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Oshkosh Corporation (NYSE:OSK)
Q4 2021 Earnings Call
Oct 28, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Oshkosh Corporation reports Fiscal 2021 Fourth Quarter and Full Year Results. [Operator Instructions]

I will now turn the conference over to Pat Davidson, Senior Vice President of Investor Relations for Oshkosh Corporation. Thank you. Mr. Davidson, you may begin.

Patrick Davidson -- Senior Vice President, Investor Relations

Good morning, and thanks for joining us. Earlier today, we published our fourth quarter 2021 results. A copy of the release is available on our website at oshkoshcorp.com. Today's call is being webcast and is accompanied by a slide presentation, which includes a reconciliation of GAAP to non-GAAP financial measures that we will use during this call and is also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to Slide two of that presentation.

Our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings conference call, if at all.

As we highlighted in our business update on October 8, 2021, we are changing our fiscal year to the calendar year. The October to December 2021 quarter will represent an abbreviated fiscal year or stub period to facilitate the transition to our first full calendar year, which will begin on January 1, 2022. This change should provide us with better visibility as our planning and reporting cycles will be aligned with those of many of our customers and suppliers. As a result, all references on this call to a quarter or year in 2021 or before are to a fiscal quarter or fiscal year unless stated otherwise. All references to 2022 or later years as to a quarter or a year are to a calendar year.

Our presenters today include John Pfeifer, President and Chief Executive Officer; and Mike Pack, Executive Vice President and Chief Financial Officer. Please turn to Slide three.

And I'll turn it over to you, John.

John C. Pfeifer -- President and Chief Executive Officer

Thank you, Pat, and good morning, everyone. As we discuss our fourth quarter and full year results, I want to provide some color on the current business environment. It's clear that we're in a unique period of time with robust customer demand for our market-leading products while facing one of the most challenging global supply chain logistics and workforce availability environments in decades. These factors are limiting production and also contributing to manufacturing labor inefficiencies. At the same time, we're facing significant material cost inflation. We view these challenges as temporary, and we believe we are taking the right actions to position our company for success as we emerge from the current environment as a stronger, more resilient business.

Some examples of the actions include: implementing multiple price increases in the last several months in our non-defense segments to mitigate cost inflation; redesigning many of our JLG products to accept higher capability microprocessors, which are produced in higher quantities by chip makers to reduce our risk of shortages; shifting production within our existing facilities to better align with labor availability; and we're undertaking a rigorous qualifying process to identify and engage hundreds of new suppliers to drive a more robust supply chain for key materials and components.

Our long-term outlook is attractive based on strong market fundamentals, strategic program wins and a comprehensive offering of innovative new products that will drive continued market leadership. With this backdrop, we reported 15.6% higher revenues on sales growth in our access equipment, defense and fire & emergency segments. This led to fourth quarter adjusted earnings per share of $1.05, slightly above the estimated range included in our October eight business update. The modest increase was driven by a lower effective tax rate.

And we continue our commitment to responsible capital allocation with increased share repurchases in the quarter, which Mike will discuss. I'm also pleased to announce that our Board approved a 12% increase in our quarterly dividend from $0.33 to $0.37, which represents the eighth consecutive year of double-digit percentage increases. Now let's move to the full year. Please turn to Slide four. We grew revenues by just under 13% for the year and adjusted earnings per share by 16.4%. This led to a full year record for free cash flow of more than $1.1 billion.

Importantly, we have an opportunity to grow revenue and EPS over the next few years based on our innovative products and strong market drivers. We also have a strong foundation of programs in our defense segment, bolstered by our significant recent program wins, including the United States Postal Service Next Generation Delivery Vehicle and the U.S. Army's Medium Caliber Weapons System. 2021 was a year of significant electrification announcements for our company.

Beyond the USPS win, we launched our revolutionary new Volterra family of electric firetrucks, including the Pierce Volterra electric custom pumper currently in service in Madison, Wisconsin; and the Volterra electric ARFF truck, which was a major highlight for attendees at the Advanced Clean Transportation Expo back in late August. The expo brings together participants from across the globe to discuss and demonstrate clean technologies for commercial applications. The customer response to these electrified products has been outstanding. We made several important investments in 2021, including the acquisition of Pratt Miller and a strategic investment and partnership with Microvast.

We wrapped the year up with a minority investment and strategic partnership with Carnegie Foundry to build upon our autonomy and robotics capabilities. We also announced a minority investment in wildland firetruck market leader, Boise Mobile Equipment. These investments highlight our commitment to advance into new markets and leverage technology to both enhance our product offerings and drive profitable growth as part of our long-term strategy. We have also continued our commitment to environmental, social and governance leadership, as evidenced by our investments in electric vehicle technologies while fostering an inclusive culture and continuing to deliver on our high governance standards. For many years, MOVE, M-O-V-E, was our strategy.

