JBT MAREL Corp (JBTM) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
We are a leading global technology solutions provider to high-value segments of the food and beverage industry. We design, produce, and service sophisticated products and systems for multi-national and regional customers.
In early 2022, we announced our Elevate 2.0 strategy that capitalizes on favorable trends, as well as our leadership position, in the food and beverage processing industry. This strategy is based on a four-pronged approach to deliver continued growth and margin expansion.
•Organic Growth. Our broad application knowledge, engineering expertise, and global sales and service allow us to work alongside our customers to develop critical products and solutions across a diverse set of food & beverage end markets. JBT is benefiting from strong commercial and market trends, which create meaningful opportunities for continued new product innovation and R&D in support of our customers' needs. Additionally, our cross-selling abilities, investment opportunities in developing geographies, and aftermarket capabilities provide meaningful growth opportunities for us globally.
•Digital Transformation. We continue to invest in our digital solution, OmniBlu™, a customer-centric platform that delivers improved access to inventory and service, advanced functionality, and measurable results for customers, while also expanding JBT's recurring revenue from aftermarket parts and services.
•Margin Enhancement. We see opportunities to improve our operating margins by 200 basis points or more in the medium-term, primarily through supply chain and strategic sourcing initiatives. Key areas of focus include supply base consolidation, make versus buy decisions, value engineering and component standardization, and best cost country sourcing.
•Acquisitions. We are also continuing our strategic acquisition program focused on companies that add complementary products and technology solutions, which enable us to offer more comprehensive solutions to customers and meet our economic criteria for returns and synergies.
On August 1, 2023, we completed the sale of the AeroTech business segment ("AeroTech"). This sale was completed pursuant to the Stock and Asset Purchase Agreement, dated May 26, 2023, to sell AeroTech to Oshkosh Corporation. This divestiture supports the Company's strategy to become a pure-play food and beverage solutions provider. For additional information, refer to Note 2. Discontinued Operations of the Notes to the Consolidated Financial Statements.
We operate under the JBT Business System, which provides a level of process rigor across the Company and is designed to standardize and streamline reporting and problem resolution processes for increased visibility, efficiency, effectiveness and productivity in all business units.
Our approach to Environmental, Social and Corporate Governance (ESG) builds on our culture and long tradition of concern for our employees’ health, safety, and well-being; partnering with our customers to find ways to make better use of the earth’s precious resources; and giving back to the communities where we live and work. Our equipment and technologies continue to deliver quality performance while striving to minimize food waste, extend food product life, support customer sustainability objectives, and maximize efficiency in order to create shared value for our food and beverage customers. While the majority of our impact lies within the solutions offered to our customers, our commitment to environmental responsibility extends to our own operations. We strive for our own facilities to operate efficiently and safely, much like the solutions we provide to our customers. We recognize the responsibility we have to make a positive impact on our shareholders, the environment and our communities in a manner that is consistent with our fiduciary duties. We have engaged in structured education for enhancing inclusive leadership skills in our organization designed to ensure more diversity in our leadership and hiring practices.
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Business Conditions and Outlook
Our operational performance was strong in 2023 despite a mixed commercial environment. We experienced healthy equipment demand across diverse end markets, including beverages, warehouse automation, and pharmaceuticals and nutraceuticals. Meanwhile, this was offset by the impact of higher interest rates and market dynamics in the poultry industry which affected customers' investment. Our aftermarket parts and service model remained resilient with year-over-year growth in recurring revenue.
Our operating margins improved meaningfully compared to 2022, driven by improved price-cost realizations, restructuring program savings, and strategic sourcing initiatives.
Looking ahead, we expect the demand environment to improve in 2024 as interest rates decline, poultry market dynamics continue to improve as well as benefit from our organic growth initiatives. Additionally, we expect our margins to continue to increase as we realize benefits from our continuous improvement efforts, restructuring program savings, and strategic sourcing initiatives.
Components of Results of Operations
Revenue
We derive our revenue from sales or operating leases of equipment as well as sales of related aftermarket goods and services and software. Revenue from equipment and software licenses is considered as non-recurring, whereas revenue from aftermarket goods and services, re-build service for customer-owned equipment, operating lease of equipment, and subscription-based software applications is considered as recurring.
