Aug 7, 2013
Executives
Debarshi Sengupta Charles H. Cannon - Chairman, Chief Executive Officer and President Ronald D.
Mambu - Chief Financial Officer, Vice President and Controller Cindy Shiao - Director of Financial Planning & Investor Relations
Analysts
Jason Ursaner - CJS Securities, Inc. Adam J.
Peck - Heartland Advisors, Inc.
Operator
Good morning, and welcome to the JBT Corporation Second Quarter 2013 Earnings Conference Call. My name is Kayla, and I will be your conference operator today.
[Operator Instructions] I would now turn the call over to JBT's Director of Investor Relations, Mr. Debarshi Sengupta, to begin today's conference.
Debarshi Sengupta
Thank you, Kayla. Good morning, everyone, and welcome to our second quarter 2013 earnings conference call.
With me on the call are our Chairman and CEO, Charlie Cannon; and our Vice President and CFO, Ron Mambu. Before we begin, I would like to remind everyone the forward-looking statements in today's call are subject to the Safe Harbor language in yesterday's press release and 8-K filing.
Our 2012 Form 10-K also contained information regarding certain risk factors that may have an impact on our results. These documents are available on our Investor Relations website.
Now I would like to turn the call over to Charlie.
Charles H. Cannon
Thanks, Debarshi, and good morning, everyone. Today, I'll provide some commentary on the business environment for our 2 segments, starting with JBT AeroTech, and I'll also discuss our business outlook for the year.
Ron will cover our second quarter financial results before we open up the call to questions. In AeroTech, the International Air Transportation Association, or IATA, recently revised its 2013 profitability forecast from $10.6 billion up to $12.7 billion.
Coupled with projected growth in passenger traffic and air freight shipments this year, we view this as further indication of a strengthening long-term outlook for the airline industry. Orders in our largest AeroTech business, gate equipment, doubled sequentially.
However, during the quarter, we were informed of delays in airport construction schedules for a couple of large passenger boarding bridge projects. While we still anticipate winning these orders, projected revenue has slipped into 2014.
For the full year, we expect gate equipment sales to be up relative to last year but lower than prior expectations. Moving to Ground Support Equipment.
We indicated in our last earnings call that the second quarter was off to a good start, and we expected an increase in demand for deicers. Driven by strong orders in the quarter, backlog in the business increased substantially, up nearly 25% year-over-year.
We already have more deicers in our backlog than we sold in all of 2012 with potential for additional orders. Lastly, orders for our Halvorsen military loaders continue to be delayed by the implementation of sequestration measures by the U.S.
government. Despite this, we continue to pursue several international opportunities, as well as several within the U.S.
Army. Overall, for AeroTech, we started off the year slowly, but order activity picked up substantially in the second quarter, and we anticipate this to continue through the third quarter.
The majority of AeroTech's current backlog is scheduled to convert to revenue in the fourth quarter. However, due to the slippage in passenger boarding bridge orders, we are revising our revenue expectations to low single-digit percentage growth for AeroTech in 2013.
In addition, we are expecting AeroTech operating income margin to be down approximately 50 basis points relative to adjusted margins from last year. Turning to FoodTech.
We ended the quarter with near-record backlog, about 26% higher than the prior year level. Backlog for freezing and protein processing equipment was up over 10%, largely driven by strength across North America and Asia in the first quarter.
In North America, demand in the first half of the year was driven by ready meals and meat processing. Second quarter inbound orders decreased sequentially, but we have almost 80% of our forecasted full year equipment volume on hand.
Moreover, with corn trading at prices nearly 40% lower than prior year highs and poultry prices up over 30%, we expect increased demand from North American poultry processors over the next 6 to 12 months. Thus, we are very comfortable with our forecast for the region.
In Asia, we saw an increase in orders in the quarter, driven by QSR suppliers expanding production. We are also seeing strong demand in China for our locally manufactured, smaller-capacity Classic 600 freezers.
Backlog for these freezers in China is now doubled, nearly double our initial targets. We are seeing increased quote activity as avian flu concerns from earlier in the year continue to subside, and we expect equipment orders to increase in the back half of the year.
In Europe, freezing and protein processing equipment orders were down in the second quarter. However, based on conversations with customers, we are anticipating a pickup in orders later in the third quarter as the summer vacation period ends.
Aftermarket volume for freezing and protein processing equipment increased in the quarter, particularly in North America. We anticipate aftermarket volume to hold through the rest of the year.
Moving to the in-container sterilization product line, quarter-end backlog was once again at a record high, up nearly 70% compared to 2012. We have a healthy equipment prospect list and anticipate increased aftermarket volume in both Europe and North America.
The sterilization product line is well positioned for a record year in 2013. Additionally, we are already winning projects for next year, and we anticipate this business will enter 2014 with another strong backlog position.
Moving to fruit and juice processing. The USDA has revised down its forecast for Florida's 2012-2013 orange crop to 133 million boxes, down 9% from the prior season.