Over the past year, we evolved beyond MOVE and have introduced our strategy summarized with three simple words: Innovate. Serve. Advance. We believe this strategy provides the necessary framework to continue to drive long-term sustainable growth, and it is grounded in our purpose: making a difference in people's lives. We innovate customer solutions by combining leading technologies and operational strength to empower and protect the everyday hero. We serve and support those who rely on us with a relentless focus throughout the product life cycle. We advance by expanding into new markets and geographies to make a difference around the world. We're excited about the direction we're headed and believe that Innovate. Serve. Advance. provides the road map to get us there. I invite you to check out the details of our strategy on the Oshkosh website.

Please turn to Slide five, and we'll get started at our segment updates with access equipment. Much like we discussed on our last call, demand for our industry-leading access equipment remains very strong, but near-term results are being meaningfully impacted by supply chain and logistics challenges as well as higher input costs. Access equipment, which faced an extreme decline in demand in 2020 as a result of the COVID-19 pandemic, has since experienced the most rapid rebound of any of our businesses. The rapid return of demand in 2021 exacerbated the supply chain challenges we have been facing, and we believe it will remain choppy well into 2022. Our access team continues to work hard to source components to build and shift products to customers around the globe.

Despite these challenges, we delivered strong revenue growth of 37% in the fourth quarter, leading to 22% revenue growth for the full year. We have taken multiple pricing actions over the past several months based on rising input costs, which we expect will largely address price/cost challenges by the end of the second quarter of 2022. And of course, we will continue to be diligent in our pricing approach should input costs increase further. Orders came in at $1.9 billion in the fourth quarter, representing a quarterly record for the segment, leading to a record backlog of $2.8 billion at September 30.

The rental equipment market is strong, and the access leadership team has taken measured steps to preserve the health of the industry by addressing unfair competition through our trade case. We believe that we are in the early stages of a multiyear growth cycle for access equipment as the rental companies work to lower the overall age of their fleets, which were at historically high levels entering 2021. I want to emphasize that our growth outlook is underpinned by strong market fundamentals, and our continued launch of innovative product offerings such as the DaVinci all-electric scissors that you've heard me talk about, and many other new product launches in recent quarters.

Our trend of new product launches continues -- continued in the fourth quarter. We're entering the North American telehandler market for agriculture in a more significant way with a new 9,000-pound capacity model. We are also expanding our industry-leading U.S. telehandler family with a new line of rotating telehandlers with our Italian partner, Dieci. I look forward to discussing additional new products with you in the coming quarters. Please turn to Slide six, and I'll review our defense segment. Our defense team delivered a solid fourth quarter, leading to a full year revenue of $2.53 billion, an increase of almost 10% and an operating margin of nearly 8% in this very challenging supply chain environment.

You're all familiar with the JLTV, one of our foundational and enduring programs. We've been showcasing the vehicle's ability to serve as a long-range weapons platform in either manned or semiautonomous modes. These capabilities directly support the Department of Defense's focus on near-peer threats. Domestic and international customers continue to be impressed with the JLTV's outstanding versatility. We are also preparing for the upcoming recompete scheduled in 2022 and believe we are well positioned to win the follow-on contract.

As we've discussed over the past several quarters, we are actively competing for a number of adjacent programs, including the CATV, a track vehicle for Arctic climates; the OMFV, which is planned to replace the Bradley Fighting Vehicle; and the EHET, or the Enhanced Heavy Equipment Transporter, among many others. The acquisition of Pratt Miller significantly enhances our ability to win adjacent programs just like it helped us win the MCWS contract earlier in 2021. Before I leave defense, I'd like to make a few comments about our Next Generation Delivery Vehicle contract with the United States Postal Service. We continue to work with the customer to finalize some of the vehicle's parameters.

We are also on track with setting up our new facility in South Carolina and expect a successful product launch in the back half of 2023. This is a 10-year contract that calls for between 50,000 and 165,000 vehicles, with a mix of both zero-emission battery electric vehicles and fuel-efficient ICE vehicles and allows the USPS to electrify its fleet. Let's turn to Slide seven for a discussion of the fire & emergency segment. The fire & emergency segment delivered another strong quarter with an operating income margin of 14% despite the challenging supply chain environment and extreme cost inflation. Even more impressive is the fact that our team at F&E delivered an all-time record for operating income margin for the full year at 14.2%.

The municipal market remains strong and we're encouraged by the record orders we booked last year, which led to our year-end record backlog, but we are tempered in our outlook for the stub period as a result of near-term supply chain disruptions we've talked about during this call. Of course, we expect to overcome these hurdles in time, and we are planning an expansion of our Appleton manufacturing sites that will support long-term growth. As I mentioned earlier, our Volterra electric custom pumper is serving frontline duty in Madison, and we recently announced an agreement with Portland to work with them on Volterra as well. We are receiving a steady stream of inquiries from fire departments around the United States, and our Volterra electric ARFF vehicle has been receiving rave reviews while conducting demos at airports around the U.S.

