of sales, in the third quarter of fiscal 2022. Improved pricing, higher sales volume and improved mix were the primary contributors to the improvement in consolidated operating income.

On August 1, 2023, the Company completed its acquisition of the AeroTech business (AeroTech) from JBT Corporation. AeroTech is a leading provider of aviation ground support products, gate equipment and airport services. AeroTech products serve approximately 75% of air travelers at U.S. airports and load approximately 70% of the world’s overnight express packages. AeroTech also operates a strong aftermarket parts and service business with recurring revenues comprising approximately 40% of its historical total revenues on an annual basis. The Company believes AeroTech is poised to benefit from numerous secular tailwinds for air transportation, which is in the early stages of an investment cycle. Global passenger traffic is expected to grow in the high single digits over the next several years and infrastructure spending is expected to accelerate with legislation and aging infrastructure. AeroTech had sales of $576 million in JBT Corporation's fiscal year ended December 31, 2022 and contributed net sales of $115.8 million to the Company from the August 1, 2023 acquisition date to September 30, 2023.

The Company increased its fiscal 2023 earnings per share estimate from a range of $7.65 to a range of $8.75 on estimated operating income of $815 million and estimated consolidated sales of $9.65 billion. The revised earnings per share estimate includes a combined $0.75 per share charge related to amortization of purchased intangible assets, acquisition costs, net losses on the sale of businesses, amortization of inventory fair value step-up and restructuring, offset in part by a pension settlement, as well as related tax impacts. Excluding these net charges, the Company increased its fiscal 2023 adjusted earnings per share estimate to be in the range of $9.50.

The Company expects Access segment sales and operating income margin in fiscal 2023 to be in the range of $5.0 billion and 15.0% compared to the Company’s previous expectation of $4.9 billion and 14.0%, respectively, largely as a result of improved production throughput and improved mix.

The Company continues to expect Defense segment sales and operating income margin in fiscal 2023 to be in the range of $2.1 billion and 3.0%, respectively.

The Company continues to expect Vocational segment fiscal 2023 sales to be in the range of $2.5 billion. The Company expects Vocational segment fiscal 2023 operating income margin in the range of 7.5%, up from the previous expectation of 6.3% as a result of higher volumes and favorable price/cost dynamics.

The Company continues to expect corporate expenses for fiscal 2023 to be $180 million.

The guidance implies that fourth quarter of fiscal 2023 earnings per share will be in the range of $1.95, reflecting continued strong demand and similar supply chain dynamics to those the Company experienced during the second and third quarters of fiscal 2023, offset in part by increased amortization of purchased intangibles, increased interest expense on the Company’s revolving credit facility and fewer production days due to holiday timing.

RESULTS OF OPERATIONS

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):

Third Quarter Fiscal 2023 Compared to 2022

Consolidated net sales increased as a result of higher sales volume ($228 million), the inclusion of sales related to the AeroTech and Hinowa acquisitions ($135 million) and higher pricing in response to higher input costs ($81 million).

The improvement in consolidated gross margin was primarily due to improved pricing (250 basis points) and favorable product mix (170 basis points).

The increase in consolidated selling, general and administrative expenses was due to higher incentive compensation expense ($18 million) as a result of improved performance as well as costs associated with the acquisition of AeroTech ($12 million).

Amortization of purchased intangible assets increased primarily due to the acquisition of AeroTech ($6 million).

The increase in consolidated operating income was primarily due to improved pricing ($81 million), the impact of higher gross margin associated with higher sales volume ($51 million) and improved sales mix ($38 million), offset in part by higher incentive compensation costs ($28 million).

First Nine Months Fiscal 2023 Compared to 2022

Consolidated net sales increased as a result of higher sales volume ($632 million), higher pricing in response to higher input costs ($340 million), the inclusion of sales from acquisitions ($187 million) and lower unfavorable cumulative catch-up adjustments on contracts in the Defense segment ($21 million), offset in part by the impact of the divestiture of the rear-discharge mixer business ($60 million).

The improvement in consolidated gross margin was primarily due to improved pricing (370 basis points) and improved sales mix (160 basis points).

The increase in consolidated selling, general and administrative expenses was due to higher incentive compensation expense ($43 million) as a result of improved performance, costs associated with the acquisition of AeroTech ($13 million), increased information technology expenses ($9 million), net losses on the sale of businesses ($5 million), higher stock-based compensation expense ($5 million) and restructuring costs ($4 million).

Amortization of purchased intangible assets increased due to acquisitions.

The increase in consolidated operating income was primarily due to improved pricing ($340 million), the impact of higher gross margin associated with higher sales volume ($135 million) and improved sales mix ($95 million), offset in part by higher incentive compensation costs ($70 million), higher material & logistics costs ($48 million), higher operating expenses ($24 million), costs related to the acquisition of AeroTech ($13 million), increased amortization of purchased intangible assets ($10 million) and amortization of inventory fair value step-up ($6 million).