Cost of Sales
Cost of sales are costs that are directly related to the procurement and manufacturing of equipment and parts sold, services provided, and other direct costs incurred to fulfill contracts with customers. Costs include direct costs, such as labor and raw materials and indirect costs such as manufacturing overhead and amortization of capitalized software to be sold, and patents and acquired technology intangible assets.
Selling, General and Administrative
Selling expense primarily consists of employee-related expenses for sales, marketing and public relations employees. Selling expense also includes trade show, market research, advertising and other related external marketing expense as well as office and software related costs to support sales.
General and administrative expense consists of employee-related expenses, stock based compensation and other expenses that support finance, human resource, legal, and internal-use information technology functions at our business units and our corporate offices. General and administrative expense incurred at our corporate offices, including the impact of unusual or strategic events not representative of operations, as well as stock based compensation for all employees are considered as our corporate expenses.
Restructuring expense
Restructuring expense consists of costs from our 2022/2023 Restructuring Plan. For additional financial information about restructuring, refer to Note 20. Restructuring of the Notes to the Consolidated Financial Statements.
Pension expense, other than service costs
Pension expense, other than service costs are related to our domestic and foreign defined benefit pension and other post-employment benefit plans.
Interest income
Interest income consists of interest earned on our cash equivalents and short-term marketable securities.
Interest expense
Interest expense consists of interest expense on our outstanding debt obligations including amortization of debt discounts and offering costs.
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Results of Continuing Operations
A discussion of our results of operations for 2023 compared to 2022 is set forth below.
CONSOLIDATED RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2023 AND 2022
| Year Ended December 31, | Favorable / (Unfavorable) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | Change | Change % | ||||||||||||
| Revenue | $ | 1,664.4 | $ | 1,590.3 | $ | 74.1 | 4.7% | |||||||||
| Cost of sales | 1,078.7 | 1,060.9 | (17.8) | (1.7)% | ||||||||||||
| Gross profit | 585.7 | 529.4 | 56.3 | 10.6% | ||||||||||||
| Gross Profit % | 35.2% | 33.3% | 190 bps | |||||||||||||
| Selling, general and administrative expense | 409.6 | 389.7 | (19.9) | (5.1)% | ||||||||||||
| Restructuring expense | 11.4 | 7.1 | (4.3) | (60.6)% | ||||||||||||
| Operating income | 164.7 | 132.6 | 32.1 | 24.2% | ||||||||||||
| Pension expense (income), other than service cost | 0.7 | — | (0.7) | (100.0)% | ||||||||||||
| Interest income | 13.4 | 3.7 | 9.7 | 262.2% | ||||||||||||
| Interest expense | 24.3 | 16.3 | (8.0) | (49.1)% | ||||||||||||
| Net income before income taxes | 153.1 | 120.0 | 33.1 | 27.6% | ||||||||||||
| Income tax provision | 23.5 | 16.2 | (7.3) | (45.1)% | ||||||||||||
| Equity in net earnings of unconsolidated affiliate | (0.3) | — | (0.3) | (100.0)% | ||||||||||||
| Income from continuing operations | 129.3 | 103.8 | 25.5 | 24.6% | ||||||||||||
| Income from discontinued operations, net of taxes | 453.3 | 33.6 | 419.7 | 1,249.1% | ||||||||||||
| Net income | $ | 582.6 | $ | 137.4 | $ | 445.2 | 324.0% | |||||||||
| Adjusted EBITDA from continuing operations(1) | $ | 273.1 | $ | 227.7 | $ | 45.4 | 19.9% | |||||||||
| Adjusted EBITDA % from continuing operations(1) | 16.4 | % | 14.3 | % | 210 bps |
(1)The key measures reviewed by the CODM to evaluate our performance are most notably Adjusted EBITDA from continuing operations and Adjusted EBITDA % from continuing operations. For additional information, refer to the 'Reconciliation of Non-GAAP Measures' section below.
2023 Compared With 2022
Revenue
Total revenue in 2023 increased $74.1 million or 4.7% compared to 2022. Acquisitions provided additional revenue of $76.8 million, organic revenue grew by $4.7 million, and foreign currency translation was unfavorable by $7.4 million compared to the prior year. Growth in organic revenue was the result of higher pricing as well as an increase in volume for recurring revenue, partially offset by a decrease in volume for non-recurring revenue.
