NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
John Bean Technologies Corporation and its majority-owned consolidated subsidiaries (the “Company,” “JBT,” “our,” “us,” or “we”) provide global technology solutions to high-value segments of the food and beverage and air transportation industries. The Company designs, produces and services sophisticated products and systems for multi-national and regional customers through FoodTech and AeroTech segments. The Company has manufacturing operations worldwide that are strategically located to facilitate delivery of its products and services to its customers.
Basis of Presentation
In accordance with Securities and Exchange Commission (“SEC”) rules for interim periods, the accompanying unaudited condensed consolidated financial statements (the “interim financial statements”) do not include all of the information and notes for complete financial statements as required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). As such, the accompanying interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2022, which provides a more complete description of the Company’s accounting policies, financial position, operating results, business, properties, and other matters. The year-end condensed consolidated Balance Sheet was derived from audited financial statements, but does not include all annual disclosures required by accounting principles generally accepted in the United States of America.
In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary for a fair statement of the Company's financial condition and operating results as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the interim results and trends in the interim financial statements may not be representative of those for the full year or any future period.
Use of estimates
Preparation of financial statements that follow U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
NOTE 2. ACQUISITIONS
During fiscal year 2022, the Company acquired 100% of voting equity of two businesses. The Company did not make any acquisitions during the three months ended March 31, 2023. A summary of the acquisitions made during 2022 is as follows:
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Date | | Type | | Company/Product Line | | Location (Near) | | Segment |
September 1, 2022 | | Stock | | Bevcorp, LLC ("Bevcorp") | | Eastlake, Ohio | | FoodTech |
A provider of beverage processing and packaging solutions in blending, handling, filling, and closing technologies. The Bevcorp acquisition expands the Company's presence in the ready-to-drink carbonated beverage production market and provides significant cross-selling opportunity in filling and seaming food and beverage applications. |
| | | | | | | | |
July 1, 2022 | | Stock | | Alco-food-machines GmbH & Co. KG ("Alco") | | Bad Iburg, Germany | | FoodTech |
A provider of further food processing equipment and production lines for a broad range of food applications. The Alco acquisition extends the Company's capabilities in further processing offerings and strengthens existing full line offerings. |
Each acquisition has been accounted for as a business combination. Tangible and identifiable intangible assets acquired and liabilities assumed were recorded at their respective estimated fair values. The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded as goodwill. The factors that contributed to the recognition of goodwill primarily relate to acquisition-driven anticipated cost savings and revenue enhancement synergies coupled with the assembled workforce acquired.
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(In millions) | Bevcorp(1) | | Alco(2) | | Total |
Financial assets | $ | 20.8 | | | $ | 9.1 | | | $ | 29.9 | |
Inventories | 33.1 | | | 11.7 | | | 44.8 | |
Property, plant and equipment | 5.5 | | | 0.9 | | | 6.4 | |
Customer relationship(3) | 127.0 | | | 9.2 | | | 136.2 | |
Patents and acquired technology(3) | 3.8 | | | 4.7 | | | 8.5 | |
Trademarks(3) | 10.0 | | | 3.2 | | | 13.2 | |
Financial liabilities | (18.7) | | | (19.9) | | | (38.6) | |
Total identifiable net assets | $ | 181.5 | | | $ | 18.9 | | | $ | 200.4 | |
| | | | | |
Cash consideration paid | $ | 294.9 | | | $ | 45.1 | | | $ | 340.0 | |
Cash acquired | 5.7 | | | 3.9 | | | 9.6 | |
Net consideration | $ | 289.2 | | | $ | 41.2 | | | $ | 330.4 | |
| | | | | |
Goodwill(4) | $ | 113.4 | | | $ | 26.2 | | | $ | 139.6 | |
(1)During the quarter ended March 31, 2023, the Company recorded an increase in cash consideration paid of $1.1 million due to finalization of the working capital adjustments, and refined estimates for financial liabilities by $(1.0) million, resulting in a corresponding net increase in residual goodwill of $0.1 million. The purchase accounting for Bevcorp is final as of March 31, 2023.
(2)The purchase accounting for Alco is provisional as of March 31, 2023. The valuation of intangibles, income tax balances, and residual goodwill is not complete. These amounts are subject to adjustment as additional information is obtained within the measurement period (not to exceed 12 months from the acquisition date). During the quarter ended March 31, 2023, the Company made no significant measurement period adjustments for this acquisition.
(3)The acquired intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from six to twenty-four years. The intangible assets acquired in 2022 have weighted average useful lives of 23 years for trademarks, 20 years for customer relationship, and 7 years for patents and acquired technology.
