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Revenue Recognition
 3 Months Ended
Mar. 31, 2024
Sales And Revenue Recognition [Abstract]  
Revenue Recognition

4. Revenue Recognition

The Company utilizes the cost-to-cost method of percentage-of-completion to recognize revenue on its performance obligations that are satisfied over time because it best depicts the transfer of control to the customer. Under the cost-to-cost method of percentage-of-completion, the Company measures progress based on the ratio of costs incurred to date to total estimated costs for the performance obligation. The Company recognizes changes in estimated sales or costs and the resulting profit or loss on a cumulative basis. Contract adjustments represent the cumulative effect of the changes on prior periods. If a loss is expected on a performance obligation, the complete estimated loss is recorded in the period in which the loss is identified.

There is significant judgment involved in estimating sales and costs, most notably within the Defense segment. Each contract is evaluated at contract inception to identify risks and estimate revenue and costs. In performing this evaluation, the Company 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. 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. In addition, as contract modifications (e.g., new orders) are received, the additional units are factored into the overall contract estimate of costs and transaction price.

Net contract adjustments impacted the Company’s results as follows (in millions, except per share amounts):

 

 

Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Net sales

 

$

(10.0

)

 

$

(6.5

)

Operating income

 

 

(13.1

)

 

 

(14.4

)

Net income

 

 

(10.0

)

 

 

(11.0

)

Diluted earnings per share

 

$

(0.15

)

 

$

(0.17

)

The Defense segment incurs pre-production engineering, factory setup and other contract fulfillment costs related to products produced for its customers under long-term contracts. An asset is recognized for costs incurred to fulfill an existing contract or highly-probable anticipated contract if such costs generate or enhance resources that will be used in satisfying performance obligations in the future and the costs are expected to be recovered. Costs related to customer-owned tooling that will be used in production and for which the customer has provided a non-cancelable right to use the tooling to perform

during the contract term are also recognized as an asset. Under the Next Generation Delivery Vehicles (NGDV) contract with the United States Postal Service (USPS), the Company has determined that it does not transfer control of any goods or services to the USPS until the construction of the production vehicles. Deferred contract costs will be amortized over the anticipated production volume of the NGDV contract. The Company periodically assesses its contract fulfillment and customer-owned tooling for impairment. The Company did not recognize any impairment losses on contract fulfillment or customer-owned tooling costs in the three months ended March 31, 2024 or 2023.

Deferred contract costs, the majority of which are related to the NGDV contract, consisted of the following (in millions):

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Costs for anticipated contracts

 

$

6.6

 

 

$

6.2

 

Engineering costs

 

 

482.0

 

 

 

439.6

 

Factory setup costs

 

 

52.5

 

 

 

44.4

 

Customer-owned tooling

 

 

252.3

 

 

 

220.5

 

Deferred contract costs

 

$

793.4

 

 

$

710.7

 

Disaggregation of Revenue

Consolidated net sales disaggregated by segment and timing of revenue recognition are as follows (in millions):

 

 

Three Months Ended March 31, 2024

 

 

 

Access

 

 

Defense

 

 

Vocational

 

 

Eliminations

 

 

Total

 

Point in time

 

$

1,221.6

 

 

$

2.3

 

 

$

560.6

 

 

$

(3.0

)

 

$

1,781.5

 

Over time

 

 

15.9

 

 

 

534.6

 

 

 

211.8

 

 

 

—

 

 

 

762.3

 

 

$

1,237.5

 

 

$

536.9

 

 

$

772.4

 

 

$

(3.0

)

 

$

2,543.8

 

 

 

 

Three Months Ended March 31, 2023

 

 

 

Access

 

 

Defense

 

 

Vocational

 

 

Eliminations

 

 

Total

 

Point in time

 

$

1,180.5

 

 

$

3.5

 

 

$

447.2

 

 

$

(0.9

)

 

$

1,630.3

 

Over time

 

 

12.7

 

 

 

509.6

 

 

 

115.5

 

 

 

—

 

 

 

637.8

 

 

$

1,193.2

 

 

$

513.1

 

 

$

562.7

 

 

$

(0.9

)

 

$

2,268.1

 

See Note 20 for further disaggregated sales information.