Gross Profit and Gross Profit Margin
Gross profit margin increased 190 bps to 35.2% compared to 33.3% in 2022. The increase was driven primarily by higher pricing, savings from our restructuring plan, and favorable mix of higher recurring revenue, partially offset by the lost leverage of fixed costs from lower equipment volume year over year.
Selling, general and administrative expense
Selling, general and administrative expense increased $19.9 million from prior year, and as a percent of revenue increased by 10 bps to 24.6% compared to 24.5% in 2022. The increase in Selling, general and administrative expense is the result of higher incentive compensation expense accruals and higher relative expenses from recently acquired companies, including higher amortization costs of acquired intangible assets, as well as higher costs related to the implementation of the OmniBluTM platform. The increase was partially offset by a decrease in M&A related costs.
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Interest income
Interest income increased $9.7 million compared to 2022. This increase is due to higher interest income on cash on hand from the sale proceeds of AeroTech.
Interest expense
Interest expense increased $8.0 million compared to 2022. This increase was primarily due to higher interest rates as well as a higher average debt balance to fund the acquisitions we made in the third quarter of 2022.
Income tax provision
The Company's tax rate from continuing operations was 15.3% for the year ended December 31, 2023 compared to 13.5% in 2022. The tax rate for the year ended December 31, 2023 was favorably impacted by discrete items totaling $9.5 million, primarily driven by a benefit related to the disposition of a subsidiary which generated a capital loss that was partially allocated to continuing operations. The tax rate for the year ended December 31, 2022 was favorably impacted by discrete items totaling $8.9 million, primarily driven by benefits from stock based compensation, the UK patent box regime, and Brazilian tax litigation.
Income from continuing operations and Adjusted EBITDA
Income from continuing operations for the year ended December 31, 2023 increased to $129.3 million compared to $103.8 million in 2022, representing an increase of $25.5 million. Adjusted EBITDA was $273.1 million for the year ended December 31, 2023 compared to $227.7 million in 2022, representing an increase of $45.4 million. The increase in Adjusted EBITDA was primarily driven by a higher gross profit partially offset by a higher selling, general and administrative expense, excluding the impacts of our depreciation, amortization, and acquisition, and integration costs.
Income from discontinued operations
For the years ended December 31, 2023 and 2022, we recognized income from discontinued operations, net of income taxes, of $453.3 million and $33.6 million, respectively. Discontinued operations consists of the results of operations of the AeroTech business, as well as the gain on the sale of AeroTech of $443.7 million, net of tax, that was completed during the third quarter of 2023.
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A discussion of our results of operations for 2022 compared to 2021 is set forth below.
CONSOLIDATED RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2022 AND 2021
| Year Ended December 31, | Favorable / (Unfavorable) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2022 | 2021 | Change | Change % | ||||||||||
| Revenue | $ | 1,590.3 | $ | 1,400.8 | $ | 189.5 | 13.5% | |||||||
| Cost of sales | 1,060.9 | 918.7 | (142.2) | (15.5)% | ||||||||||
| Gross profit | 529.4 | 482.1 | 47.3 | 9.8% | ||||||||||
| Gross Profit % | 33.3% | 34.4% | -110 bps | |||||||||||
| Selling, general and administrative expense | 389.7 | 351.4 | (38.3) | (10.9)% | ||||||||||
| Restructuring expense | 7.1 | 5.1 | (2.0) | (39.2)% | ||||||||||
| Operating income | 132.6 | 125.6 | 7.0 | 5.6% | ||||||||||
| Pension expense (income), other than service cost | — | (1.3) | (1.3) | (100.0)% | ||||||||||
| Interest income | 3.7 | 3.8 | (0.1) | (2.6)% | ||||||||||
| Interest expense | 16.3 | 11.2 | (5.1) | (45.5)% | ||||||||||
| Net income before income taxes | 120.0 | 119.5 | 0.5 | 0.4% | ||||||||||
| Income tax provision | 16.2 | 27.0 | 10.8 | 40.0% | ||||||||||
| Income from continuing operations | 103.8 | 92.5 | 11.3 | 12.2% | ||||||||||
| Income from discontinued operations, net of taxes | 33.6 | 26.6 | 7.0 | 26.3% | ||||||||||
| Net income | $ | 137.4 | $ | 119.1 | $ | 18.3 | 15.4% | |||||||
| Adjusted EBITDA from continuing operations(1) | $ | 227.7 | $ | 212.2 | $ | 15.5 | 7.3% | |||||||
| Adjusted EBITDA % from continuing operations(1) | 14.3% | 15.1% | -80 bps |
(1)The key measures reviewed by the CODM to evaluate our performance are most notably Adjusted EBITDA from continuing operations and Adjusted EBITDA % from continuing operations. For additional information, refer to the 'Reconciliation of Non-GAAP Measures' section below.
