NOTE 2. ACQUISITIONS
During 2019 the Company acquired 100% of voting equity of three businesses for an aggregate consideration of $382.9 million, net of cash acquired. A summary of the acquisitions made during the period is as follows:
|
|
|
|
|
|
|
|
|
|
Date
|
|
Type
|
|
Company/Product Line
|
|
Location (Near)
|
|
Segment
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
Stock
|
|
Proseal UK Limited
|
|
Adlington, UK
|
|
JBT FoodTech
|
|
|
|
|
|
|
|
|
|
A leading provider of tray sealing technology for the fresh produce, ready meals, proteins, sandwiches, and snack industries.
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
Stock
|
|
Prime Equipment Group, LLC
|
|
Columbus, Ohio
|
|
JBT FoodTech
|
|
|
|
|
|
|
|
|
|
A manufacturer of turnkey primary and water re–use solutions for the poultry industry.
|
|
|
|
|
|
|
|
|
|
February 1, 2019
|
|
Stock
|
|
LEKTRO, Inc.
|
|
Warrenton, Oregon
|
|
JBT AeroTech
|
|
|
|
|
|
|
|
|
|
A manufacturer of commercial aviation ground support equipment, including electric towbarless aircraft pushback tractors for narrow body and smaller aircrafts.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proseal(1)
|
|
Prime(1)
|
|
LEKTRO(2)
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Financial assets
|
$
|
46.4
|
|
|
$
|
12.9
|
|
|
$
|
4.2
|
|
|
$
|
63.5
|
|
Inventories
|
24.8
|
|
|
11.6
|
|
|
7.0
|
|
|
43.4
|
|
Property, plant and equipment
|
22.2
|
|
|
1.5
|
|
|
0.3
|
|
|
24.0
|
|
Other intangible assets (3)
|
91.5
|
|
|
28.4
|
|
|
19.4
|
|
|
139.3
|
|
Deferred taxes
|
(19.2
|
)
|
|
—
|
|
|
(4.9
|
)
|
|
(24.1
|
)
|
Financial liabilities
|
(35.3
|
)
|
|
(21.0
|
)
|
|
(4.6
|
)
|
|
(60.9
|
)
|
Total identifiable net assets
|
$
|
130.4
|
|
|
$
|
33.4
|
|
|
$
|
21.4
|
|
|
$
|
185.2
|
|
|
|
|
|
|
|
|
|
Cash consideration paid
|
$
|
264.5
|
|
|
$
|
60.6
|
|
|
$
|
48.3
|
|
|
$
|
373.4
|
|
Contingent consideration (4)
|
14.7
|
|
|
1.3
|
|
|
—
|
|
|
16.0
|
|
Holdback payment due to seller
|
—
|
|
|
0.9
|
|
|
—
|
|
|
0.9
|
|
Total consideration
|
279.2
|
|
|
62.8
|
|
|
48.3
|
|
|
390.3
|
|
Cash acquired
|
4.3
|
|
|
1.4
|
|
|
1.7
|
|
|
7.4
|
|
Net consideration
|
$
|
274.9
|
|
|
$
|
61.4
|
|
|
$
|
46.6
|
|
|
$
|
382.9
|
|
|
|
|
|
|
|
|
|
Goodwill (5)
|
$
|
148.8
|
|
|
$
|
29.4
|
|
|
$
|
26.9
|
|
|
$
|
205.1
|
|
|
|
(1)
|
The purchase accounting for Proseal and Prime is complete as of March 31, 2020. During the quarter ended March 31, 2020, there were no significant measurement period adjustments.
|
|
|
(2)
|
The purchase accounting for LEKTRO was final as of December 31, 2019.
|
|
|
(3)
|
The acquired intangible assets subject to amortization are being amortized on a straight-line basis over their estimated useful lives, which range from seven to twenty-one years. The intangible assets acquired in 2019 include customer relationships totaling $87.0 million (14 - year weighted average useful life), technology totaling $37.6 million (9 - year weighted average useful life), and tradenames totaling $14.7 million (20 - year weighted average useful life).