As I close out my comments on F&E, I want to welcome Boise Mobile Equipment to the Pierce family. Boise is the industry leader in wildland firefighting trucks. Our minority investment will bring the Boise product into our dealer network and allow both Pierce and Boise to take advantage of this growing segment of the market. Please turn to Slide eight, and we'll talk about our commercial segment. Similar to our other segments, commercial delivered solid results in 2021. In fact, the team posted its best full year adjusted operating income margin in the past 15 years. That's an impressive accomplishment in this difficult supply chain environment with record high steel costs.

As many of you are aware, we build RCVs and rear-discharge concrete mixers on third-party chassis either purchased by us and supplied to customers with a body and a complete package or furnished by our customers. This represents a meaningful risk as chassis availability has worsened over the past couple of months, and we expect it will remain challenged for much of 2022. Demand for RCVs and mixtures has been strong, and we have a solid outlook for both markets.

Residential construction as well as other construction indicators are positive, and elevated customer fleet ages are creating additional demand for replacement. Our outlook is further supported by solid orders in the quarter for both RCVs and mixers as the U.S. and Canada moved beyond the pandemic. These orders led to an all-time high backlog of just under $570 million, providing good visibility into 2022.

I'm going to turn it over to Mike to discuss our fourth quarter results and expectations for the stub period.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Thanks, John, and good morning, everyone. Please turn to Slide nine. As John highlighted, we faced significant supply chain and logistics disruptions in the fourth quarter, well beyond our experience in the third quarter. We also experienced meaningful material cost inflation. Recall that we account for inventory on a last-in first-out basis, so the additional cost escalation we saw in purchases in the fourth quarter negatively impacted price/cost dynamics, particularly at access equipment. We previously expected a consolidated year-over-year price/cost headwind of $35 million in the quarter. The actual price/cost impact increased to approximately $60 million.

Supply chain disruptions, unfavorable price/cost dynamics and labor constraints all contributed to fourth quarter financial results significantly lower than the expectations discussed on our third quarter call. Consolidated sales for the fourth quarter were $2.06 billion or $279 million higher than the prior year, representing a 16% increase. The consolidated sales increase was driven by a 37% increase at access equipment, a 5% increase at defense and a 10% increase at fire & emergency, partially offset by a 6% decrease at commercial. Access equipment sales increased by $230 million over the prior year quarter due to improved market demand led by North America.

As the impact of the pandemic has waned, the sales increase was lower than our prior expectations by approximately $130 million, largely due to the previously mentioned supply chain disruptions. Defense sales increased in the quarter due to higher JLTV sales as well as the benefit of Pratt Miller sales, which we acquired in the second quarter, partially offset by lower FMTV and international sales. Fire & emergency sales increased in the quarter on higher ARFF deliveries and commercial sales were down on lower package sales.

Consolidated adjusted operating income for the fourth quarter was $104.2 million or 5.1% of sales compared to $124.1 million or 7% of sales in the prior year quarter. Access equipment adjusted operating income decreased as a result of unfavorable price/cost dynamics, the return of spending subject to temporary cost reductions in the prior year and unfavorable product liability largely offset by an increase in sales and improved manufacturing absorption. Defense adjusted operating income decreased as a result of unfavorable product mix, increased material costs and unfavorable production variances partially offset by higher sales volume.

Fire & emergency adjusted operating income decreased in the current year quarter as a result of higher material costs, unfavorable manufacturing efficiencies and the return of spending subject to temporary cost reductions in the prior year, offset in part by higher sales and improved pricing. The commercial segment adjusted operating income decreased as a result of unfavorable material costs and the return of spending subject to temporary cost reductions in the prior year, offset in part by improved manufacturing absorption and improved pricing.

Adjusted earnings per share for the quarter was $1.05 compared to adjusted EPS of $1.30 in the prior year. During the quarter, we repurchased approximately 821,000 shares of common stock for a total cost of $95 million. Please turn to Slide 10 for a discussion of our expectations for the stub period. We expect that the challenges we faced in the fourth quarter of 2021 will continue into the stub period. Demand remains robust across the company as indicated by our strong order rates in the fourth quarter and record year-end backlogs in several segments.

However, the current supply chain and logistics disruptions are making it difficult to forecast sales volume. While our backlog supported a 10% to 15% sales increase in the stub period versus the first quarter of 2021, we expect parts availability will likely constrain our ability to deliver higher sales. As a result of this uncertainty, we are unable to provide quantitative expectations for the stub period at this time. We do expect that stub period EPS will be significantly lower than the first quarter of 2021 and may approach breakeven levels on a consolidated basis.