2022 Compared With 2021
Revenue
Total revenue in 2022 increased $189.5 million or 13.5% compared to 2021. Organic revenue grew $171.8 million in the period and acquisitions provided additional revenue of $93.5 million, partially offset by unfavorable currency translation of $75.8 million compared to the prior year. The growth from organic revenue was the result of increases in sales volume for both recurring and non-recurring revenues.
Gross Profit and Gross Profit Margin
Gross profit margin decreased 110 bps to 33.3% in 2022 compared to 34.4% for the year ended December 31, 2021. The decrease was primarily due to supply chain disruptions and pressures resulting in inefficiencies that drove increases in material, freight, and labor costs as well as due to a higher mix of organic revenue growth from lower-margin non-recurring revenue compared to recurring revenue.
Selling, general and administrative expense
Selling, general and administrative expense increased $38.3 million from prior year, and as a percent of revenue increased by 60 bps to 24.5% compared to 25.1% in 2021. The increase in Selling, general and administrative expense was the result of higher relative expenses from recently acquired companies, including higher amortization costs of acquired intangible assets, as well as the costs related to the implementation of the OmniBluTM platform.
Interest expense
Interest expense increased $5.1 million compared to 2021. The increase was primarily due to higher interest rates as well as a higher average debt balance used to fund the acquisitions in the third quarter of 2022.
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Income tax provision
The Company's tax rate from continuing operations was 13.5% for the year ended December 31, 2022 compared to 22.6% for 2021. The tax rate for the year ended December 31, 2022 was favorably impacted by discrete items totaling $8.9 million, primarily driven by benefits from stock based compensation, the UK patent box regime, and Brazilian tax litigation.
Income from continuing operations and Adjusted EBITDA
Income from continuing operations for the year ended December 31, 2022 increased to $103.8 million compared to $92.5 million in 2021, representing an increase of $11.3 million. Adjusted EBITDA was $227.7 million for the year ended December 31, 2022 compared to $212.2 million in 2021, representing an increase of $15.5 million. The increase in Adjusted EBITDA was primarily driven by a higher gross profit partially offset by a higher selling, general and administrative expense, excluding the impacts of our depreciation, amortization, and acquisition, and integration costs.
Income from discontinued operations
For the years ended December 31, 2022 and 2021, we recognized income from discontinued operations, net of income taxes, of $33.6 million and $26.6 million, respectively.
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Reconciliation of Non-GAAP Measures
The key measures reviewed by the CODM for allocating resources and evaluating financial performance of our ongoing operations are most notably Adjusted EBITDA from continuing operations and Adjusted EBITDA margin from continuing operations. These non-GAAP financial measures adjust for certain amounts that are otherwise included or excluded from a measure calculated under US GAAP. By adjusting for these items, we believe we provide greater transparency into our operating results and trends, and a more meaningful comparison of our ongoing operating results, consistent with how management evaluates performance. Management uses these non-GAAP financial measures in financial and operational evaluation, planning and forecasting. We also believe that these non-GAAP measures are useful to investors as a way to evaluate and compare our operating performance against peers in the Company's industry. The adjustments generally fall within the following categories: restructuring related costs, M&A related costs, pension-related costs, constant currency adjustments and other major items affecting comparability of our ongoing operating results. The definition of Adjusted EBITDA used here may differ from that used by other companies.