(4)The Company expects goodwill of $136.4 million from these acquisitions to be deductible for income tax purposes.
NOTE 3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by business segment were as follows:
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(In millions) | FoodTech | | AeroTech | | Total |
Balance as of December 31, 2022 | $ | 770.2 | | | $ | 37.6 | | | $ | 807.8 | |
Acquisitions | 0.1 | | | — | | | 0.1 | |
Currency translation | 5.4 | | | 0.1 | | | 5.5 | |
Balance as of March 31, 2023 | $ | 775.7 | | | $ | 37.7 | | | $ | 813.4 | |
Intangible assets consisted of the following:
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| March 31, 2023 | | December 31, 2022 |
(In millions) | Carrying Amount | | Accumulated Amortization | | Carrying Amount | | Accumulated Amortization |
Customer relationship | $ | 439.8 | | | $ | 132.7 | | | $ | 437.8 | | | $ | 124.1 | |
Patents and acquired technology | 176.5 | | | 99.1 | | | 174.4 | | | 93.9 | |
Trademarks | 58.4 | | | 17.1 | | | 57.8 | | | 17.0 | |
Non-amortizing intangible assets | 10.5 | | | — | | | 10.4 | | | — | |
Other | 8.8 | | | 8.8 | | | 8.6 | | | 8.6 | |
Total intangible assets | $ | 694.0 | | | $ | 257.7 | | | $ | 689.0 | | | $ | 243.6 | |
NOTE 4. INVENTORIES
Inventories consisted of the following:
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(In millions) | March 31, 2023 | | December 31, 2022 |
Raw materials | $ | 132.8 | | | $ | 123.5 | |
Work in process | 92.4 | | | 77.7 | |
Finished goods | 221.4 | | | 212.6 | |
Gross inventories before LIFO reserves and valuation adjustments | 446.6 | | | 413.8 | |
LIFO reserves | (63.1) | | | (62.0) | |
Valuation adjustments | (31.6) | | | (29.3) | |
Net inventories | $ | 351.9 | | | $ | 322.5 | |
NOTE 5. PENSION
Components of net periodic benefit cost were as follows: | | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Service cost | $ | 0.3 | | | $ | 0.5 | |
Interest cost | 3.2 | | | 1.9 | |
Expected return on plan assets | (4.3) | | | (3.9) | |
Amortization of net actuarial losses | 1.3 | | | 2.0 | |
Net periodic cost | $ | 0.5 | | | $ | 0.5 | |
The Company expects to contribute $14.5 million to its pension and other post-retirement benefit plans in 2023. The pension contributions will be primarily for the U.S. qualified pension plan, and all of the contributions are expected to be in the form of cash. We have made no contribution to our U.S. qualified pension plan during the three months ended March 31, 2023.
NOTE 6. DEBT
The components of the Company's borrowings were as follows:
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(In millions) | Maturity Date | | March 31, 2023 | | December 31, 2022 |
Revolving credit facility (1) | December 14, 2026 | | $ | 563.0 | | | $ | 584.6 | |
Less: unamortized debt issuance costs | | | (2.0) | | | (2.2) | |
Revolving credit facility, net | | | $ | 561.0 | | | $ | 582.4 | |
| | | | | |
Convertible senior notes (2) | May 15, 2026 | | $ | 402.5 | | | $ | 402.5 | |
Less: unamortized debt issuance costs | | | (7.0) | | | (7.6) | |
Convertible senior notes, net | | | $ | 395.5 | | | $ | 394.9 | |
| | | | | |
Long-term debt, net | | | $ | 956.5 | | | $ | 977.3 | |
(1) Weighted-average interest rate at March 31, 2023 was 5.54%
(2) Effective interest rate for the Notes (as defined below) for the quarter ended March 31, 2023 was 0.82%
Components of interest expense recognized for the 0.25% Convertible Senior Notes due 2026 (the "Notes") were as follows:
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| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Contractual interest expense | $ | 0.3 | | | $ | 0.3 | |
Interest cost related to amortization of issuance costs | 0.6 | | | 0.5 | |
Total interest expense | $ | 0.9 | | | $ | 0.8 | |
Convertible Note Hedge Transactions
On May 28, 2021, the Company closed a private offering of $402.5 million aggregate principal amount of the Notes to qualified institutional buyers. The initial conversion rate of the Notes is 5.8958 shares of the Company's common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $169.61 per share. The conversion rate of the Notes is subject to adjustment upon the occurrence of certain specified events.