|
|
|
(4)
|
Proseal and Prime purchase agreements include contingent payments due to the sellers to the extent Proseal and Prime achieve certain earnings targets.
|
The Proseal purchase agreement includes a contingent payment due to the sellers to the extent Proseal achieves certain earnings targets. Proseal earnings performance for the period from January 1, 2020 through December 31, 2020 would result in a payment of $17.7 million in the event earnout targets are met, and no payment if not met. Acquisition date fair value of these contingent payments was determined to be $14.7 million for Proseal.
The Prime purchase agreement include contingent payments due to the sellers to the extent the Prime results exceed certain earnings targets. These payments are based on the achievement of earnings target ranges for the respective year, and would result in a payment ranging from $0 million to $1 million for the earnout period of calendar year 2019, and an additional payment of $0 million to $0.5 million for the earnout period of calendar year 2020. Acquisition date fair value of these contingent payments was determined at $1.3 million for Prime.
Refer to Note 9. Fair Value Of Financial Instruments for a description of how these values for contingent consideration obligations were determined.
|
|
(5)
|
The Company expects goodwill of $58.8 million from these acquisitions to be deductible for income tax purposes.
|
Pro forma Financial Information (unaudited)
The Company's acquisition of Proseal was material to its overall results and as such is required under ASC 805, Business Combinations, to present pro forma information. The following information reflects the results of the Company’s operations for the three months ended March 31, 2020 and 2019 on a pro forma basis as if the acquisition of Proseal had been completed on January 1, 2018. Pro forma adjustments have been made to illustrate the incremental impact on earnings of interest costs on the borrowings to acquire the company, amortization expense related to acquire intangible assets, depreciation expense related to the fair value of the acquired depreciable tangible assets and the related tax impact associated with the incremental interest costs and amortization and depreciation expense.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions, except per share data)
|
2020
|
|
2019
|
Revenue
|
|
|
|
Pro forma
|
$
|
457.7
|
|
|
$
|
439.6
|
|
As reported
|
457.7
|
|
|
417.5
|
|
Income from continuing operations
|
|
|
|
Pro forma
|
$
|
29.0
|
|
|
$
|
20.8
|
|
As reported
|
29.0
|
|
|
19.7
|
|
Income from continuing operations per share
|
|
|
|
Pro forma
|
|
|
|
Basic
|
$
|
0.91
|
|
|
$
|
0.65
|
|
Fully diluted
|
0.90
|
|
|
0.65
|
|
As reported
|
|
|
|
Basic
|
$
|
0.91
|
|
|
$
|
0.62
|
|
Fully diluted
|
0.90
|
|
|
0.62
|
|
The unaudited pro forma information is provided for illustrative purposes only and does not purport to represent what the Company's consolidated results of operations would have been had the transaction actually occurred as of January 1, 2018, and does not purport to project actual consolidated results of operations.