The following table presents a reconciliation of the Company's reported Income from continuing operations to Adjusted EBITDA.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | 2021 | |||||||
| Income from continuing operations | $ | 129.3 | $ | 103.8 | $ | 92.5 | ||||
| Income tax provision | 23.5 | 16.2 | 27.0 | |||||||
| Interest expense, net | 10.9 | 12.6 | 7.4 | |||||||
| Depreciation and amortization | 91.3 | 76.2 | 72.1 | |||||||
| EBITDA from continuing operations | 255.0 | 208.8 | 199.0 | |||||||
| Restructuring related costs (1) | 11.4 | 7.3 | 5.3 | |||||||
| Pension expense (income), other than service cost (2) | 0.7 | — | (1.3) | |||||||
| M&A related costs (3) | 6.0 | 11.6 | 9.2 | |||||||
| Adjusted EBITDA from continuing operations | $ | 273.1 | $ | 227.7 | $ | 212.2 |
(1) Costs incurred as a direct result of the restructuring program are excluded because they are not part of the ongoing operations of our underlying business.
(2) Pension expense (income), other than service cost is excluded as it represents all non service-related pension expense, which consists of non-cash interest cost, expected return on plan assets and amortization of actuarial gains and losses.
(3) M&A related costs include integration costs, amortization of inventory step-up from business combinations, advisory and transaction costs for both potential and completed M&A transactions and strategy. M&A related costs are excluded as they are not part of the ongoing operations of our underlying business.
We also present certain financial information on a constant currency basis to provide greater transparency into our operating results and trends, and a more meaningful comparison of our ongoing operating results, consistent with how management evaluates performance. We evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation excludes the impact of fluctuations in foreign currency exchange rates. We calculate constant currency percentages by converting our financial results in local currency for a period using the average exchange rate for the prior period to which we are comparing.
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Restructuring
In the third quarter of 2020, the Company implemented a restructuring plan ("2020 restructuring plan") for manufacturing capacity rationalization across the Company. The Company completed the 2020 restructuring plan as of June 30, 2022 and total cost in connection with the 2020 restructuring plan was $11.0 million.
In the third quarter of 2022, the Company implemented a restructuring plan (the "2022/2023 restructuring plan") to optimize our overall cost structure on a global basis. The initiatives under this plan include streamlining operations and our general and administrative infrastructure. As of December 31, 2023, the Company recognized restructuring charges of $16.8 million, net of a cumulative release of the related liability of $6.5 million. The total estimated cost, net of releases was revised in the second quarter from $8.0 million to $10.0 million to a range of $16.0 million to $18.0 million, which was originally expected to be recognized by the end of 2023. During the quarter we have refined our range to $17.0 million to $18.0 million and now expect the full amount to be recognized by the first quarter of 2024. These changes are due to additional actions being taken, as well as delays in certain actions that support our streamlining operations under this plan.
The following table details the cumulative amount of annualized savings and incremental savings for the 2022/2023 restructuring plan:
| Cumulative Amount | Incremental Amount | Cumulative Amount | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | As of December 31, 2022 | During the year ended December 31, 2023 | As of December 31, 2023 | |||||||
| Cost of sales | $ | 0.1 | $ | 4.8 | $ | 4.9 | ||||
| Selling, general and administrative | 0.1 | 6.1 | 6.2 | |||||||
| Total restructuring savings | $ | 0.2 | $ | 10.9 | $ | 11.1 |
Cumulative savings for the 2022/2023 restructuring plan were revised in the second quarter from the range of $9.0 million to $12.0 million to a range of $18.0 million to $20.0 million to reflect the impact of additional actions being taken to streamline operations. Full year 2023 savings were revised in the second quarter from $5.0 million to $6.0 million to a range of $9.0 million to $10.0 million, which was below our actual savings for 2023 due to timing of the expected benefits. The remainder of the savings will be realized in 2024.
For additional financial information about restructuring, refer to Note 20. Restructuring of the Notes to Consolidated Financial Statements.
Inbound Orders and Order Backlog
Inbound orders represent the estimated sales value of confirmed customer orders received during the year. Inbound orders from continuing operations during the years ended December 31, 2023 and 2022 were $1,667.5 million and $1,587.4 million, respectively.
Inbound orders from continuing operations increased $80.1 million for the year ended December 31, 2023 compared to 2022, which includes an unfavorable foreign currency translation impact of $3.7 million in the period resulting in an increase of $83.8 million on a constant currency basis.