We expect that unfavorable price/cost dynamics will be a $75 million to $85 million headwind versus the first quarter of 2021. Steel and other component costs have continued to increase. We have taken multiple pricing actions in our non-defense businesses over the past several months, and in many cases, prices are now greater than 10% above early 2021 levels. We believe these price increases will enable us to achieve price/cost equilibrium but will still need to -- but we still need to work through large backlogs, so will take until the end of the second quarter of 2022 for these pricing actions to largely catch up with cost escalation. If we experience further escalation, we expect to take further pricing action.

We also expect higher spending levels in the stub period versus the first quarter of 2021. Last year, COVID-19 infection rates spiked early in our first quarter and our spending levels remained low. Since then, our spending levels have begun to normalize in areas such as travel, advertising and medical. We also expect that parts availability constraints will continue to drive labor inefficiencies. While the current environment is challenging, we are taking appropriate actions and believe that supply chain constraints will subside over time and the longer-term outlook for our businesses remains very strong. We'll provide further updates on 2022 during our January earnings call.

I'll turn it back over to John now for some closing comments.

John C. Pfeifer -- President and Chief Executive Officer

We just completed a challenging quarter and expect those challenges to remain for the next few quarters. However, we believe we're taking the right actions as we manage through this period, position ourselves for success as supply chains improve. We also won significant programs in 2021 and are committed to driving long-term profitable growth as we innovate, serve and advance the company.

Before I turn it back over to Pat for Q&A, I want to thank all 15,000 Oshkosh team members for the hard work and sacrifice they go through every single day to help our company be successful.

Okay, Pat, back to you.

Patrick Davidson -- Senior Vice President, Investor Relations

Thanks, John. [Operator Instructions] Operator, please begin the question-and-answer period of this call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Felix Boeschen with Raymond James. Please proceed.

Felix Boeschen -- Raymond James -- Analyst

Hey. Good morning everybody.

John C. Pfeifer -- President and Chief Executive Officer

Good morning.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Good morning.

Felix Boeschen -- Raymond James -- Analyst

Hey Just curious if you could talk about maybe directionally how you think the new fiscal year shapes out from a price/cost perspective over time. I know you said $75 million, $85 million headwind in the stub and then price/cost parity by the end of 2Q. But just wondering if we think that $85 million headwind gets slightly better by quarter as sort of pricing flows in. Or just generally, how much visibility you have there, given the large backlog and clearly, still some supply chain issues?

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Sure. Thanks, Felix. I can take that one. First of all, just to level set, everything that we're currently booking in North America has double-digit price increases in it since the beginning of 2021, so I think that's just a good backdrop as we think about the backlog. Just from a quarterly cadence, you're correct, we see about $75 million to $85 million in the stub period. As we look to the first quarter, expecting similar levels to that base center backlog. We do see in the second quarter, that starts getting meaningfully better, and you should start seeing our margins start normalizing. And then as we said, by the second quarter, we should be largely price/cost-neutral.

John C. Pfeifer -- President and Chief Executive Officer

At the end of the second quarter.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Excuse me. By the third quarter, we should be largely price/cost-neutral.

Felix Boeschen -- Raymond James -- Analyst

Okay, that's helpful. And then John or Mike, I'm not sure who this is best for, but the model is throwing off, obviously, a substantial amount of free cash and cash has grown on the balance sheet. I know you guys have talked about M&A in the past as a focal point. So maybe just curious if you could touch on that environment and how you would think about uses of cash or the right amount of cash on the balance sheet outside of M&A going forward. I'll leave it there.

John C. Pfeifer -- President and Chief Executive Officer

Yes. This is John, Felix. I'll talk about that because we're pretty focused on our capital plan. We do have a lot of cash on our balance sheet and we've generated a lot of cash. We're always going to be returning cash to shareholders. I talked a little bit about share buybacks and increasing our dividend. But we're also making investments organically in terms of technologies and new product developments and how we grow the business over time. And we've got a constant pipeline of inorganic moves that we're always looking at. But we're very, very prudent about how we look at those moves.

We know exactly where we think we should be making moves, and you've seen us do some smaller moves. Boise Mobile was a great move but a smaller move. We did the acquisition of Pratt Miller, which is a fantastic acquisition a few quarters ago that's leading to a lot of really positive growth opportunities for our company. So you'll continue to see us active. But as you know, the M&A environment today is very frothy. And so we're pretty prudent about -- we want to look at where we can make moves that are going to make meaningful differences to how we grow the company over time. And we're careful but focused on it. So I think you'll see us continue to make a few moves inorganically.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

And Felix, one other thing I'd just add is we did step up our repurchase activity in the quarter. I would expect that to continue, perhaps even at a somewhat more robust level into the stub period. So that's share buybacks as well as our increased dividend that we talked about today will also remain important parts of our capital allocation strategy.