NOTE 3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill by business segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
JBT FoodTech
|
|
JBT AeroTech
|
|
Total
|
Balance as of December 31, 2019
|
$
|
490.9
|
|
|
$
|
38.0
|
|
|
$
|
528.9
|
|
Acquisitions
|
0.3
|
|
|
—
|
|
|
0.3
|
|
Currency translation
|
(9.2
|
)
|
|
(0.2
|
)
|
|
(9.4
|
)
|
Balance as of March 31, 2020
|
$
|
482.0
|
|
|
$
|
37.8
|
|
|
$
|
519.8
|
|
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
(In millions)
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Gross carrying amount
|
|
Accumulated amortization
|
Customer relationship
|
$
|
249.2
|
|
|
$
|
66.6
|
|
|
$
|
251.3
|
|
|
$
|
61.9
|
|
Patents and acquired technology
|
141.3
|
|
|
51.1
|
|
|
138.7
|
|
|
48.5
|
|
Trademarks
|
36.7
|
|
|
14.0
|
|
|
38.0
|
|
|
11.6
|
|
Non-amortizing intangible assets
|
15.5
|
|
|
—
|
|
|
15.6
|
|
|
—
|
|
Other
|
9.4
|
|
|
9.0
|
|
|
16.7
|
|
|
12.4
|
|
Total intangible assets
|
$
|
452.1
|
|
|
$
|
140.7
|
|
|
$
|
460.3
|
|
|
$
|
134.4
|
|
NOTE 4. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
(In millions)
|
March 31, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
96.5
|
|
|
$
|
100.8
|
|
Work in process
|
70.4
|
|
|
65.8
|
|
Finished goods
|
140.6
|
|
|
149.5
|
|
Gross inventories before LIFO reserves and valuation adjustments
|
307.5
|
|
|
316.1
|
|
LIFO reserves
|
(49.4
|
)
|
|
(49.5
|
)
|
Valuation adjustments
|
(20.9
|
)
|
|
(21.6
|
)
|
Net inventories
|
$
|
237.2
|
|
|
$
|
245.0
|
|
NOTE 5. PENSION
Components of net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In millions)
|
2020
|
|
2019
|
Service cost
|
$
|
0.5
|
|
|
$
|
0.4
|
|
Interest cost
|
2.3
|
|
|
2.6
|
|
Expected return on plan assets
|
(3.3
|
)
|
|
(3.8
|
)
|
Amortization of net actuarial losses
|
2.0
|
|
|
1.7
|
|
Net periodic cost
|
$
|
1.5
|
|
|
$
|
0.9
|
|
The Company expects to contribute up to $5 million to its pension and other post-retirement benefit plans in 2020, all of which would be contributed to its U.S. qualified pension plan. The Company did not make a contribution to its U.S. qualified pension plan during the three months ended March 31, 2020.
NOTE 6. 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, 2020 and 2019 by component are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits (1)
|
|
Derivatives Designated as Hedges (1)
|
|
Foreign Currency Translation (1)
|
|
Total (1)
|
(In millions)
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2019
|
$
|
(147.0
|
)
|
|
$
|
0.1
|
|
|
$
|
(45.9
|
)
|
|
$
|
(192.8
|
)
|
Other comprehensive income (loss) before reclassification
|
—
|
|
|
(2.4
|
)
|
|
(24.7
|
)
|
|
(27.1
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
1.5
|
|
|
—
|
|
|
(0.5
|
)
|
|
1.0
|
|
Ending balance, March 31, 2020
|
$
|
(145.5
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(71.1
|
)
|
|
$
|
(218.9
|
)
|
(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, 2020 were $2.0 million of charges to pension expense, other than service cost, net of $0.5 million in benefit for income taxes. Reclassification adjustments for derivatives designated as hedges for the same period were $0.0 million of benefit in interest expense, net of $0.0 million income tax provision. Reclassification adjustments for foreign currency translation related to net investment hedges for the three months ended March 31, 2020 were $0.7 million of benefit in interest expense, net of $0.2 million income tax provision.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits (1)
|
|
Derivatives Designated as Hedges (1)
|
|
Foreign Currency Translation
|
|
Total (1)
|
(In millions)
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2018
|
$
|
(140.4
|
)
|
|
$
|
2.0
|
|
|
$
|
(48.1
|
)
|
|
$
|
(186.5
|
)
|
Other comprehensive income (loss) before reclassification
|
0.4
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(0.2
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
1.3
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
0.5
|
|
Ending balance, March 31, 2019
|
$
|
(138.7
|
)
|
|
$
|
1.3
|
|
|
$
|
(48.8
|
)
|
|
$
|
(186.2
|
)
|
(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, 2019 were $1.7 million of charges to pension expense, other than service cost, net of $0.4 million in provision for income taxes. Reclassification adjustments for derivatives designated as hedges for the same period were $0.5 million of benefit in interest expense, net of $0.1 million in provision for income taxes. Reclassification adjustments for foreign currency translation related to net investment hedges for the three months ended March 31, 2019 were $0.6 million of benefit in interest expense, net of $0.2 million in provision for income taxes.