Order backlog is calculated as the estimated sales value of unfilled, confirmed customer orders. Order backlog from continuing operations was $678.2 million and $664.4 million as of December 31, 2023 and 2022, respectively.
Order backlog from continuing operations at December 31, 2023 increased by $13.8 million compared to December 31, 2022. We expect to convert 93% of backlog at December 31, 2023 into revenue during 2024.
Seasonality
We experience seasonality in our operating results. Our revenue and operating income are generally lower in the first quarter and highest in the fourth quarter, primarily as a result of our customers' purchasing trends.
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Liquidity and Capital Resources
Overview of Sources and Uses of Cash
Our primary sources of liquidity are cash flows provided by operating activities from our U.S. and foreign operations, borrowings from our revolving credit facility, and proceeds from the issuance of the convertible notes on May 28, 2021. In addition, we completed the sale of the AeroTech business on August 1, 2023 and received proceeds of $808.2 million. During the second half of 2023, we used the proceeds to repay $305.4 million of our debt as well as to make payments of $15.4 million for transaction costs related to the sale of AeroTech, $133.2 million for tax on the gain from the sale of AeroTech, and $9.0 million for contribution to our U.S. qualified pension plan. We expect to use the remaining net proceeds from the transaction for potential acquisitions as well as our other stated capital allocation priorities.
As of December 31, 2023, we had $483.3 million of cash and cash equivalents, $35.5 million of which was held by our foreign subsidiaries. Although certain funds are considered permanently invested in our foreign subsidiaries, we are not presently aware of any restriction on the repatriation of these funds. We maintain significant operations outside of the U.S., and many of our uses of cash for working capital, capital expenditures and business acquisitions arise in these foreign jurisdictions. If these funds were needed to fund our operations or satisfy obligations in the U.S., they could be repatriated and their repatriation into the U.S. could cause us to incur additional U.S. income tax and foreign withholding taxes. The foreign withholding taxes on these repatriations to the U.S. would potentially be partially offset by U.S. foreign tax credits.
As noted above, certain funds held outside of the U.S. are considered permanently invested in our non-U.S. subsidiaries. At times, these foreign subsidiaries have cash balances that exceed their immediate working capital or other cash needs. In these circumstances, the foreign subsidiaries may loan funds to the U.S. parent company on a temporary basis; the U.S. parent company has in the past and may in the future use the proceeds of these temporary intercompany loans to reduce outstanding borrowings under our committed credit facilities. By using available non-U.S. cash to repay our debt on a short-term basis, we can optimize our leverage ratio, which has the effect of lowering our interest costs.
For the year ended December 31, 2023, we had total operating cash flow of $74.2 million. Our liquidity as of December 31, 2023, or cash plus borrowing ability under our revolving credit facilities, was $1.2 billion.
The cash flows generated by our operations and borrowings are expected to be sufficient to satisfy our principal cash requirements that include our working capital needs, new product development, restructuring expenses, capital expenditures, income taxes, debt repayments, dividends, periodic pension contributions, and other financing arrangements.
Based on our current capital allocation objectives, during 2024 we anticipate capital expenditures to be between $50 million and $60 million. Our level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures in the U.S. over five years. As a result, the Company experienced a decrease in cash from operations in 2023 of $16 million and will experience approximately a $10 million decrease in cash from operations in 2024. The impact will continue over the five-year amortization period but decrease each year.
Contractual Obligations and Cash Requirements
The following is a summary of our significant contractual and other obligations at December 31, 2023:
| (In millions) | Total Payments | Current | Long-Term | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt (a) | $ | 646.4 | $ | — | $ | 646.4 | ||||
| Interest payments on long-term debt (b) | 15.9 | 5.6 | 10.3 | |||||||
| Operating leases (c) | 44.1 | 13.8 | 30.3 | |||||||
| Total contractual and other obligations (d) | $ | 706.4 | $ | 19.4 | $ | 687.0 |
(a)A summary of our long-term debt obligations as of December 31, 2023 can be found in Note 8, “Debt”, of the Notes to the Consolidated Financial Statements.
(b)Amounts include contractual interest payments using the interest rates as of December 31, 2023 and include the effect of our interest rate swaps.