On May 28, 2021, the Company paid an aggregate amount of $65.6 million for the Convertible Note Hedge Transactions (the "Hedge Transactions"). The Hedge Transactions cover, subject to anti-dilution adjustments substantially similar to those in the Notes, approximately 2.4 million shares of the Company's common stock. These are the same number of shares initially underlying the Notes, at a strike price of $169.61, subject to customary adjustments. The Hedge Transactions will expire upon the maturity of the Notes, subject to earlier exercise or termination.
The Hedge Transactions are expected generally to reduce the potential dilutive effect of the conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted Notes, in the event that the market price per share of the Company's common stock, as measured under the terms of the Hedge Transactions, is greater than the Hedge Transactions strike price of $169.61. The Hedge Transactions meet the criteria in ASC 815-40 to be classified within Stockholders' Equity, and therefore these transactions are not revalued after their issuance.
The Company made a tax election to integrate the Notes and the Hedge Transactions. The accounting impact of this tax election makes the Hedge Transactions deductible as original issue discount interest for tax purposes over the term of the note, and results in a $17.1 million deferred tax asset recorded as an adjustment to Additional paid-in capital on our Balance Sheet as of March 31, 2023.
Warrant Transactions
In addition, concurrently with entering into the Hedge Transactions, the Company separately entered into privately-negotiated Warrant Transactions (the "Warrant Transactions"), whereby the Company sold to the counterparties warrants to acquire, collectively, subject to anti-dilution adjustments, 2.4 million shares of its common stock at an initial strike price of $240.02 per share. The Company received aggregate proceeds of $29.5 million from the Warrant Transactions with the counterparties, with such proceeds partially offsetting the costs of entering into the Hedge Transactions. The warrants expire in August 2026. If the market value per share of the common stock, exceeds the strike price of the warrants, the warrants will have a dilutive effect on our earnings per share, unless the Company elects, subject to certain conditions, to settle the warrants in cash. The warrants meet the criteria in ASC 815-40 to be classified within Stockholders' Equity, and therefore the warrants are not revalued after issuance.
NOTE 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the Balance Sheet date. For the Company, AOCI is composed of adjustments related to pension and other postretirement benefit plans, derivatives designated as hedges, and foreign currency translation adjustments. Changes in the AOCI balances for the three months ended March 31, 2023 and 2022 by component are shown in the following tables:
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(In millions) | Pension and Other Postretirement Benefits (1) | | Derivatives Designated as Hedges (1) | | Foreign Currency Translation (1) | | Total (1) |
Beginning balance, December 31, 2022 | $ | (130.9) | | | $ | 14.8 | | | $ | (88.2) | | | $ | (204.3) | |
Other comprehensive income (loss) before reclassification | (0.1) | | | (0.4) | | | 6.2 | | | 5.7 | |
Amounts reclassified from accumulated other comprehensive income | 1.0 | | | (1.8) | | | (0.5) | | | (1.3) | |
Ending balance, March 31, 2023 | $ | (130.0) | | | $ | 12.6 | | | $ | (82.5) | | | $ | (199.9) | |
(1) All amounts are net of income taxes.
Reclassification adjustments from AOCI into earnings for pension and other postretirement benefit plans for the three months ended March 31, 2023 were $1.4 million of charges to pension expense, other than service cost, net of $0.4 million income tax benefit. Reclassification adjustments for derivatives designated as hedges for the same period were $2.4 million of interest income, net of $0.60 income tax provision. Reclassification adjustments for foreign currency translation related to net investment hedges for the three months ended March 31, 2023 were $0.7 million of benefit in interest expense, net of $0.2 million income tax provision.
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(In millions) | Pension and Other Postretirement Benefits (1) | | Derivatives Designated as Hedges (1) | | Foreign Currency Translation(1) | | Total (1) |
Beginning balance, December 31, 2021 | $ | (145.5) | | | $ | 1.8 | | | $ | (53.7) | | | $ | (197.4) | |
Other comprehensive income (loss) before reclassification | — | | | 7.0 | | | 0.6 | | | 7.6 | |
Amounts reclassified from accumulated other comprehensive income | 1.6 | | | 0.3 | | | (0.5) | | | 1.4 | |
Ending balance, March 31, 2022 | $ | (143.9) | | | $ | 9.1 | | | $ | (53.6) | | | $ | (188.4) | |
(1) All amounts are net of income taxes.