NOTE 7. REVENUE RECOGNITION
Transaction price allocated to the remaining performance obligations
The majority of the Company's contracts are completed within twelve months. For performance obligations that extend beyond one year, the Company had $230.8 million of transaction price related to performance obligations as of March 31, 2020. The Company expects to complete these obligations and recognize 59% of remaining transaction price in 2020, and the remainder in 2021. The Company has elected the following optional exemptions from the remaining performance obligation disclosures:
|
|
•
|
Contracts that have an original expected duration of one year or less; and
|
|
|
•
|
Performance obligations related to revenue recognized over time using the as-invoiced practical expedient.
|
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of good or service and primary geographical market. The table also includes a reconciliation of the disaggregated revenue with the reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
(In millions)
|
JBT FoodTech
|
|
JBT AeroTech
|
|
JBT FoodTech
|
|
JBT AeroTech
|
Type of Good or Service
|
|
|
|
|
|
|
|
Recurring (1)
|
$
|
153.7
|
|
|
$
|
45.7
|
|
|
$
|
133.3
|
|
|
$
|
50.9
|
|
Non-recurring (1)
|
156.0
|
|
|
102.3
|
|
|
161.3
|
|
|
72.0
|
|
Total
|
309.7
|
|
|
148.0
|
|
|
294.6
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
Geographical Region (2)
|
|
|
|
|
|
|
|
North America
|
154.1
|
|
|
130.4
|
|
|
156.1
|
|
|
94.9
|
|
Europe, Middle East and Africa
|
99.6
|
|
|
10.6
|
|
|
79.4
|
|
|
23.4
|
|
Asia Pacific
|
35.4
|
|
|
5.7
|
|
|
37.7
|
|
|
4.1
|
|
Latin America
|
20.6
|
|
|
1.3
|
|
|
21.4
|
|
|
0.5
|
|
Total
|
309.7
|
|
|
148.0
|
|
|
294.6
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
Timing of Recognition
|
|
|
|
|
|
|
|
Point in Time
|
148.4
|
|
|
77.1
|
|
|
146.0
|
|
|
68.6
|
|
Over Time
|
161.3
|
|
|
70.9
|
|
|
148.6
|
|
|
54.3
|
|
Total
|
309.7
|
|
|
148.0
|
|
|
294.6
|
|
|
122.9
|
|
(1) Aftermarket parts and services and revenue from leasing 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:
|
|
|
|
|
|
|
|
|
|
Balances as of
|
(In millions)
|
March 31, 2020
|
|
December 31, 2019
|
Contract assets
|
$
|
80.6
|
|
|
$
|
74.4
|
|
Contract liabilities
|
90.0
|
|
|
92.5
|
|
The revenue recognized during the three months ended March 31, 2020 and 2019 that was included in contract liabilities at the beginning of the period amounted to $50 million and $112.5 million, respectively. The change from December 31, 2019 is driven by the timing of advance and milestone payments received from customers. There were no significant changes in the contract balances other than those described above.