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(c)A summary of our operating lease obligations as of December 31, 2023 can be found in Note 19, “Leases”, of the Notes to the Consolidated Financial Statements.
(d)This table does not include obligations under our pension and postretirement benefit plans, which are included in Note 10, Pension and Post-Retirement and Other Benefit Plans, of the Notes to the Consolidated Financial Statements.
We also have outstanding firm purchase orders with certain suppliers for the purchase of raw materials and services, which are not included in the table above. These purchase orders are generally short-term in nature and include a requirement that our supplier provide products or services to our specifications and require us to make a firm purchase commitment to our supplier. The costs associated with these agreements will be reflected in cost of sales on our Consolidated Statements of Income as substantially all of these commitments are associated with purchases made to fulfill our customers’ orders.
The following is a summary of other off-balance sheet arrangements at December 31, 2023:
| (In millions) | Total Amount | Current | Long-Term | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Letters of credit and bank guarantees | $ | 25.1 | $ | 24.4 | $ | 0.7 | ||||
| Surety bonds | 1.0 | 0.9 | 0.1 | |||||||
| Total other off-balance sheet arrangements | $ | 26.1 | $ | 25.3 | $ | 0.8 |
To provide required security regarding our performance on certain contracts, we provide letters of credit, surety bonds and bank guarantees, for which we are contingently liable. In order to obtain these financial instruments, we pay fees to various financial institutions in amounts competitively determined in the marketplace. Our ability to generate revenue from certain contracts is dependent upon our ability to obtain these off-balance sheet financial instruments.
Our off-balance sheet financial instruments may be renewed, revised or released based on changes in the underlying commitment. Historically, our commercial commitments have not been drawn upon to a material extent; consequently, management believes it is not likely that there will be claims against these commitments that would result in a negative impact on our key financial ratios or our ability to obtain financing.
Cash Flows
Cash flows for each of the years ended December 31, 2023 and 2022 were as follows:
| (In millions) | 2023 | 2022 | 2021 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Cash provided by continuing operating activities | $ | 74.2 | $ | 135.2 | $ | 174.9 | ||||
| Cash provided (required) by continuing investing activities | 729.3 | (413.2) | (270.5) | |||||||
| Cash (required) provided by continuing financing activities | (354.1) | 270.6 | 80.8 | |||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | (1.2) | (2.5) | (2.3) | |||||||
| Net increase (decrease) in cash from continuing operations | $ | 448.2 | $ | (9.9) | $ | (17.1) |
2023 Compared with 2022
Cash provided by continuing operating activities in 2023 was $74.2 million, representing a $61.0 million decrease compared to 2022. The decrease was primarily due to tax payments of $133.2 million for income taxes on gain from sale of AeroTech. Excluding the impact of this tax payment in 2023, cash provided by continuing operations increased by $72.2 million year over year, primarily due to reduced inventory investment and increased customer collections of trade receivables and advance payments, partially offset by an increased payments for accounts payable and for pension contributions.
Cash provided by continuing investing activities during 2023 was $729.3 million, representing a $1.1 billion increase compared to 2022. The increase is primarily from the proceeds received on the sale of the AeroTech business and lower spending on acquisitions and capital expenditures year over year.
Cash required by continuing financing activities of $354.1 million in 2023 represents an increase in cash outflows of $624.7 million compared to 2022. This increase in cash outflows year over year was primarily due to higher debt repayments of our revolving credit facility using proceeds from the AeroTech sale, compared to higher borrowings from our credit facility to fund acquisitions during 2022.
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2022 Compared with 2021
Cash provided by continuing operating activities in 2022 was $135.2 million, representing a $39.7 million decrease compared to 2021. Decrease was primarily driven by a decrease in customer advance payments and an increase in inventory, partially offset by lower pension contributions and an increase in accounts payable.
Cash required by investing activities during 2022 was $413.2 million, representing a $142.7 million increase compared to 2021, primarily due to increased acquisition and capital expenditure spending year over year.
Cash provided by financing activities of $270.6 million in 2022 represents an increase of $189.8 million compared to 2021. This increase was primarily driven by higher borrowings to fund acquisitions in 2022, partially offset by prior year activity that did not recur in the current year. Specifically the cash provided by financing activities of $80.8 million in 2021 was primarily due to proceeds from the issuance of the convertible notes, bond hedge and warrant transactions, partially offset by paying down borrowings under our revolving credit facility and payment of acquisition date earn-out liability.