Felix Boeschen -- Raymond James -- Analyst

Very helpful. Thank you.

Operator

Our next question is from Stanley Elliott with Stifel. Please proceed.

Stanley Elliott -- Stifel -- Analyst

Hey, good morning everyone. Thank you all for taking the question. Curious on the EV commentary. I mean, you obviously have a lot of prototypes and units in the field across all the different segments. Are we still looking at kind of a '23, '24 period of commercialization? Is there an opportunity to accelerate that? I mean, you mentioned kind of a frothy M&A environment. Just curious how you think about that, given the interest levels you're seeing.

John C. Pfeifer -- President and Chief Executive Officer

Yes. EVs is a long-term strategy for us. When we look at our markets, we think that EVs will gradually be put into the market over the next 10 to 20 years. There are certain segments where we're already commercializing, mostly access today, where we're commercializing things like all-electric aerial work platforms. If you look at F&E, it's more of a 2023 where you'll see much more commercialization of these EV vehicles that we put into the market recently. And the U.S. Postal Service, of course, will start shipping EV vehicles in 2023 as part of that program.

So I think we've already started it now in some segments. I think '23 is certainly a year where you'll see a lot more actual product being released for sale and shipment. And it'll -- but it will continue to gradually increase with every year that goes by for the next 10 to 20 years as fleets get electrified. And that's good for us because this offers economic benefit to our customers. This is a lot of value created with these EVs and -- so it's good for us from a margin standpoint, it's great for our customers in terms of giving them a better economic solution.

Stanley Elliott -- Stifel -- Analyst

Great. And then in terms of the access, you mentioned North America strength. What's happening over in China? I mean, that's been a great growth market for you all. Curious what's happening if some of the things with the property market has kind of curtailed some of the growth opportunities there. Just curious how that's shaken out.

John C. Pfeifer -- President and Chief Executive Officer

Yes. China is -- has -- the access equipment segment in China has slowed a bit as China's economy has slowed a little bit, but it's still a very robust market and one of the biggest -- it will be one of the biggest markets in the world. It's already the biggest construction market in the world. So while it slowed a little bit, we're still very bullish on China. We've got great operations there, incredible people there who do a great job addressing the marketplace. But it has slowed a little bit over the past year.

Stanley Elliott -- Stifel -- Analyst

Great, guys. Thanks and best of luck.

Operator

Our next question is from Jerry Revich with Goldman Sachs. Please proceed.

Jerry Revich -- Goldman Sachs -- Analyst

Yes. Hi, good morning, everone.

John C. Pfeifer -- President and Chief Executive Officer

Good morning.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Good morning.

Jerry Revich -- Goldman Sachs -- Analyst

Can you talk about coming through and exiting this post-COVID environment? How are you thinking about potential structural changes to the supply chain or price protection that you give customers and orders going forward? Any significant changes in the business model that you're thinking through as a result of what we learned, call it, in the COVID and post-COVID environment so far?

John C. Pfeifer -- President and Chief Executive Officer

Yes, Jerry. Thanks for the question. So we've been doing an enormous amount of heavy lifting in our supply chain capabilities. We have qualified literally hundreds of new suppliers to both dual-source and/or just improve our resiliency of supply because of some of the disruption that we've seen. So we've looked at it not just in the short term but more of an opportunity of, let's really take a look at the supply chain and make sure that we're building it for the future, not just looking at it for what do we need next quarter but what do we need for the next five years as we continue to grow the business.

So a lot of heavy lifting and that's why we've qualified hundreds of new suppliers. We've also done a lot of work digitally connecting our supply chain to give us more visibility than we've had in the past so that we know where we have opportunities and we know where we have issues quicker. We've been doing a lot of reengineering of components, which helps facilitate better supply. I talked in the opening commentary about redesigning all the chips for access, which gave us much better supply of chips. So there's a lot of heavy lifting that's been done. As you look at the price/cost issue that we're currently wrestling with and we talk about, we'll come out of this as we get through Q2.

We built really fast, strong backlogs in the access equipment segment earlier -- started earlier in 2021. And as those backlogs built, we were also seeing really strong -- stronger-than-usual material cost inflation. And when we book orders, we'd have a forecast for what material cost inflation would be. And then a month later, those forecasts were much higher than they were when we booked a bunch of backlog the month before. And that's what created the pinch that we're in right now. But we are confident. So if you go back in time, should we have been doing more locking than we were doing? Probably. We probably should have.