Reclassification adjustments from AOCI into earnings for pension and other postretirement benefit plans for the three months ended March 31, 2022 were $2.0 million of charges to pension expense, other than service cost, net of $0.4 million in benefit for income taxes. Reclassification adjustments for derivatives designated as hedges for the same period were $0.4 million of interest expense, net of $0.1 million income tax benefit. Reclassification adjustments for foreign currency translation related to net investment hedges for the three months ended March 31, 2022 were $0.7 million of benefit in interest expense, net of $0.2 million income tax provision.
NOTE 8. REVENUE RECOGNITION
Transaction price allocated to remaining performance obligations
The Company has estimated that $1.2 billion in revenue is expected to be recognized in the future periods related to remaining performance obligations from the Company's contracts with customers outstanding as of March 31, 2023. The Company expects to complete these obligations and recognize 70% as revenue in 2023, 25% in 2024, and the remainder after 2024.
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of good or service, primary geographical market, and timing of recognition for each reportable segment. The table also includes a reconciliation of the disaggregated revenue to total revenue of each reportable segment.
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| Three Months Ended | | Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
(In millions) | FoodTech | | AeroTech | | FoodTech | | AeroTech |
Type of Good or Service | | | | | | | |
Recurring (1) | $ | 219.3 | | | $ | 54.5 | | | $ | 174.2 | | | $ | 48.7 | |
Non-recurring (1) | 169.2 | | | 86.5 | | | 182.1 | | | 64.2 | |
Total | 388.5 | | | 141.0 | | | 356.3 | | | 112.9 | |
| | | | | | | |
Geographical Region (2) | | | | | | | |
North America | 240.6 | | | 127.3 | | | 210.3 | | | 104.1 | |
Europe, Middle East and Africa | 95.2 | | | 7.2 | | | 89.4 | | | 5.3 | |
Asia Pacific | 29.8 | | | 4.9 | | | 36.0 | | | 2.7 | |
Latin America | 22.9 | | | 1.6 | | | 20.6 | | | 0.8 | |
Total | 388.5 | | | 141.0 | | | 356.3 | | | 112.9 | |
| | | | | | | |
Timing of Recognition | | | | | | | |
Point in Time | 201.8 | | | 69.4 | | | 171.9 | | | 49.6 | |
Over Time | 186.7 | | | 71.6 | | | 184.4 | | | 63.3 | |
Total | 388.5 | | | 141.0 | | | 356.3 | | | 112.9 | |
(1) Aftermarket parts and services and revenue from lease and long-term service contracts are considered recurring revenue. Non-recurring revenue includes new equipment and installation.
(2) Geographical region represents the region in which the end customer resides.
Contract balances
The timing of revenue recognition, billings and cash collections results in trade receivables, contract assets, and advance and progress payments (contract liabilities). Contract assets exist when revenue recognition occurs prior to billings. Contract assets are transferred to trade receivables when the right to payment becomes unconditional (i.e., when receipt of the amount is dependent only on the passage of time). Conversely, the Company often receives payments from its customers before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Balance Sheet as Contract assets and within Advance and progress payments, respectively, on a contract-by-contract net basis at the end of each reporting period.
Contract asset and liability balances for the period were as follows:
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| Balances as of |
(In millions) | March 31, 2023 | | December 31, 2022 |
Contract Assets | $ | 96.4 | | | $ | 89.6 | |
Contract Liabilities | 209.8 | | | 182.1 | |
| | | |
| Balances as of |
| March 31, 2022 | | December 31, 2021 |
Contract Assets | 104.0 | | | 94.4 | |
Contract Liabilities | 207.1 | | | 178.0 | |
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| | | |
| | | |
The revenue recognized during the three months ended March 31, 2023 and 2022 that was included in contract liabilities at the beginning of the period amounted to $77.1 million and $83.5 million, respectively. The remainder of the change from December 31, 2022 and December 31, 2021 is driven by the timing of advance and milestone payments received from customers, customer returns and fulfillment of performance obligations. There were no significant changes in the contract balances other than those described above.
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share from net income for the respective periods and basic and diluted shares outstanding:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions, except per share data) | 2023 | | 2022 |
Basic earnings per share: | | | |
Net income | $ | 25.6 | | | $ | 25.6 | |
Weighted average number of shares outstanding | 32.0 | | | 32.0 | |
Basic earnings per share from net income | $ | 0.80 | | | $ | 0.80 | |
Diluted earnings per share: | | | |
Net income | $ | 25.6 | | | $ | 25.6 | |
Weighted average number of shares outstanding | 32.0 | | | 32.0 | |
Effect of dilutive securities: | | | |
Restricted stock | 0.1 | | | 0.1 | |
Total shares and dilutive securities | 32.1 | | | 32.1 | |
Diluted earnings per share from net income | $ | 0.80 | | | $ | 0.80 | |
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
•Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities that the Company can assess at the measurement date.