NOTE 8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the respective periods and basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In millions, except per share data)
|
2020
|
|
2019
|
Basic earnings per share:
|
|
|
|
Income from continuing operations
|
$
|
29.0
|
|
|
$
|
19.7
|
|
Weighted average number of shares outstanding
|
31.9
|
|
|
31.8
|
|
Basic earnings per share from continuing operations
|
$
|
0.91
|
|
|
$
|
0.62
|
|
Diluted earnings per share:
|
|
|
|
Income from continuing operations
|
$
|
29.0
|
|
|
$
|
19.7
|
|
Weighted average number of shares outstanding
|
31.9
|
|
|
31.8
|
|
Effect of dilutive securities:
|
|
|
|
Restricted stock
|
0.2
|
|
|
0.2
|
|
Total shares and dilutive securities
|
32.1
|
|
|
32.0
|
|
Diluted earnings per share from continuing operations
|
$
|
0.90
|
|
|
$
|
0.62
|
|
NOTE 9. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
As of December 31, 2019
|
(In millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
$
|
12.8
|
|
|
$
|
12.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14.3
|
|
|
$
|
14.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives
|
18.3
|
|
|
—
|
|
|
18.3
|
|
|
—
|
|
|
12.0
|
|
|
—
|
|
|
12.0
|
|
|
—
|
|
Total assets
|
$
|
31.1
|
|
|
$
|
12.8
|
|
|
$
|
18.3
|
|
|
$
|
—
|
|
|
$
|
26.3
|
|
|
$
|
14.3
|
|
|
$
|
12.0
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
—
|
|
Contingent consideration
|
16.1
|
|
|
—
|
|
|
—
|
|
|
16.1
|
|
|
17.4
|
|
|
—
|
|
|
—
|
|
|
17.4
|
|
Total liabilities
|
$
|
28.6
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
|
$
|
16.1
|
|
|
$
|
20.2
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
17.4
|
|
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. Investments include an unrealized gain of $1.7 million as of March 31, 2020 and unrealized gain of $1.8 million as of December 31, 2019.
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.
Contingent consideration obligation represents the estimated fair value of the additional consideration payable in connection with the Company's acquisitions of Proseal and Prime completed in the second quarter of 2019. The Company estimated the acquisition date fair value of the contingent consideration obligation for Proseal using a Monte Carlo simulation, and a scenario based method for Prime. The significant unobservable inputs used in the fair value measurement of the contingent consideration obligations were the acquired company's projected performance, a risk-adjusted discount rate and performance volatility driven by industry peers. As payment for this contingent consideration is based on acquired company achieving earning targets, changes to projected performance of acquired companies would have resulted in a lower or higher fair value measurement. At each reporting date, the Company revalues the contingent consideration obligations to their fair values and records any changes in fair value within selling, general and administrative expenses in the Income Statement.
Following table provides a summary of changes in fair value of contingent consideration during the the quarter ended March 31, 2020:
|
|
|
|
|
|
Three months ended
|
|
March 31, 2020
|
Beginning balance
|
$
|
17.4
|
|
Acquisitions
|
—
|
|
Measurement adjustments recorded to earnings
|
(0.3
|
)
|
Foreign currency translation adjustment
|
(1.0
|
)
|
Ending balance
|
$
|
16.1
|
|
The fair value of contingent consideration obligations as of March 31, 2020 was $15.6 million included in other liabilities and $0.5 million included in other current liabilities within the Balance Sheet.
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 long-term debt approximate their fair values due to their variable interest rates.
NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Derivative Financial Instruments
All derivatives are recorded as other 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 are 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. Major foreign currency exposures involve the markets in Western Europe, South America and Asia. Some of the Company's sales and purchase contracts contain embedded derivatives due to the nature of doing business in certain jurisdictions, which are taken into consideration as part of the Company's risk management policy. The purpose of the Company's 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, 2020 of $482.3 million, as hedges and therefore do not apply hedge accounting.