As we look at it going forward, we're being much more aggressive with making sure as we are building backlog today and we're building backlog at full price today, so we're very confident in what we're doing. And it's -- we're protecting ourselves as we go more prudently based on what we see with material costs as we go forward. So that's what gives us the confidence to say that as we get into Q2, we'll start to see nice improvement there.

Jerry Revich -- Goldman Sachs -- Analyst

And John, on that note, as we think about the next time the demand environment accelerates like this, will you have the capability to lock in cost when orders are accelerating? Is that a function of the work you've done on qualifying and expanding the supply base? Or is the expanded use of any futures or other instruments? In other words, in a tepid demand recovery, it's pretty easy to match those two. But what about the next time we have that type of demand cycle we're looking at now? Are the systems in place to allow you to match in that type of environment?

John C. Pfeifer -- President and Chief Executive Officer

Yes, Jerry. The work we're doing now is, particularly on the cost side, trying to lock in costs either with price locks or with suppliers as we see healthy order rates and backlog building. That's where we put the most focus with regard to how we're operating.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

And certainly, the environment we're in right now is further unique because you see the escalation. But the level of disruption, whether it's logistics or even obtaining components not just in our industry but across industries, I think, has certainly been a unique adder to sort of the situation that us and many other companies are facing right now.

John C. Pfeifer -- President and Chief Executive Officer

Thanks, Jerry.

Jerry Revich -- Goldman Sachs -- Analyst

-- discussion. Thanks.

Operator

Our next question is from Stephen Volkmann with Jefferies. Please proceed.

Stephen Volkmann -- Jefferies -- Analyst

Hi. Good morning, guys. Thanks for taking my question. I'm wondering if we can just go back. You talked a lot about the price/cost trajectory. That was very helpful. But you also talked about a lot of other sort of near-term pressures with labor availability and parts availability and productivity resulting from those. Can you just talk us through sort of like you did on price/cost? How does that play out sort of in the stub period and then into '22, do you think?

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Sure. Really, as we look at the stub period, when we -- while we're not providing explicit guidance as we're talking about it qualitatively, we don't expect a meaningful change in supply chain at this point in time. So we're expecting that we're going to face those labor inefficiencies and so on that we faced in the quarter. And of course, we know the cost side of it. While we're certainly not providing guidance yet for 2022 and there are a lot of moving pieces, we do believe over time, supply chain is going to get better in the labor situation.

The exact cadence of that is not clear. Hopefully, as we approach that July -- or excuse me, that January earnings call, we'll start to have better visibility to that. But I think if you look at the biggest factors that we're facing right now, it's really this cost/price dynamic. And I think that's where we have visibility and that's what gives us confidence that we should start seeing a return of normalcy to our margins as we exit the second quarter, really more so in the third quarter next year and the fourth quarter.

John C. Pfeifer -- President and Chief Executive Officer

Yes. And Stephen, a little bit bigger picture. If you look at where we are in this supply chain disruption period, we've done a lot of really good work with our supply base. Our supply base has improved in its ability to keep pace with our production forecast. Now we still have problem areas. We talked about chassis. Chassis is an example of a fundamental supply concern. But for the most part, we've had a lot of suppliers make nice improvements in their ability to produce.

We still see huge challenges in the logistics side of things, not only high cost but really the lead times and the predictability of being able to -- for domestic freight, for ocean freight and the predictability of it is one of the biggest challenges is really the long lead times and hard-to-predict lead times in terms of when we can get supply in the door. And when we're running the way we're running, that becomes challenging. It becomes a little bit unpredictable. So we still have a ways to go on the logistics front, but we have made improvements in the overall ability of our supply base to keep up.

Stephen Volkmann -- Jefferies -- Analyst

Okay, that's helpful. And then related to that, I saw your inventories didn't look like they were up much sequentially. I would have thought maybe you would have some partially built equipment sort of sitting around waiting for parts that could ultimately be shipped out, but maybe that's not as big a deal as I might have thought. Just anything happening there?

Michael E. Pack -- Executive Vice President and Chief Financial Officer

From a concentration perspective, we're definitely seeing higher raw materials and WIP levels. Our finished goods are definitely at lower levels. I think what you're seeing is really the supply of parts in the fourth quarter certainly was not at the levels that we wanted to see and that ultimately impacted sales. I think you're still seeing some supply chain availability dynamics reading through those inventory numbers.

Stephen Volkmann -- Jefferies -- Analyst

Thank you.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Thanks Steve.

Operator

Our next question is from Mig Dobre with Baird. Please proceed.

Mig Dobre -- Baird -- Analyst

Thank you and good morning everyone. I'm just trying to maybe put a little finer point here and understand all the moving pieces on your price/cost commentary. If we're looking at the orders that you've taken into the quarter in access equipment, so a little over, call it, $1.8 billion, is it fair to say that these orders are going to convert to revenue in the second quarter of '22 or maybe even beyond?