In addition, the USDA's foreign agricultural service office in Brazil forecasts that 2013-'14 orange crop in Brazil will be lower than last year. Despite the unfavorable impact of the revised forecast on the variable revenue component of our lease contracts, citrus is on track to have a strong year in 2013.
On the business front, we entered into lease contracts with several new small customers and also successfully negotiated a contract renewal with a major customer. Both accomplishments in the quarter position the business well for the future.
For FoodTech, overall, we ended the quarter with a strong backlog position. Though a high percentage of the backlog will convert to revenue in 2013, particularly in the fourth quarter, we expect to enter 2014 with a backlog slightly higher than the excellent backlog we started this year with.
Consistent with the guidance we provided in our first quarter earnings call, we project mid to high single-digit percentage growth in FoodTech revenue in 2013, and we expect full year FoodTech operating income margin to be roughly in line with the 11% margin achieved in the first half of the year. This represents more than 100 basis point improvement over last year's margin, setting up FoodTech for record performance this year.
In summary, for the full year 2013, we are revising our projected diluted earnings per share from continuing operations to be in the range of $1.32 to $1.40. The upper end of the range reflects potential for additional revenue opportunities across some of our businesses.
Driving the lower end of the range are risks associated with certain project schedules. Furthermore, we expect third quarter earnings to be slightly up from the prior year, followed by a very strong fourth quarter.
Now I'll turn it over to Ron Mambu to provide more details on second quarter results.
Ronald D. Mambu
Thanks, Charlie. Revenue for the second quarter was $227 million, up 6% year-over-year.
The increase was driven by higher equipment sales in FoodTech and higher recurring revenue across both segments. Gross profit margin and operating income margin were essentially flat relative to the prior year, as increases in FoodTech were offset by lower margins in AeroTech.
Second quarter diluted earnings per share from continuing operations was $0.30, an increase of 11% over the prior year period. Second quarter backlog of $352 million increased 21% from the prior year period after adjusting for the removal of backlog associated with 2 canceled U.S.
Air Force contracts. Now turning to segment results.
AeroTech's second quarter revenue declined 2% compared to the same period in 2012. Strong Ground Support Equipment sales and aftermarket volume, particularly for deicers and cargo loaders, was more than offset by lower sales of passenger boarding bridges, military loaders and automated systems.
AeroTech operating profit margin in the second quarter declined significantly from the prior year period. The absence of a $1.4 million gain on the French Swisslog transaction in the second quarter of 2012 contributed to the profit decline.
Adjusting for that gain, margins contracted approximately 300 basis points. This decrease was largely attributable to unfavorable product mix and low margins of certain equipment rebuild orders.
During the quarter, we announced several large orders for Ground Support Equipment, gate equipment and automated systems. These orders drove a 44% increase in inbound sequentially.
AeroTech backlog was up 16% relative to the prior year after adjusting for the 2 U.S. Air Force contracts.
Turning to FoodTech. Second quarter revenue of $152 million increased $15 million or 11% year-over-year.
The increase was mainly driven by $12 million in higher equipment sales across fruit and juice processing and in-container sterilization equipment. Recurring revenue contributed $2 million to the total increase, driven by higher aftermarket sales in North America for freezing and protein processing and higher lease revenue from citrus juice extractors.
FoodTech operating profit increased by $6 million in the second quarter. Operating income margin expanded approximately 280 basis points year-over-year to 13%.
The expansion was largely a result of continued margin improvement initiatives, including the higher margins on freezers manufactured in North America and cost reductions. As Charlie noted, second quarter backlog increased 26% year-over-year to $195 million.
The increase was driven by strong demand for in-container sterilization, fruit and juice processing and freezing equipment. Corporate items in the second quarter were $10 million, an increase of $1 million from the prior year period.
The unfavorable comparison was driven by higher compliance costs, incentive-based compensation and pension expense. Also in the quarter, we recognized a $1.2 million net loss on foreign currency positions, which also factors into our earnings guidance for the year.
For the full year, the company expects corporate items, excluding net interest expense and any future mark-to-market impacts, to range between $28 million and $30 million. Cash generated by operating activities during the second quarter was $13 million, driving debt net of cash to a record low of $84 million.
Income tax expense in the second quarter of 2013 reflected a full year estimated effective income tax rate of 34%, on the upper end of our previously guided range. A higher percentage of U.S.
income is driving an increase in our effective income tax rate. Capital expenditures for the quarter totaled $6 million, essentially flat relative to the prior year period.
For the full year, capital expenditures are projected to be about $33 million as spending on the replacement of our Lakeland, Florida manufacturing facility will pick up in the second half of 2013. We plan to file our 10-Q tomorrow, so there'll be more detailed information readily available for your review.