•Level 2: Observable inputs other than those included in Level 1 that are observable for the asset or liability, either directly or indirectly. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Financial assets and financial liabilities measured at fair value on a recurring basis are as follows:
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| As of March 31, 2023 | | As of December 31, 2022 |
(In millions) | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | | |
Investments | $ | 12.9 | | | $ | 12.9 | | | $ | — | | | $ | — | | | $ | 12.1 | | | $ | 12.1 | | | $ | — | | | $ | — | |
Derivatives | 30.4 | | | — | | | 30.4 | | | — | | | 34.3 | | | — | | | 34.3 | | | — | |
Total assets | $ | 43.3 | | | $ | 12.9 | | | $ | 30.4 | | | $ | — | | | $ | 46.4 | | | $ | 12.1 | | | $ | 34.3 | | | $ | — | |
Liabilities: | | | | | | | | | | | | | | | |
Derivatives | $ | 4.7 | | | $ | — | | | $ | 4.7 | | | $ | — | | | $ | 7.2 | | | $ | — | | | $ | 7.2 | | | $ | — | |
Total liabilities | $ | 4.7 | | | $ | — | | | $ | 4.7 | | | $ | — | | | $ | 7.2 | | | $ | — | | | $ | 7.2 | | | $ | — | |
Investments represent securities held in a trust for the non-qualified deferred compensation plan. Investments are classified as trading securities and are valued based on quoted prices in active markets for identical assets that the Company has the ability to access. Investments are reported separately in other assets on the Balance Sheet, and include an unrealized gain of $0.7 million and an unrealized loss of $3.9 million as of March 31, 2023 and December 31, 2022, respectively.
The Company uses the income approach to measure the fair value of derivative instruments on a recurring basis. This approach calculates the present value of the future cash flow by measuring the change between the derivative contract rate and the published market indicative currency rate, multiplied by the contract notional values, and applying an appropriate discount rate as well as a factor of credit risk.
The Notes are not registered securities nor listed on any securities exchange but may be traded by qualified institutional buyers. The fair value of the Notes estimated using Level 2 inputs was $366.3 million as of March 31, 2023.
The carrying amounts of cash and cash equivalents, trade receivables and payables, as well as financial instruments included in other current assets and other current liabilities, approximate fair values because of their short-term maturities.
The carrying values of the Company's revolving credit facility recorded in long-term debt on the Balance Sheet approximate their fair values due to their variable interest rates.
NOTE 11. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Derivative Financial Instruments
All derivatives are recorded as assets or liabilities in the Balance Sheet at their respective fair values. For derivatives designated as cash flow hedges, the unrealized gain or loss related to the derivatives is recorded in Other comprehensive income (loss) until the hedged transaction affects earnings. The Company assesses at inception of the hedge, whether the derivative in the hedging transaction will be highly effective in offsetting changes in cash flows of the hedged item. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge are recognized in earnings.
Foreign Exchange: The Company manufactures and sells products in a number of countries throughout the world and, as a result, the Company is exposed to movements in foreign currency exchange rates. The Company's major foreign currency exposures involve the markets in Western Europe, South America and Asia. Some sales and purchase contracts contain embedded derivatives due to the nature of doing business in certain jurisdictions, which the Company takes into consideration as part of its risk management policy. The purpose of foreign currency hedging activities is to manage the economic impact of exchange rate volatility associated with anticipated foreign currency purchases and sales made in the normal course of business. The Company primarily utilizes forward foreign exchange contracts with maturities of less than 2 years in managing this foreign exchange rate risk. The Company has not designated these forward foreign exchange contracts, which had a notional value at March 31, 2023 of $553.5 million, as hedges and therefore does not apply hedge accounting.
Commodity Price Risk: The Company's operations subject us to risk related to the price volatility of certain commodities. The Company principally uses a combination of purchase orders and various short-term supply arrangements in connection with the purchase of our raw materials and components required to manufacture our products. To mitigate the commodity price risk associated with the Company's operations, the Company may enter into commodity derivative instruments. During April 2022, the Company entered into various commodity forward contracts with a maturity of less than 1 year to mitigate this commodity price volatility. All of the Company's commodity forward contracts expired as of December 31, 2022.