And is this order batch that you've taken this quarter considered to be price/cost neutral? Related to this, too, I'm curious as to what your cost assumptions are in this comment that you're price/cost neutral. Do you actually bake in current spot prices for raw materials? Or is it that you're expecting that raw materials are going to moderate? It's kind of a lot here, but hopefully, you can address it all.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Yes. So first of all, speaking to the backlog, and we're not going to break down different price levels, but we've had multiple price increases. So if you look at the breakdown of our backlog, there are several price levels. Obviously, the most recent pricing actions we took were more like the middle of the fourth quarter. So there are certainly orders booked in the fourth quarter that weren't at that third price level yet. So what we see, again, it very much aligns with the commentary I had before. We'll be largely shipping the backlog over the next 2.5 quarters that's out there. So you have, obviously again, the $75 million to $85 million headwind in the stub period.

That inventory is in backlog today. Likewise, in the first quarter, we should see similar levels of cost/price headwind and then it gets meaningfully better. So we really start getting the benefit of those price increases as we manage through the second quarter of next year. And that's why we've said, really coming out of the second quarter or in the third quarter, largely back to cost/price neutral. From an assumption standpoint, of course, we're looking at what our current costs are. And obviously, we have much better visibility today as we work through our -- with our suppliers and understand where costs are at. We're not seeing the rapid increase of steel anymore.

While it's still obviously at a very, very elevated level, I think the good news is we are seeing locks available in areas like hot-rolled coil for meaningfully lower than what current spot rates are. And that's consistent if you look out on many of the published steel curves, that it is expected to tail off, albeit still at very elevated levels versus historically. So those are all things that we're looking at. It's not just steel, though. We're looking at all components from -- and our pricing decisions from labor to rubber components to aluminum to commercial chatter third-party chassis. So we're looking at it holistically, Mig.

John C. Pfeifer -- President and Chief Executive Officer

Yes. And Mig, just to emphasize, our order rates are really healthy. The market is really healthy. And all of our orders recently and a healthy percent of our backlog is at our full price level. And that's across -- if I look at access alone, right? All of our commercial segments have come up in double digits because of the material cost inflation. If I look at access alone, independent rental companies, national rental companies, the order rates across are all at the price level that gets us to where we need to be in terms of that price/cost equation.

Mig Dobre -- Baird -- Analyst

I see. And maybe to go back to the sort of process question that Jerry was asking earlier. I mean, look, a skeptic's view of what's going on here would be -- could be that there's some flaws in the process, given what's been happening this year and your performance relative to peers, right, in terms of how the order intake was managed relative to cost inflation and then also some of the disruptions that showed up maybe sooner for you than it has for others.

And I guess I'm wondering here, as you're sort of running an analysis looking back beyond qualifying additional suppliers, which you talked about, are there some procedural things that you think you're going to implement going forward so that investors can gain some level of confidence that structurally, you can sort of become a better business next cycle or through the cycle as these headwinds eventually dissipate?

John C. Pfeifer -- President and Chief Executive Officer

The answer to your question is an emphatic absolutely yes. We are -- it was kind of a -- it was an unusual period, I'd say, from March, April through where we were in, let's call it, September in terms of how fast that backlog built, along with how much cost escalation got away from everybody, almost. I mean, the forecast just kept changing constantly so you thought you were OK with a certain cost level and then the forecast would change.

And we just kept seeing it escalate and escalate and escalate. But absolutely, we will learn and we will put more specific practices in place so that in the future, we're more protected from this type of a rapid buildup of backlog in the event that there's also a rapid cost escalation that goes with it.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Yes. And when we're talking about the forecast, we're looking at really those fuel curves that are published out in the marketplace. I think if you roll back the clock to the February time frame when we're already starting to book meaningful orders, there is a view that still is going to be elevated for a few months and would come down, which is not dissimilar to other cycles, what's happened. We obviously saw a very different trajectory in this case. And so those forecasts that were published that companies across the globe are looking at, obviously, that view continue to increase and push out longer.

So again, I think we're definitely dealing with some unique factors that we haven't seen in other recoveries. And again, it's -- you look at how we managed the pandemic, obviously delivered solid results through that. And what we're dealing with right now is short term in nature, and we certainly see light at the end of the tunnel as we exit the second quarter.

John C. Pfeifer -- President and Chief Executive Officer

And Mig, and I'll just emphasize, there's a few -- this -- we don't like what we're going through at all. We will learn from it. It's a few quarters of disruption for us. We are entering what we believe is a multiyear cycle in access equipment. We are completely confident in our ability, as we go through a multiyear growth cycle, to deliver for our customers and to deliver for our investors. We're very confident in our ability to do that in spite of the short-term issue that we're in.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Thanks, Mig.