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

Third Quarter Fiscal 2023 Compared to 2022

Interest expense, net of interest income increased due to increased borrowings and lower cash holdings as a result of the AeroTech acquisition.

Miscellaneous income (expense) increased primarily due to foreign currency transaction gains for the third quarter of fiscal 2023 ($1 million) compared to foreign currency transaction losses for the third quarter of fiscal 2022 ($6 million).

The effective tax rate decreased as the provision for income taxes was elevated in the third quarter of fiscal 2022 due to a foreign anti-hybrid tax matter that was resolved in the fourth quarter of fiscal 2022.

First Nine Months Fiscal 2023 Compared to 2022

Interest expense net of interest income decreased due to the benefit of higher interest rates on the Company’s cash holdings prior to the acquisition of AeroTech. The cash holdings were reduced during the third quarter of fiscal 2023 in connection with the AeroTech acquisition.

Miscellaneous income (expense) in the first nine months of fiscal 2023 included foreign currency transaction gains ($5 million) and a gain on a mediation settlement with the Company’s pension advisor ($5 million). Miscellaneous income (expense) in the first nine months of fiscal 2022 included an unrealized loss on an investment ($10 million) and foreign currency transaction losses ($8 million).

The provision for income taxes for the first nine months of fiscal 2022 included a charge of $27 million as the Company revised its interpretation of certain foreign anti-hybrid tax legislation based upon comments from the corresponding taxing authorities in the first quarter of fiscal 2022.

Losses of unconsolidated affiliates 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, primarily to eliminate cumulative translation adjustments.

SEGMENT RESULTS

Access

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

Third Quarter Fiscal 2023 Compared to 2022

Access segment net sales increased as a result of improved sales volume ($213 million), higher pricing in response to higher input costs ($41 million) and the inclusion of sales from the Hinowa acquisition ($19 million).

The improved gross margin in the Access segment was primarily due to higher pricing (230 basis points), improved logistics costs (210 basis points) and favorable product mix (110 basis points).

The increase in operating income in the Access segment was primarily due to the impact of higher gross margin associated with higher sales volume ($58 million), improved pricing ($41 million), improved logistics costs ($26 million) and favorable product mix ($18 million), offset in part by higher incentive compensation expense ($15 million), higher material costs ($11 million) and higher SG&A expenses ($10 million).

First Nine Months Fiscal 2023 Compared to 2022

Access segment net sales increased as a result of improved sales volume ($670 million), higher pricing in response to higher input costs ($222 million) and the inclusion of sales from the Hinowa acquisition ($57 million).

The improved gross margin in the Access segment was primarily due to higher pricing (430 basis points), lower material & logistics cost (180 basis points) and improved product mix (130 basis points).

The increase in operating income in the Access segment was primarily due to improved pricing ($222 million), the impact of higher gross margin associated with higher sales volume ($166 million) and favorable product mix ($55 million), offset in part by higher incentive compensation ($35 million) and higher SG&A expenses ($23 million).

Defense

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

Third Quarter Fiscal 2023 Compared to 2022

Defense segment net sales decreased due to lower Joint Light Tactical Vehicle (JLTV) program volume ($70 million) offset in part by higher Family of Medium Tactical Vehicle (FMTV) sales volume ($35 million). In June 2023, the Company learned that its protest of the award for the JLTV follow on contract to another company was denied by the Government Accountability Office. The Company expects to continue to build JLTVs through the end of fiscal 2024 under the current contract. The JLTV program accounted for $213 million of sales in the third quarter of fiscal 2023.

The increase in gross margin in the Defense segment was due to unfavorable cumulative catch-up adjustments on contracts in the third quarter of fiscal 2022 (230 basis points).

The increase in operating income in the Defense segment was primarily a result of unfavorable cumulative catch-up adjustments on contracts in the third quarter of fiscal 2022 ($13 million) and a gain on the sale of the Company's snow removal apparatus business ($8 million).

First Nine Months Fiscal 2023 Compared to 2022

Defense segment net sales decreased due to lower JLTV program volume ($268 million) offset in part by higher FMTV sales volume ($109 million). The JLTV program accounted for $716 million of sales in the first nine months of fiscal 2023.

The increase in gross margin in the Defense segment was due to lower unfavorable cumulative catch-up adjustments on contracts (80 basis points) and lower new product development expenses (60 basis points), offset in part by unfavorable product mix (80 basis points).