The following table presents the fair value of foreign currency derivatives and embedded derivatives included within the Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
As of December 31, 2019
|
(In millions)
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Total
|
$
|
5.9
|
|
|
$
|
9.4
|
|
|
$
|
5.7
|
|
|
$
|
3.5
|
|
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 the Company to net settle for transactions with the same counterparty. However, it 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, 2020 and December 31, 2019, information related to these offsetting arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of March 31, 2020
|
Offsetting of Assets
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Presented in the Consolidated Balance Sheet
|
|
Amount Subject to Master Netting Agreement
|
|
Net Amount
|
Derivatives
|
$
|
16.6
|
|
|
$
|
—
|
|
|
$
|
16.6
|
|
|
$
|
(3.1
|
)
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of March 31, 2020
|
Offsetting of Liabilities
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Presented in the Consolidated Balance Sheet
|
|
Amount Subject to Master Netting Agreement
|
|
Net Amount
|
Derivatives
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
12.5
|
|
|
$
|
(3.1
|
)
|
|
$
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of December 31, 2019
|
Offsetting of Assets
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Presented in the Consolidated Balance Sheet
|
|
Amount Subject to Master Netting Agreement
|
|
Net Amount
|
Derivatives
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
12.0
|
|
|
$
|
(2.1
|
)
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
As of December 31, 2019
|
Offsetting of Liabilities
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Presented in the Consolidated Balance Sheet
|
|
Amount Subject to Master Netting Agreement
|
|
Net Amount
|
Derivatives
|
$
|
2.8
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
(2.1
|
)
|
|
$
|
0.7
|
|
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 Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated
as Hedging Instruments
|
|
Location of Gain (Loss) Recognized
in Income on Derivatives
|
|
Amount of (Loss) Gain Recognized in Income
|
|
|
|
|
Three Months Ended
March 31,
|
(In millions)
|
|
|
|
2020
|
|
2019
|
Foreign exchange contracts
|
|
Revenue
|
|
$
|
(4.6
|
)
|
|
$
|
(2.0
|
)
|
Foreign exchange contracts
|
|
Cost of sales
|
|
2.8
|
|
|
0.8
|
|
Foreign exchange contracts
|
|
Selling, general and administrative expense
|
|
0.4
|
|
|
(0.1
|
)
|
Total
|
|
|
|
(1.4
|
)
|
|
(1.3
|
)
|
Remeasurement of assets and liabilities in foreign currencies
|
|
|
|
2.9
|
|
|
0.4
|
|
Net gain (loss) on foreign currency transactions
|
|
|
|
$
|
1.5
|
|
|
$
|
(0.9
|
)
|
Interest Rates: The Company has entered into one interest rate swap executed in January 2016 with a notional amount of $50 million expiring in January 2021, and four forward starting interest rate swaps with a combined notional amount of $200 million which were executed in March 2020 and which cover the period beginning April 7, 2020 to April 7, 2025. These interest rate swaps fix the interest rate applicable to certain of its variable-rate debt. The agreements swap one-month LIBOR for fixed rates. We have 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, 2020, the fair value of these derivatives designated as cash flow hedges were recorded in the Balance Sheet as other current liabilities of $0.4 million, other liabilities of $2.7 million, and as accumulated other comprehensive income, net of tax, of $2.3 million.
Net Investment: The Company has entered into a cross currency swap agreement that synthetically swaps $116.4 million of fixed rate debt to Euro denominated fixed rate debt. The agreement is designated as a net investment hedge for accounting purposes. Accordingly, the gain or loss on this derivative instrument is 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 swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense, net on the condensed consolidated statements of income. For the three months ended March 31, 2020, gains recorded in interest expense, net under the cross currency swap agreement were $0.7 million.
At March 31, 2020, the fair value of these derivatives designated as net investment hedges were recorded in the Balance Sheet as other assets of $12.4 million and as accumulated other comprehensive income, net of tax, of $9.2 million.
Refer to Note 9. 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. Maximum exposure to credit loss in the event of non-performance by the counterparty, for all receivables and derivative contracts as of March 31, 2020, is limited to the amount drawn and outstanding on the financial instrument. Refer to Note 1. Description Of Business And Basis Of Presentation 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 11. LEASES
The following table provides the required information regarding operating leases for which the Company is lessor.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
(In millions)
|
March 31, 2020
|
|
March 31, 2019
|
Fixed payment revenue
|
$
|
16.3
|
|
|
$
|
16.1
|
|
Variable payment revenue
|
5.1
|
|
|
5.4
|
|
Total
|
$
|
21.4
|
|
|
$
|
21.5
|
|
Sales-type lease revenue was $1.5 million for the three months ended March 31, 2020 and an immaterial amount for the three months ended March 31, 2019.
