John Bean Technologies: Classic, Unloved Spin-off?

John Bean Technologies (JBT) looks like a classic, unloved spin-off. At the end of July, JBT spun-off from FMC Technologies (FTI) closing at $14.50 on the first day of trading. Since then, the stock has sold off 18% as the normal turnover of the shareholder base takes hold. While it is not clear that the sell-off is done, JBT looks like a solid little business with a reasonable balance sheet and a low valuation. The major concern is the health of airline industry which is the main customer segment for one of its two businesses.

JBT is a technology solutions provider to segments of the food processing and air transportation industries. The Company designs, manufactures, tests and services systems and products through its JBT FoodTech and JBT AeroTech segments. JBT FoodTech markets its solutions and services to large food processing companies. JBT AeroTech markets its solutions and services to airports, airlines, air freight and ground handling companies. 

Business Overview

JBT FoodTech

JBT FoodTech is a leading supplier of customized industrial food processing solutions and services used in the food processing industry. This segment manufactures and services technologically sophisticated food processing systems for the preparation of ready-to-eat meals, shelf stable sterilized packaged foods, meat, seafood and poultry products, juice and dairy products, fruit and vegetables and bakery products. 

JBT FoodTech has operations located globally to serve its existing JBT FoodTech equipment base located in more than 100 countries. The Company has principal production facilities in the United States (California, Minnesota, Ohio and Florida), Belgium, Brazil, South Africa, China, Italy and Sweden. 

The Company estimates that their installed equipment collectively processes approximately 75 percent of the global production of citrus juices, freezes approximately 50 percent of the commercially frozen foods on a global basis and sterilize approximately 50 percent of the world’s canned foods. Accordingly, this provides the Company with strong, recurring aftermarket products, parts and service revenue, which accounted for approximately 25 percent of JBT FoodTech’s total revenue in 2007.

Specifically, JBT FoodTech offers a broad portfolio of systems, equipment and services to customers that are customized to meet specific customer application needs. These systems include:

• Freezer solutions for the freezing and chilling of meat, seafood, poultry, ready-to-eat meals, fruit, vegetable and bakery products;
• Protein processing solutions that portion, coat and cook poultry, meat, seafood, vegetable and bakery products;
• Shelf stable sterilization solutions for fruits, vegetables, soups, sauces, dairy and pet food products as well as ready-to-eat meals in a wide variety of modern packages;
• Fruit processing solutions that extract, concentrate and aseptically process citrus, tomato and other fruits; and
• Aftermarket Products, Parts and Services

The Company’s customer base includes many blue chip companies, including, but not limited to: Tyson Foods, Campbell’s, Heinz, Florida Natural, ConAgra Foods, IngHam, Nestle, Wayne Farms, Unilever, Sunkist, and Del Monte.

JBT AeroTech

JBT AeroTech is a leading supplier of customized solutions and services used for applications in the air transportation industry. This segment designs, manufactures and services technologically sophisticated ground support equipment, airport gate equipment and services for airport authorities, airlines, air freight and ground handling companies and the military. 

JBT AeroTech has principal production facilities located in the United States (Florida, Utah and Pennsylvania), Spain, Mexico and the United Kingdom. The Company has also established regional manufacturing partnerships in Asia, Africa and South America.

The Company estimates that their installed equipment collectively processes approximately 70 percent of the world’s overnight express packages and boards approximately 75 percent of U.S. passengers.

Specifically, JBT AeroTech offers a broad portfolio of systems, equipment and services to airport authority, airline, air cargo, ground handling and military customers.   These systems include:

• Ground support equipment for cargo loading, aircraft deicing and aircraft towing;
• Gate equipment for passenger loading, on the ground aircraft power and cooling;
• Airport services for maintenance of airport equipment, systems and facilities. Specifically, they offer technology and operation monitoring services centered around their patent pending iOPS Suite, which links maintenance management systems and aircraft avionics data to critical ground-based monitoring, diagnostic and tracking systems on gate equipment, baggage handling systems, facility systems and ground support systems; 
• Military equipment for cargo loading, aircraft towing and on the ground aircraft cooling; and
• Aftermarket Products, Parts and Services

The Company’s customer base includes many worldwide leaders in the air transportation business, including, but not limited to: FedEx, UPS, DHL, British Airways, Continental United, Air France and the U.S. Military.