The fair values of our foreign currency and commodity derivative assets are recorded within other current assets and other assets, and the fair values of foreign currency and commodity derivative liabilities are recorded within other current liabilities and other liabilities. The following table presents the fair value of foreign currency derivatives, commodity derivatives, and embedded derivatives included within the Balance Sheet:
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| As of March 31, 2023 | | As of December 31, 2022 |
(In millions) | Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
Total | $ | 5.1 | | | $ | 4.7 | | | $ | 4.5 | | | $ | 7.2 | |
A master netting arrangement allows counterparties to net settle amounts owed to each other as a result of separate offsetting derivative transactions. The Company enters into master netting arrangements with its counterparties when possible to mitigate credit risk in derivative transactions by permitting it to net settle for transactions with the same counterparty. However, the Company does not net settle with such counterparties. As a result, derivatives are presented at their gross fair values in the Balance Sheet.
As of March 31, 2023 and December 31, 2022, information related to these offsetting arrangements was as follows:
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(In millions) | As of March 31, 2023 |
Offsetting of Assets | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Amount Subject to Master Netting Agreement | | Net Amount |
Derivatives | $ | 28.8 | | | $ | — | | | $ | 28.8 | | | $ | (2.8) | | | $ | 26.0 | |
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(In millions) | As of March 31, 2023 |
Offsetting of Liabilities | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Amount Subject to Master Netting Agreement | | Net Amount |
Derivatives | $ | 4.7 | | | $ | — | | | $ | 4.7 | | | $ | (2.8) | | | $ | 1.9 | |
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(In millions) | As of December 31, 2022 |
Offsetting of Assets | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Amount Subject to Master Netting Agreement | | Net Amount |
Derivatives | $ | 33.0 | | | $ | — | | | $ | 33.0 | | | $ | (3.0) | | | $ | 30.0 | |
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(In millions) | As of December 31, 2022 |
Offsetting of Liabilities | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Amount Subject to Master Netting Agreement | | Net Amount |
Derivatives | $ | 7.3 | | | $ | — | | | $ | 7.3 | | | $ | (3.0) | | | $ | 4.3 | |
The following table presents the location and amount of the gain (loss) on foreign currency derivatives and on the remeasurement of assets and liabilities denominated in foreign currencies, as well as the net impact recognized in the Statements of Income:
| | | | | | | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income |
| | | | Three Months Ended March 31, |
(In millions) | | | | 2023 | | 2022 |
Foreign exchange contracts | | Revenue | | $ | 0.9 | | | $ | (0.2) | |
Foreign exchange contracts | | Cost of sales | | 0.6 | | | (0.9) | |
Foreign exchange contracts | | Selling, general and administrative expense | | 0.2 | | | 0.5 | |
Total | | | | 1.7 | | | (0.6) | |
Remeasurement of assets and liabilities in foreign currencies | | | | (1.1) | | | 1.1 | |
Net gain (loss) | | | | $ | 0.6 | | | $ | 0.5 | |
Interest Rates: The Company has entered into four interest rate swaps executed in March 2020 with a combined notional amount of $200 million expiring in April 2025, and one interest rate swap executed in May 2020 with a notional amount of $50 million expiring in May 2025. These interest rate swaps fix the interest rate applicable to certain of the Company's variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The Company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income (loss).
At March 31, 2023, the fair value of these derivatives designated as cash flow hedges were recorded in the Balance Sheet as other assets of $17.0 million and as accumulated other comprehensive income, net of tax, of $12.5 million. At December 31, 2022, the fair value of these derivatives designated as cash flow hedges were recorded in the Balance Sheet as other assets of $19.9 million and as accumulated other comprehensive income, net of tax, of $14.8 million.
Net Investment: The Company has entered into cross currency swap agreements that synthetically swap $116.4 million of fixed rate debt to Euro denominated fixed rate debt. The agreements are designated as net investment hedges for accounting purposes. Accordingly, the gains or losses on these derivative instruments are included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. Coupons received for the cross currency swaps are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense, net on the Statements of Income. Coupon interest from cross currency swap agreements recorded in interest expense, net was approximately $0.7 million for both the three months ended March 31, 2023 and 2022.
At March 31, 2023, the fair value of these derivatives designated as net investment hedges were recorded in the Balance Sheet as other current assets of $8.3 million and as accumulated other comprehensive income, net of tax, of $6.2 million. At December 31, 2022, the fair value of these derivatives designated as net investment hedges were recorded in the Balance Sheet as other current assets of $9.9 million and as accumulated other comprehensive income, net of tax, of $7.3 million.