Refer to Note 15. Related Party Transactions for details of operating lease agreements with related parties.
NOTE 12. 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.
In 2013, the Company received a notice of examination from the Delaware Department of Finance commencing an examination of the Company's books and records to determine compliance with Delaware unclaimed property law. The examination was not complete when, in 2017, Delaware promulgated a law which permitted companies an election to convert an examination to a review under the Secretary of State’s voluntary disclosure agreement program. In December 2017, the Company elected this alternative and is in the process of meeting the requirements under the voluntary disclosure agreement program. The requirements include reviewing the Company's books and records and filing any previously unfiled reports for all unclaimed property presumed unclaimed, under the law, from 2003. The Company completed the exercise in the fourth quarter and concluded that the Company's obligation is immaterial. We submitted our conclusions to the Secretary of State in December; however as of the date of this filing, the Secretary of State of Delaware has not responded to our filing.
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 $146.9 million at March 31, 2020, represent guarantees of future performance. The Company has also provided $7.7 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 two years 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 between eighty-five and ninety-five percent of the contract values. In addition, the Company generally retains recourse to the equipment sold. As of March 31, 2020, the gross value of such arrangements was $3.3 million, of which its net exposure under such guarantees was $0.2 million.
The Company provides warranties of various lengths and terms to certain of its 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 cost 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)
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
12.0
|
|
|
$
|
13.5
|
|
Expense for new warranties
|
3.0
|
|
|
3.2
|
|
Adjustments to existing accruals
|
0.2
|
|
|
(1.3
|
)
|
Claims paid
|
(3.5
|
)
|
|
(3.4
|
)
|
Added through acquisition
|
0.1
|
|
|
0.4
|
|
Translation
|
(0.2
|
)
|
|
(0.1
|
)
|
Balance at end of period
|
$
|
11.6
|
|
|
$
|
12.3
|
|
NOTE 13. 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, operating profit margin, EBITDA, adjusted when applicable, and EBITDA margins.
Reportable segments are:
|
|
•
|
JBT 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, and juices.
|
|
|
•
|
JBT 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.
|
Total revenue by segment includes intersegment sales, which are made at prices that reflect, as nearly as practicable, the market value of the transaction. 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, interest income and expense, and income taxes. See the table below for further details on corporate expense.
Segment operating profit is defined as total segment revenue less segment Operating expense. Business segment information was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In millions)
|
2020
|
|
2019
|
Revenue
|
|
|
|
JBT FoodTech
|
$
|
309.7
|
|
|
$
|
294.6
|
|
JBT AeroTech
|
148.0
|
|
|
122.9
|
|
Total revenue
|
457.7
|
|
|
417.5
|
|
|
|
|
|
Income before income taxes
|
|
|
|
Segment operating profit:
|
|
|
|
JBT FoodTech
|
40.7
|
|
|
38.7
|
|
JBT AeroTech
|
18.5
|
|
|
10.1
|
|
Total segment operating profit
|
59.2
|
|
|
48.8
|
|
Corporate items:
|
|
|
|
Corporate expense (1)
|
13.5
|
|
|
12.9
|
|
Restructuring expense (2)
|
2.0
|
|
|
5.9
|
|
Operating income
|
43.7
|
|
|
30.0
|
|
|
|
|
|
Pension expense, other than service cost
|
1.0
|
|
|
0.5
|
|
Interest expense, net
|
4.8
|
|
|
3.3
|
|
Income from continuing operations before income taxes
|
$
|
37.9
|
|
|
$
|
26.2
|
|
|
|
(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 14. Restructuring for further information on restructuring expense.
|
NOTE 14. RESTRUCTURING
Restructuring expense primarily consists 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.