In summary, due to project slippages in Aerotech, we anticipate achieving low single-digit percentage revenue growth in 2013 and segment operating profit margin roughly 50 basis points lower than last year's adjusted margin. For FoodTech, given its strong backlog position, we expect to achieve mid to high single-digit percentage revenue growth in 2013 and approximately 11% full year segment operating profit margin.
This represents an improvement of over 100 basis points from last year's margin, setting up FoodTech for a record performance in 2013. We expect third quarter diluted earnings per share from continuing operations to be slightly up from the prior year, followed by a very strong fourth quarter.
For the full year 2013, we project diluted earnings per share from continuing operations to be in the range of $1.32 to $1.40. With that, we'd like to take your questions.
So operator, please open up the call.
Operator
[Operator Instructions] Your first question comes from the line of Jason Ursaner with CJS Securities.
Jason Ursaner - CJS Securities, Inc.
Just first on the 2 passenger boarding bridge projects. I guess, can you go over -- what's your confidence in eventually winning these 2 projects?
And does the pushout change that probability or win rate at all?
Charles H. Cannon
No. We have the same probability of winning that we had before.
I mean, and one way of looking at this, I think we've always said -- I think we've always told you that we have the best visibility in Jetway of all our businesses. And I think the more accurate way to say that is we have the best visibility in Jetway of all our businesses after we get the order because they're big orders and they've got longer lead times.
With a certain amount of humility, it's obvious that we sometimes struggle to predict when the order comes in, given the nature of the beast. These airport projects can be multibillion-dollar projects, and our $8 million order's kind of not driving it, if you follow that.
So in the cases, there was an international and a domestic. And we've already been told, on the domestic one, it's our order.
And in that particular project, I think it's an FAA delay for approval. But I don't -- we don't -- this delay is not meant to signal we have doubt about winning the ones I've said.
Jason Ursaner - CJS Securities, Inc.
Okay. And then just acquisition-wise, relative to your own size, you guys obviously maintain a lot of capacity on the revolver at pretty attractive rates.
So just maybe an update on where you stand on the acquisition front at this point and how the pipeline is evolving?
Charles H. Cannon
Well, it's -- obviously, this is a tricky one for us to comment on, so I'm not going to say a lot about pipeline. I will say that we're encouraged, as I say, relative to a year ago in terms of the number of different opportunities we're looking at.
That's not to say I've got any of them across the finish line yet, but it seems to be, right now, I wouldn't describe it, and maybe Ron would comment, but I think it seems to be a richer pipeline than we've had in a couple of years for small bolt-ons.
Ronald D. Mambu
I agree with that, Jason, although I think I'd add that our focus remains on the bolt-on variety versus anything like JBT size.
Jason Ursaner - CJS Securities, Inc.
Is the bolt-on, I guess, more similar to the sizes you guys previously talked about, or the South Africa, Thailand bakery? When you -- I mean, those were smaller than that.
Charles H. Cannon
Yes, they're -- we'd like -- there's a couple we're looking at that are a little bit bigger than those, but they're not going to be huge. I mean, a $20 million or $25 million acquisition is right in our wheelhouse.
Operator
[Operator Instructions] Your next question is from the line of Adam Peck with Heartland Fund.
Adam J. Peck - Heartland Advisors, Inc.
So did you say the FoodTech backlog was close to a record?
Ronald D. Mambu
Yes. That's correct.
Adam J. Peck - Heartland Advisors, Inc.
Okay. And when you think about AeroTech for next year, does that mean there's a high likelihood that the first half of next year would be much stronger than you originally anticipated?
Ronald D. Mambu
Yes, I don't know that we're going to comment a lot on next year yet because there are a lot of factors other than Jetway that play on that. But I think we said in the first quarter call that we were in really good shape in FoodTech and really liked our position, and that has not changed as of this call.
FoodTech is right on track with where we thought we would be earlier in the year. On the AeroTech side, we said it was critical that we inbound orders.
And in fact, we inbounded over $100 million in the second quarter. And in the third quarter, I think we're going to inbound even more than that.
So we think, even though we started out behind in AeroTech and we're not happy with the margins in the second quarter, we like the business perspective going forward in AeroTech in terms of volume. And as you know, we do get a little leverage on that volume typically in AeroTech.
Cindy Shiao
And as previously mentioned, the balance sheet is in great shape, I think probably the best shape since the spin. 2014 CapEx will most likely be lower, right, because Lakeland will be completed?
Ronald D. Mambu
Yes, Adam. Lakeland is being phased in over several years.
So probably, 2014 is not going to be much different than '13. But I would expect 2015, then, that we would see a difference.
Operator
There are no further questions. I would like to hand the call back over to Mr.
Debarshi Sengupta for closing remarks.
Debarshi Sengupta
Thank you, everyone, for joining us this morning. A replay of our call will be available on our IR website early this afternoon.
If you have any further questions, please give us a call. Have a good day.
Operator
Thank you. This does conclude today's conference call.
You may now disconnect.