Refer to Note 10. Fair Value Of Financial Instruments for a description of how the values of the above financial instruments are determined.
Credit Risk
By their nature, financial instruments involve risk including credit risk for non-performance by counterparties. Financial instruments that potentially subject the Company to credit risk primarily consist of trade receivables and derivative contracts. The Company manages the credit risk on financial instruments by transacting only with financially secure counterparties, requiring credit approvals and establishing credit limits, and monitoring counterparties’ financial condition. The Company's maximum exposure to credit loss in the event of non-performance by the counterparty, for all receivables and derivative contracts as of March 31, 2023, is limited to the amount drawn and outstanding on the financial instrument. Refer to Note 1. Description of Business and Basis of Presentation in Item 8. Financial Statements and Supplementary Data of the Company's most recent Annual Report on Form 10-K, for a description of how allowance for credit loss is determined on financial assets measured at amortized cost, which includes Trade receivables, Contract assets, and non-current receivables.
NOTE 12. LEASES
The following table provides the required information regarding operating and sales-type leases for which the Company is lessor.
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Fixed payment revenue | $ | 15.1 | | | $ | 15.6 | |
Variable payment revenue | 12.5 | | | 9.4 | |
Operating lease revenue | $ | 27.6 | | | $ | 25.0 | |
| | | |
Sales-type lease revenue | $ | — | | | $ | 0.7 | |
Refer to Note 16. Related Party Transactions for details of operating lease agreements with related parties.
NOTE 13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is at times subject to pending and threatened legal actions, some for which the relief or damages sought may be substantial. Although the Company is not able to predict the outcome of such actions, after reviewing all pending and threatened actions with counsel and based on information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company's results of operations or financial position. However, it is possible that the ultimate resolution of such matters, if unfavorable, may be material to its results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not currently known.
Liabilities are established for pending legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not considered probable that a liability has been incurred or not possible to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no liability would be recognized until that time.
Guarantees and Product Warranties
In the ordinary course of business with customers, vendors and others, the Company issues standby letters of credit, performance bonds, surety bonds and other guarantees. These financial instruments, which totaled $165.7 million at March 31, 2023, represent guarantees of future performance. The Company has also provided approximately $6.2 million of bank guarantees and letters of credit to secure a portion of its existing financial obligations. The majority of these financial instruments expire within one year and are expected to be replaced through the issuance of new or the extension of existing letters of credit and surety bonds.
In some instances, the Company guarantees its customers’ financing arrangements. The Company is responsible for payment of any unpaid amounts, but will receive indemnification from third parties for seventy-five percent of the contract values. In addition, the Company generally retains recourse to the equipment sold. As of March 31, 2023, the gross value of such arrangements was $2.0 million, of which the Company's net exposure under such guarantees was $0.3 million.
The Company provides warranties of various lengths and terms to certain customers based on standard terms and conditions and negotiated agreements. The Company provides for the estimated cost of warranties at the time revenue is recognized for products where reliable, historical experience of warranty claims and costs exist. The Company also provides a warranty liability when additional specific obligations are identified. The warranty obligation reflected in other current liabilities in the consolidated Balance Sheet is based on historical experience by product and considers failure rates and the related costs in correcting a product failure. Warranty cost and accrual information were as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Balance at beginning of period | $ | 15.1 | | | $ | 12.7 | |
Expense for new warranties | 4.6 | | | 2.7 | |
Adjustments to existing accruals | (0.3) | | | (0.1) | |
Claims paid | (4.2) | | | (3.0) | |
Added through acquisition | 0.1 | | | — | |
Translation | 0.1 | | | (0.1) | |
Balance at end of period | $ | 15.4 | | | $ | 12.2 | |
NOTE 14. BUSINESS SEGMENT INFORMATION
Operating segments for the Company are determined based on information used by the chief operating decision maker (CODM) in deciding how to evaluate performance and allocate resources to each of the segments. JBT’s CODM is the Chief Executive Officer (CEO). While there are many measures the CEO reviews in this capacity, the key segment measures reviewed include operating profit, EBITDA, adjusted when applicable, and EBITDA margins.
Reportable segments are:
•FoodTech—provides comprehensive solutions throughout the food production value chain extending from primary processing through packaging systems for a large variety of food and beverage groups, including poultry, beef, pork, seafood, ready-to-eat meals, fruits, vegetables, dairy, bakery, pet foods, soups, sauces, plant-based meats, juices, and carbonated beverages.
•AeroTech— supplies customized solutions and services used for applications in the air transportation industry, including airport authorities, airlines, airfreight, ground handling companies, militaries and defense contractors.