The increase in operating income in the Defense segment was primarily the result of the lower unfavorable cumulative catch-up adjustments on contracts ($15 million), lower new product development costs ($10 million) and a gain on the sale of the Company's snow removal apparatus business ($8 million), offset in part by the impact of lower gross margin associated with lower sales volume ($12 million) and unfavorable product mix ($11 million).

Vocational

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

Third Quarter Fiscal 2023 Compared to 2022

Vocational segment net sales increased due to the inclusion of sales related to the AeroTech acquisition ($116 million), improved sales volume ($45 million) and higher pricing in response to higher input costs ($40 million), offset in part by the impact of the sale of the rear discharge concrete mixer business ($20 million).

The increase in gross margin in the Vocational segment was primarily attributable to higher pricing (450 basis points) and improved product mix (190 basis points), offset in part by higher material costs (270 basis points) and amortization of inventory fair value step-up due to the AeroTech acquisition (90 basis points).

The increase in operating income in the Vocational segment was largely a result of higher pricing ($40 million), improved product mix ($12 million) and the impact of higher gross margin associated with higher sales volume ($11 million), offset in part by higher material costs ($19 million), costs related to the acquisition of AeroTech ($18 million), including acquisition costs and the amortization of inventory fair value step-up, and higher incentive compensation ($6 million).

First Nine Months Fiscal 2023 Compared to 2022

Vocational segment net sales increased due to the inclusion of sales related to acquisitions ($130 million), higher pricing in response to higher input costs ($119 million) and improved sales volume ($62 million), offset in part by the sale of the rear discharge mixer business ($60 million).

The increase in gross margin in the Vocational segment was primarily attributable to higher pricing (490 basis points) and improved product mix (80 basis points), offset in part by higher material costs (400 basis points).

The increase in operating income in the Vocational segment was largely a result of higher pricing ($119 million), improved product mix ($17 million) and the impact of higher gross margin associated with higher sales volume ($15 million), offset in part by higher material costs ($73 million), costs related to the acquisition of AeroTech ($13 million), the loss on the sale of the rear discharge concrete mixer business ($13 million), higher incentive compensation ($12 million) and amortization of inventory fair value step-up ($6 million).

Corporate and Intersegment Eliminations

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

Third Quarter Fiscal 2023 Compared to 2022

Corporate operating expenses increased primarily due to higher incentive compensation costs ($6 million).

First Nine Months Fiscal 2023 Compared to 2022

Corporate operating expenses increased primarily due to higher incentive compensation costs ($16 million).

Liquidity and Capital Resources

The Company generates significant capital resources from operating activities, which is the expected primary source of funding for the Company. In addition to cash generated from operations, the Company had other sources of liquidity available at September 30, 2023, including $106.1 million of cash and cash equivalents and $580.7 million of unused available capacity under the Revolving Credit Facility (as defined in “Liquidity”). The Company used available cash and approximately $575 million of borrowings under the Revolving Credit Facility to fund its acquisition of AeroTech on August 1, 2023. 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 with the financial covenant at September 30, 2023 and expects to remain in compliance with the financial covenant contained in the Credit Agreement for the foreseeable future.

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.

Financial Condition at September 30, 2023

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

The Company’s ratio of debt to total capitalization of 23.7% at September 30, 2023 remained within its targeted range. The debt to total capitalization increase compared to December 31, 2022 was primarily due to the acquisition of AeroTech and corresponding borrowings on the Revolving Credit Facility.

The Company’s goal is to maintain an investment-grade credit rating. The rating agencies periodically update the Company’s credit ratings as events or changes in economic conditions occur. At September 30, 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:

The Company does not anticipate that the acquisition of AeroTech and related financing will have a negative impact on the Company's long-term credit ratings.

Consolidated days sales outstanding (defined as “Trade Receivables” at quarter end divided by “Net Sales” for the most recent quarter multiplied by 90 days) increased from 45 days at December 31, 2022 to 51 days at September 30, 2023. Days sales outstanding for segments other than the Defense segment increased from 49 days at December 31, 2022 to 52 days at September 30, 2023 due to timing of sales within the Access 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) increased from 4.1 times at December 31, 2022 to 4.2 times at September 30, 2023, primarily due to improved inventory turnover within the Access and Vocational segments. Consolidated days payable outstanding (defined as “Accounts Payable” at quarter end divided by material costs of sales for the most recent quarter multiplied by 90 days) was 62 days at September 30, 2023, down from 66 days at December 31, 2022 due to more timely invoice processing.

Cash Flows

Operating Cash Flows

Operating activities provided $120.0 million of cash in the first nine months of fiscal 2023 compared to $138.3 million during the first nine months of fiscal 2022. Higher net income during the first nine months of fiscal 2023 was offset by higher working capital as a result of lower customer advance receipts, higher accounts receivable associated with higher sales levels, higher incentive compensation accruals and the timing of federal income tax payments. The Company continues to expect to generate approximately $550 million of cash flows from operations in fiscal 2023.