Mig Dobre -- Baird -- Analyst

Thank you for the comments. Good luck.

Operator

Our next question is from Chad Dillard with Bernstein. Please proceed.

Brandon -- Bernstein -- Analyst

Good morning, everyone. This is Brandon [Phonetic] on for Chad. Quick question. So based on the conversation in the backlog right now, what are you guys expecting in terms of customer mix next year in terms of like rental -- national rental companies versus the independent rental companies?

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Yes, I can take that one. The mix, first of all, just backing up, we saw a pretty similar mix year-over-year this year, slightly heavily more weighted toward the nationals each of the last two years, so a bit over 50%. We expect similar mixes going forward. We don't expect a major mix shift there.

Brandon -- Bernstein -- Analyst

Cool. And then one follow-up. How should we think about for defense, the top line in '22 and then how it goes into '23? Can we expect to see some growth in the business in '23 on top of the USPS stuff?

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Sure. As we look at 2022, as we've been saying over the last couple of years, we do expect that JLTV volumes are going to be lower. That is going to put downward pressure on defense's revenues. And obviously, and really, as we think of 2022, we're not going to see much of any USPS revenue. We'll have some Medium Caliber Weapon System revenue. We'll start seeing a build of that in 2023, with that more robust in 2024 and really tied to the ramp-up of USPS, which will happen in the back half of 2023.

John C. Pfeifer -- President and Chief Executive Officer

Brandon, the way -- this is John. The way to look at our defense business, it's really a growth business. Today, it's primarily tactical wheeled vehicles, and that's a great base business for us. Tactical wheeled vehicles tend to go through cycles where they're growing and then cycles where they're not growing. But they are critical, enduring programs for the Department of Defense. Why do I say this is a growth business?

It's a growth business because we are winning adjacent programs that are material in nature and that are going -- that will drive growth from say, the second half of '23 or 2024 onward. It's programs like the MCWS program and, more importantly, the United States Postal Service program. These are big programs driving growth and we're competing for a lot more. So having this business where we've got this base of tactical wheeled vehicles that we know how to execute on plus adding incremental program wins, that drives a growth business over the next three to five years.

Brandon -- Bernstein -- Analyst

Great, thank you all.

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our final question is from Tim Thein with Citigroup. Please proceed.

Tim Thein -- Citigroup -- Analyst

Great, thank you. And Mike, a good reminder earlier in terms of the LIFO accounting. I certainly think that's at least played some role in the difference in terms of some of the near-term performance versus peers. But just the question, John, just to continue along that last train of thought in terms of the growth prospects for defense. How do you -- or how should we think about that in the context of some of the recent press reports about potentially some larger cuts to JLTV volumes? I don't -- sure there's a timing aspect to that. But maybe you can just kind of update us on your thoughts there.

John C. Pfeifer -- President and Chief Executive Officer

Yes. So here's how I think about JLTV. The recent presidential budgets would indicate that 2022 volumes will be down and '23 will likely be down. These programs go through their ups and their downs. What -- the thing that we always focused on is the Army's acquisition objective still is about 50,000 vehicles. I think it's precisely 49,900 vehicles. And then the U.S. Marines went from 5,000 and increased it all the way up to 15,000 or 16,000 units. Now to date, we've shipped about 13,500 units. So you can see in terms of the long-term objective for the Army and the Marines, the two biggest customers, we still have a long way to run with these programs. These programs for JLTV, this JLTV program will go well into the 2040s, beyond 2040.

And as you -- that's why I say this is a great base business. Now there's going to be up years and there's going to be down years based on presidential budgets and priorities and so forth and what's happening around the world, but these are fundamental programs for the Army and the Marines to operate. And so it's a great base business and then we build on top of that some of these other program wins that we're getting, and that's why our defense business is a really nice growth platform for us as a company. But we focused on the Army's acquisition objective long term, that 50,000 units, and the Marine's acquisition objective. That's what we focus on, knowing that there'll be ups and downs from year-to-year.

Tim Thein -- Citigroup -- Analyst

Got it. Okay. In the interest of time, I'll just leave it there. Thank you.

John C. Pfeifer -- President and Chief Executive Officer

Thanks, Tim.

Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

John C. Pfeifer -- President and Chief Executive Officer

Well, I want to thank everybody for joining us today. Appreciate your interest in Oshkosh Corporation and wish everyone a safe and healthy next quarter.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Patrick Davidson -- Senior Vice President, Investor Relations

John C. Pfeifer -- President and Chief Executive Officer

Michael E. Pack -- Executive Vice President and Chief Financial Officer

Felix Boeschen -- Raymond James -- Analyst

Stanley Elliott -- Stifel -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Mig Dobre -- Baird -- Analyst

Brandon -- Bernstein -- Analyst

Tim Thein -- Citigroup -- Analyst

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