In the first quarter of 2018, the Company implemented a restructuring plan ("2018 restructuring plan") to address its global processes to flatten the organization, improve efficiency and better leverage general and administrative resources. The total estimated cost in connection with this plan is in the range of $62 million to $64 million. We have recognized cumulative restructuring charges of $61.8 million, net of cumulative releases of the related liability of $11.5 million, through March 31, 2020. We expect to recognize the remaining costs by end of the year 2020.
In the first quarter of 2020, the Company implemented an immaterial restructuring plan with a total estimated cost by the end of the second quarter of $2.0 million. Through March 31, 2020 we have recognized restructuring charges of $0.7 million related to severance primarily within the JBT AeroTech segment.
The following table details the amounts reported in restructuring expense for the active restructuring plans on the consolidated statement of income since the implementation of this plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amount
|
|
For the Three Months Ended
|
|
Cumulative Amount
|
(In millions)
|
Balance as of December 31, 2019
|
|
March 31, 2020
|
|
As of March 31, 2020
|
2018 restructuring plan
|
|
|
|
|
|
Severance and related expense
|
$
|
25.4
|
|
|
$
|
2.2
|
|
|
$
|
27.6
|
|
Other
|
45.6
|
|
|
0.1
|
|
|
45.7
|
|
Other
|
|
|
|
|
|
Severance and related expense
|
—
|
|
|
0.7
|
|
|
0.7
|
|
Total Restructuring charges
|
$
|
71.0
|
|
|
$
|
3.0
|
|
|
$
|
74.0
|
|
The restructuring expense for 2018 restructuring plan is primarily associated with the JBT FoodTech segment, and is excluded from the calculation of segment operating profit. Expense incurred during the three months ended March 31, 2020 primarily relates to costs to streamline operations and consulting fees as a direct result of the plan.
Liability balances for restructuring activities are included in other current liabilities in the accompanying Balance Sheet. The table below details the activities in 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to Earnings
|
|
|
|
|
(In millions)
|
Balance as of
December 31, 2019
|
|
Charged to
Earnings
|
|
Release of Liability
|
|
Payments Made
|
|
Balance as of
March 31, 2020
|
2018 restructuring plan
|
|
|
|
|
|
|
|
|
|
Severance and related expense
|
$
|
4.2
|
|
|
$
|
2.2
|
|
|
$
|
(0.6
|
)
|
|
$
|
(2.5
|
)
|
|
3.3
|
|
Other
|
1.5
|
|
|
0.1
|
|
|
(0.4
|
)
|
|
(1.1
|
)
|
|
0.1
|
|
Other
|
|
|
|
|
|
|
|
|
|
Severance and related expense
|
—
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
Total
|
$
|
5.7
|
|
|
$
|
3.0
|
|
|
$
|
(1.0
|
)
|
|
$
|
(3.6
|
)
|
|
4.1
|
|
The Company released $1.0 million of liability during the three months ended March 31, 2020 which it no longer expects to pay in connection with the 2018 restructuring plan due to actual severance payments differing from the original estimates and natural attrition of employees.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company entered into an agreement to lease a manufacturing facility in Columbus, Ohio from an entity owned by certain of the Company's employees who were former owners or employees of its newly acquired business, Prime. The lease commenced on September 1, 2019, with an eight year term. The operating lease right-of-use asset and the lease liability related to this agreement is $3.8 million and $3.9 million, respectively.
NOTE 16. SUBSEQUENT EVENTS
On April 15, 2020, the Company entered into one forward starting interest rate swap with a notional amount of $50 million covering the period beginning May 7, 2020 to May 7, 2025. This interest rate swap fixes the interest rate applicable to certain of its variable-rate debt. The agreement swaps one-month LIBOR for fixed rates.