Investing Cash Flows

Investing activities used cash of $1.19 billion in the first nine months of fiscal 2023 compared to $190.9 million during the first nine months of fiscal 2022. The Company used $808 million to fund the acquisition of AeroTech during the third quarter of fiscal 2023 and $188 million to fund the acquisition of Hinowa S.p.A. during the first quarter of fiscal 2023. Through September 30, 2023, the Company used $228 million for capital expenditures. The Company anticipates that it will spend $300 million on capital expenditures in fiscal 2023. The expected increase in capital spending in fiscal 2023 compared to other recent fiscal years is primarily a result of investments in the NGDV facility in South Carolina as well as manufacturing capacity expansions in the Access and Vocational segments.

Financing Cash Flows

Financing activities provided cash of $371.3 million in the first nine months of fiscal 2023 compared to the use of $451.8 million during the first nine months of fiscal 2022. The change in cash use/generation was primarily due to changes in debt and lower share repurchases in the first nine months of fiscal 2023 as compared to the first nine months of 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 $70 million of those borrowings. The Company repaid its $225 million term loan in the second quarter of fiscal 2022. In the first nine months of fiscal 2023, the Company repurchased 265,795 shares of its Common Stock at an aggregate cost of $22.6 million. As of September 30, 2023, the Company had approximately 11.3 million shares of Common Stock remaining under its repurchase authorization. In the first nine months of fiscal 2022, the Company repurchased 1,508,467 shares of its Common Stock 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 September 30, 2023, borrowings under the Revolving Credit Facility of $505.0 million and outstanding letters of credit of $14.3 million reduced available capacity under the Revolving Credit Facility to $580.7 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 September 30, 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 12 to Condensed Consolidated Financial Statements for additional information regarding the Company’s debt as of September 30, 2023.

Application of Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires the Company to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. The accounting policies that the Company believes are most critical to the portrayal of its financial condition and results of operations are reported in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Estimates

The Company’s disclosures of critical accounting estimates in its Annual Report on Form 10-K for the year ended December 31, 2022, other than as noted below, have not materially changed since that report was filed.

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 asset 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 includes estimates of discount rates, revenue growth rates, EBITDA, royalty rates, customer attrition rates and technology obsolesce 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 uncertain and 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 2 to Condensed Consolidated Financial Statements for additional information regarding acquisitions.

New Accounting Standards

There are no significant impacts of new accounting standards on the Company’s Condensed Consolidated Financial Statements.

Customers and Backlog

Sales to the U.S. government comprised approximately 19% of the Company’s net sales in the first nine months of 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 at September 30, 2023 increased 21.1% to $15.7 billion compared to $13.0 billion at September 30, 2022. Access segment backlog increased 2.3% to $4.0 billion at September 30, 2023 compared to $3.9 billion at September 30, 2022 primarily due to higher pricing. Defense segment backlog increased 12.5% to $6.7 billion at September 30, 2023 compared to $6.0 billion at September 30, 2022 primarily due to a change in mix to a higher percentage of battery electric vehicles on the initial vehicle order from the USPS for the NGDV program. Vocational segment backlog increased 61.1% to $5.0 billion at September 30, 2023 compared to $3.1 billion at September 30, 2022 due to strong demand for fire apparatus coming out of the COVID-19 pandemic, rising prices and the inclusion of AeroTech backlog of $762.3 million. Global supply chain challenges and the associated delays in production have also led to higher backlogs in the Access and Vocational segments.

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 84% of the Company’s September 30, 2023 backlog is not expected to be filled in fiscal 2023.

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:

The Company’s quantitative and qualitative disclosures about market risk for changes in interest rates and commodity risk, which are incorporated by reference to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, have not materially changed since that report was filed.

Evaluation of Disclosure Controls and Procedures. In accordance with Rule 13a-15(b) of the Exchange Act, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of September 30, 2023. Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting with the exception of those changes related to the acquisition of AeroTech.

As part of the Company's ongoing integration of the AeroTech business, the Company is integrating its controls and procedures into AeroTech and augmenting company-wide controls to reflect the risks inherent in an acquisition of this type. As permitted by SEC guidance for newly-acquired businesses, the Company's report on its internal control over financial reporting in the Annual Report on Form 10-K for the year ending December 31, 2023, will include a scope exception that excludes the acquired AeroTech business so that management has sufficient time to evaluate and implement the Company's internal control structure over the operations of the AeroTech business.

The Company’s financial position, results of operations and cash flows are subject to various risks, many of which are not exclusively within the Company’s control, which may cause actual performance to differ materially from historical or projected future performance. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2022, which have not materially changed.