Financing Arrangements
As of December 31, 2023 we had $250.0 million drawn on and $1,043.8 million of availability under the revolving credit facility. Our ability to use this availability is subject to our compliance with the leverage ratio covenant described below.
Our credit agreement includes restrictive covenants that, if not met, could lead to a renegotiation of our credit lines, a requirement to repay our borrowings and/or a significant increase in our cost of financing. Restrictive covenants include a minimum interest coverage ratio, a maximum leverage ratio, as well as certain events of default. As of December 31, 2023, we were in compliance with all covenants in our credit agreement. We expect to remain in compliance with all covenants in the foreseeable future.
On May 28, 2021, we closed a private offering of $402.5 million aggregate principal amount of the Company's 0.25% Convertible Senior Notes due 2026 (the "Notes") to qualified institutional buyers, resulting in net proceeds to us of approximately $392.2 million after deducting initial purchasers’ discounts. The Notes will mature on May 15, 2026 unless earlier converted, redeemed or repurchased. Concurrently with the issuance of the Notes, we entered into the Note hedge transactions that reduce potential dilution upon conversion of the Notes and into the warrant transactions to raise additional capital to partially offset the costs of entering into the Note hedge transactions.
For additional information about our credit agreement, Notes, convertible note hedge and warrant transactions, refer to Note 8. Debt of the Notes to the Consolidated Financial Statements.
As of December 31, 2023, we have 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. 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).
As a result, as of December 31, 2023, all of our total outstanding debt of $652.5 million effectively remains fixed rate debt, with the Convertible Senior Notes subject to a fixed rate of 0.25% and all of the revolving credit facility subject to an average fixed rate of 0.76% in addition to the premium charged for the credit spread on our revolving credit facility.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions about matters that are inherently uncertain. On an ongoing basis, our management re-evaluates these estimates, judgments and assumptions for reasonableness because of the critical impact that these factors have on the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed this disclosure. We believe that the following are the critical accounting estimates used in preparing our financial statements.
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Revenue Recognition
We recognize a large portion of our product revenue over time, using the "cost-to-cost" input method for contracts that provide highly customized equipment and refurbishments of customer-owned equipment for which we have a contractual, enforceable right to collect payment upon customer cancellation for performance completed to date. The input method of “cost-to-cost” to recognize revenue over time requires that we measure progress based on costs incurred to date relative to total estimated cost at completion. These cost estimates are based on assumptions and estimates to project the outcome of future events including estimated labor and material costs required to complete open projects.
Defined Benefit Pension Plans
The measurement of pension plans’ costs requires the use of assumptions for discount rates, investment returns, employee turnover rates, retirement rates, mortality rates and other factors. The actuarial assumptions used in our pension reporting are reviewed annually and compared with external benchmarks to ensure that they appropriately account for our future pension and post-retirement benefit obligations. While we believe that the assumptions used are appropriate, differences between assumed and actual experience may affect our operating results.
Our accrued pension liability reflects the funded status of our worldwide plans, or the projected benefit obligation net of plan assets. Our discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plan’s expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. The projected benefit obligation is sensitive to changes in our estimate of the discount rate. The discount rate used in calculating the projected benefit obligation for the U.S. pension plan, which represents 86% of all pension plan obligations, was 4.99% in 2023, 5.18% in 2022 and 2.90% in 2021. A decrease of 50 basis points in the discount rate used in our calculation would increase our projected benefit obligation by $11.7 million.
Our pension expense is sensitive to changes in our estimate of the expected rate of return on plan assets. The expected return on assets used in calculating the pension expense for the U.S. pension plan, which represents 94% of all pension plan assets, was 6.25% for 2023, 5.50% for 2022 and 5.75% for 2021. For 2024, the rate is expected to be 5.50%. A change of 50 basis points in the expected return on assets assumption would impact pension expense by $1.3 million (pre-tax).
See Note 10. Pension and Post-Retirement and Other Benefit Plans of the notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional discussion of our assumptions and the amounts reported in the Consolidated Financial Statements.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements see Note 1 of the Notes to Consolidated Financial Statements.