Segment operating profit is defined as total segment revenue less segment operating expenses. The following items have been excluded in computing segment operating profit: corporate expense, restructuring costs, pension expense, other than service cost, interest income and expense, and income taxes. See the table below for further details on corporate expense.
Business segment information was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(In millions) | 2023 | | 2022 |
Revenue | | | |
FoodTech | $ | 388.5 | | | $ | 356.3 | |
AeroTech | 141.0 | | | 112.9 | |
Total revenue | 529.5 | | | 469.2 | |
| | | |
Income before income taxes | | | |
Segment operating profit: | | | |
FoodTech | 46.3 | | | 39.9 | |
AeroTech | 13.2 | | | 6.8 | |
Total segment operating profit | 59.5 | | | 46.7 | |
Corporate items: | | | |
Corporate expense (1) | 18.9 | | | 15.6 | |
Restructuring expense (2) | 0.6 | | | 0.5 | |
Operating income | 40.0 | | | 30.6 | |
| | | |
Pension expense, other than service cost | 0.2 | | | — | |
Interest expense, net | 7.2 | | | 2.1 | |
Net income before income taxes | $ | 32.6 | | | $ | 28.5 | |
(1)Corporate expense generally includes corporate staff-related expense, stock-based compensation, LIFO adjustments, certain foreign currency-related gains and losses, and the impact of unusual or strategic events not representative of segment operations.
(2)Refer to Note 15. Restructuring for further information on restructuring charges.
NOTE 15. RESTRUCTURING
Restructuring charges primarily consist of employee separation benefits under existing severance programs, foreign statutory termination benefits, certain one-time termination benefits, contract termination costs, asset impairment charges and other costs that are associated with restructuring actions. Certain restructuring charges are accrued prior to payments made in accordance with applicable guidance. For such charges, the amounts are determined based on estimates prepared at the time the restructuring actions were approved by management. Inventory write offs due to restructuring are reported in Cost of products and are included in each segment's operating profit given the nature of the item. All other restructuring charges that are reported as Restructuring expenses are excluded from the calculation of each segment's operating profit.
In the third quarter of 2022, the Company implemented a restructuring plan (the "2022/2023 restructuring plan") to optimize the overall FoodTech cost structure on a global basis. The initiatives under this plan will include streamlining operations and enhancing our general and administrative infrastructure. As of March 31, 2023, the Company recognized restructuring charges of $6.0 million, net of a cumulative release of the related liability of $1.3 million. The total estimated cost, net release of liability in connection with this plan is in the range of $8.0 million to $10.0 million expected to be recognized by the end of 2023.
The following table details the cumulative restructuring charges reported in operating income for the 2022/2023 restructuring plan since the implementation of this plan:
| | | | | | | | | | | | | | | | | |
| Cumulative Amount | | As of the Quarter Ended | Cumulative Amount |
(In millions) | Balance as of December 31, 2022 | | March 31, 2023 | | Balance as of March 31, 2023 |
2022/2023 restructuring plan | | | | | |
Severance and related expense | $ | 5.4 | | | $ | 0.6 | | | $ | 6.0 | |
Total Restructuring charges, net release of liability | $ | 5.4 | | | $ | 0.6 | | | $ | 6.0 | |
Restructuring charges, net of related release of liability, is reported in restructuring expense within the Consolidated Statements of Income. Liability balances for restructuring activities are included in other current liabilities in the accompanying Balance Sheets. The table below details the activities in 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Impact to Earnings | | | | |
(In millions) | Balance as of December 31, 2022 | | Charged to Earnings | | Releases | | Cash Payments | | Balance as of March 31, 2023 |
2022/2023 restructuring plan | | | | | | | | | |
Severance and related expense | $ | 4.3 | | | $ | 1.6 | | | $ | (1.0) | | | $ | (1.1) | | | $ | 3.8 | |
Total | $ | 4.3 | | | $ | 1.6 | | | $ | (1.0) | | | $ | (1.1) | | | $ | 3.8 | |
The Company released $1.0 million of the liability during the three months ended March 31, 2023, which it no longer expects to pay in connection with the restructuring plans due to actual severance payments differing from the original estimates and natural attrition of employees.
NOTE 16. RELATED PARTY TRANSACTIONS
The Company is a party to lease agreements to lease manufacturing facilities from entities owned by certain of the Company's employees who were former owners or employees of acquired businesses. As of March 31, 2023, the operating lease right-of-use asset and the lease liability related to these agreements is $3.9 million and $4.1 million, respectively.