Contract Assets and Contract Liabilities

In instances where the Company recognizes revenue prior to having an unconditional right to payment, the Company records a contract asset. The Company reduces contract assets when the Company has an unconditional right to payment. The Company periodically assesses its contract assets for impairment. The Company did not record any impairment losses on contract assets during the three months ended March 31, 2024 or 2023.

The Company is generally entitled to bill its customers upon satisfaction of its performance obligations, except for its long-term contracts in the Defense segment which typically allow for billing upon acceptance of the finished goods, payments received from customers in advance of performance and extended warranties that are billed in advance of the warranty coverage period. Customer payment terms generally do not exceed one year. See Note 9 for additional information on the Company’s receivables balances.

With the exception of Pierce Manufacturing Inc. (Pierce) in the Vocational segment, the Company’s contracts typically do not contain a significant financing component. Pierce customers earn interest on customer advances at a rate determined in a separate financing transaction between Pierce and the customer at contract inception. Interest charges for amounts due on customer advances are recorded in “Interest expense” in the Condensed Consolidated Statements of Income and were $8.8 million and $6.3 million for the three months ended March 31, 2024 and 2023, respectively.

The timing of billing does not always match the timing of revenue recognition. In instances where a customer pays consideration in advance or when the Company is entitled to bill a customer in advance of recognizing the related revenue, the Company records a contract liability. The Company reduces contract liabilities when the Company transfers control of the promised goods and services. Contract assets and liabilities are determined on a net basis for each contract. Contract liabilities consisted of the following (in millions):

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Customer advances

 

$

703.8

 

 

$

706.9

 

Other current liabilities

 

 

87.6

 

 

 

96.2

 

Non-current customer advances

 

 

1,181.5

 

 

 

1,190.7

 

Other non-current liabilities

 

 

69.1

 

 

 

68.5

 

Total contract liabilities

 

$

2,042.0

 

 

$

2,062.3

 

Revenue recognized during the period from beginning contract liabilities was as follows (in millions):

 

 

Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Beginning liabilities recognized in revenue

 

$

203.5

 

 

$

189.2

 

The Company offers a variety of service-type warranties, including optionally priced extended warranty programs. Outstanding balances related to service-type warranties are included within contract liabilities. Revenue related to service-type warranties is deferred until after the expiration of the standard warranty period. The revenue is then recognized over the term of the service-type warranty period in proportion to the costs that are expected to be incurred. Changes in the Company’s service-type warranties were as follows (in millions):

 

 

Three Months Ended
March 31,

 

 

 

2024

 

 

2023

 

Balance at beginning of period

 

$

85.4

 

 

$

76.1

 

Deferred revenue for new service warranties

 

 

9.4

 

 

 

9.0

 

Amortization of deferred revenue

 

 

(7.0

)

 

 

(6.5

)

Foreign currency translation

 

 

(0.3

)

 

 

0.1

 

Balance at end of period

 

$

87.5

 

 

$

78.7

 

Classification of service-type warranties in the Condensed Consolidated Balance Sheets consisted of the following (in millions):

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Other current liabilities

 

$

32.4

 

 

$

30.9

 

Other non-current liabilities

 

 

55.1

 

 

 

54.5

 

 

$

87.5

 

 

$

85.4

 

 

Remaining Performance Obligations

As of March 31, 2024, the Company had unsatisfied performance obligations for contracts with an original duration greater than one year totaling $11.23 billion, of which $2.55 billion is expected to be satisfied and recognized in revenue in the remaining nine months of 2024, $3.22 billion is expected to be satisfied and recognized in revenue in 2025 and $5.46 billion is expected to be satisfied and recognized in revenue after 2025.