Financial Trends and Ratios

The financial trends below have been pulled from the Company’s audited combined financial statements. The results should be read in conjunction with financial results that account for adjustments due to the completion of the Company’s spin off that occurred July 31, 2008, which will be discussed below.

1. Based on the number of shares of common stock outstanding on the distribution date/spin off, or 27.6 million shares
2. Based on the number of shares of common stock that has the potential to be outstanding, i.e. the diluted outstanding shares, amounting to approximately 28 million shares

Latest Quarter Results

The latest results for the Company were second quarter results ending June 30, 2008. During this period, total revenue increased $38.8 million, or 16.31 percent, from $237.9 million to $276.7 million from the second quarter of 2007. Additionally, net income increased $5.2 million, or 66.7%, from $7.8 million to $13.0 million. By segment, JBT Food Tech’s revenue was $7.9 million higher in the second quarter of 2008 compared to the same period in 2007, while JBT AeroTech’s revenue was $30.3 million higher in the second quarter of 2008 compared to the same period in 2007. According to the Company, higher levels of air traffic in 2007 resulted in high demand for JBT AeroTech equipment resulting in a strong backlog at the end of 2007, compared to 2006. 

Unfortunately, JBT AeroTech experienced a decrease in orders in the second quarter of 2008 as a result of uncertainty in the economy and high fuel costs affecting profitability in the airline and air freight industries. Management has stated that they believe this trend will not reverse in the second half of 2008. This assumption has been correct so far, notwithstanding a decrease in crude oil that has slowly been creeping upwards again. 

Adjustments Due to Spin-off

On July 31, 2008, FMC Technologies affected the spin-off of JBT Corporation through the pro rata distribution to its stockholders of all 27.6 million issued and outstanding shares of JBT Corporation held by FMC Technologies. In connection with this spin-off, JBT Corporation obtained $75 million in proceeds by issuing senior unsecured notes that require semiannual interest payments and whose principal is due on July 31, 2015. Additionally, JBT Corporation entered into a $225 million, 5-year revolving credit facility, upon which the Company borrowed $75.5 million. The Company is required to make quarterly interest payments on the amount borrowed. The proceeds from the issuance of notes and the borrowed revolving credit facility money were to fund a $150.5 million dividend to FMC Technologies in connection with the spin-off. The final dividend amount will be determined by a “true-up” process in accordance with the “Separation and Distribution Agreement” between the companies. 

As a result of this process, earnings per share, or EPS, were not presented in the Company’s 10-Q for the second quarter ending June 30, 2008 and 2007, as the capital structure for these quarters were not comparable to the capital structure that that now exists after the spin-off. However, beginning in the quarter ending September 30, 2008, the Company will present EPS of JBT Corporation based on weight average shares giving effect to the issuance of 27.6 million on the spin-off date as if they were issued and outstanding on January 1, 2008. In addition, the Company has outstanding share-based payment awards that may be dilutive to the shares; therefore, diluted EPS will be based on approximately 28.1 million weighted average shares outstanding. 

Additionally, to reflect the dividend payment of $150.5 million paid to FMC Technologies on July 31, 2008 in connection with the spin-off and issuance of $150.5 million of unsecured debt in order to fund the dividend, the Company has estimated an interest expense. This interest expense would have been incurred by the Company if the spin-off had occurred on January 1, 2007. The pro forma interest expense incurred for the six months ended June 30, 2008 was $4.6 million ($2.9 million after tax).

The Company provided unaudited pro forma combined statements of income to adjust Fiscal 2007 and six month ended June 30, 2008 results based on the above adjustments in outstanding shares and interest expense. 

Fiscal 2007 results were affected as follows (click to enlarge): 

Six Months Ended June 30, 2008 results were affected as follows (click to enlarge):

Valuation 

 click to enlarge

Air T Inc. is a direct competitor of JBT Corporation in the air transportation industry. They, however, also provide overnight air cargo services to the air express delivery industry through its wholly owned subsidiaries, Mountain Air Cargo, Inc and CSA Air, Inc, which accounted for approximately 50 percent of the company’s consolidated revenues in the fiscal year ended March 31, 2008.

United Technologies Corporation provides high-technology products and services to the building systems and aerospace industries. One of the company’s six segments competes directly with JBT Corporation. This segment, called Carrier, includes heating, ventilating, air conditioning and refrigeration systems and equipment, and food service equipment. This segment accounted for approximately 20 percent of the company’s consolidated revenues in the fiscal year ended December 31, 2007.

Growth

JBT Corporation expects growth in both of their segments due to both the food and air transportation industry forecasts. Additionally, within each industry, JBT Corporation expects other specific characteristics to increase the Company’s growth potential.

Food Industry

1. Industry consolidation may create higher demand for technologically sophisticated, integrated systems and services that FoodTech provides, in order to become more efficient and to lower costs
2. Euromonitor International reports that smaller households, longer working hours and less structured mealtimes have resulted in growing consumer demand for convenient, easy-to-use, portable foods and packaging that require minimum of time and effort to prepare. This may increase demand for FoodTech’s freezer, shelf stable sterilization and fruit processing solutions.
3. Consumer demand in the segments of the convenience food industry that FoodTech serves has increased. For Instance, Euromonitor International projects that through 2010, worldwide retail sales of frozen processed poultry will increase at a compound annual rate of 4.9 percent and frozen processed seafood will grow at a compound annual rate of 5.6 percent.
4. Growth in Developing Markets such as Asia, the Middle East, Latin America and Easter Europe. 
5. Acquisitions

Air Transportation

1. Industry consolidation and restructuring to reduce costs and improve efficiencies may result in higher demand for AeroTech’s innovative products. In addition, as aging equipment reach the end of their life cycle, AeroTech expects demand for ground support equipment to increase.
2. Developing markets such as Asia will create expanding infrastructure needs, which include terminals, airport gates systems, baggage and cargo handling systems and ground support equipment.
3. Technological, safety and environment challenges will increase the demand for new innovative products from AeroTech to support the changing equipment designs. 

Moreover, the Company’s large installed base will drive growth in recurring revenue. Already the Company has approximately 40,000-plus and 30,000-plus units of delivered base for the FoodTech and AeroTech segments, respectively. From 2005-2007 this base experienced aftermarket revenue growth of 9 percent CAGR (see graph 1.1)

Forward-Looking Statements

The Company expects operating earnings in 2008 to still surpass the record levels earned in 2007. This is largely due to the high order backlog experienced in 2008 and strong operating profits. In addition, they expect overall growth in revenue of approximately 6-10 percent for the full year 2008, notwithstanding the challenging economic conditions and high energy costs.

The Company has said based on estimated diluted weighted average shares outstanding, incremental pro forma interest expense of $5.2 million and an effective tax rate of 38 percent, they expect full year adjusted diluted earnings per share to be within a range of $1.25 to $1.35.

The Company also anticipates paying cash dividends on their common stock, beginning a quarterly dividend of $0.07 per share, or approximately $1.9 million, payable in the fourth quarter of 2008.

Investment Opportunity

JBT Corporation has the benefits of being a spin-off company that has been sold off by investors of FMC Technologies, discounting the true value of the common stock. In addition, the Company runs two differentiated segments with emerging growth opportunities. In fiscal 2007, the AeroTech and FoodTech segments accounted for approximately 40 and 60 percent of the company’s consolidated revenues, respectively. 

FMC Tech is a solid mid cap stock with a $6 billion market cap. JBT is on the lower end of the small cap universe at just over $300 million. Surely, many portfolios managers owning FMC Tech received such a small position in JBT that they are blowing out of it regardless of the valuation. The thinking goes, “I owned FMC Tech for FMC Tech, not JBT. Why I am going to buy more shares of JBT to make it a meaningful position if I didn’t even want to own it the first place.”

An area of concern is the huge backlog the company experienced in 2007 year-end and the decline in orders for the second half of Fiscal 2008 within the Company’s AeroTech segment. The backlog has increased revenue in fiscal 2008; however, the question is what the segment can earn beyond this fiscal year.

However, on August 12, 2008 the company announced two contracts worth a total of $28 million within the company’s FoodTech segment. The growth of this segment could partially offset the potential decrease in revenue within the AeroTech segment. 

Additionally, the stock may have experienced a sell off due to its confusing capital structure and not accounting for adjustments that have been made to its past earnings per share. The adjustments put the stock in line to experience growth in 2008; however, looking at results from 2007 without these adjustments, the company looks like it will experience negative growth in line with the Company’s stated EPS outlook of $1.25 to $1.35.

Disclosure: I have a personal position in JBT

Comments

[EttU:]

JBT, a solid small company, with the flexibility and potential for continuing stable growth over the long term. JBT is now a version of the original FMC corporation which I believe is now about 100 years old.

2008 Oct 21 03:52 PM