Blue Bird Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 30, 2018 (13 weeks), with year-to-date results for the nine months ended June 30, 2018. Comparatives are the quarter and nine months ended July 1, 2017. Blue Bird designs and manufactures school buses and sells replacement parts.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $314.2 million | $332.6 million | $693.4 million | $677.9 million |
| Gross profit / margin | $37.0 million / 11.8% | $45.0 million / 13.5% | $79.3 million / 11.4% | $87.9 million / 13.0% |
| Operating profit / margin | $16.0 million / 5.1% | $28.7 million / 8.6% | $13.7 million / 2.0% | $34.1 million / 5.0% |
| Net income | $21.9 million | $20.0 million | $15.9 million | $14.3 million |
| Diluted EPS | $0.77 | $0.68 | $0.55 | $0.46 |
| Adjusted EBITDA / margin | $23.7 million / 7.5% | $32.9 million / 9.9% | $39.4 million / 5.7% | $43.9 million / 6.5% |
Quarterly sales fell 5.5%, mainly because bus sales declined 6.2% amid fewer units booked and a 3.6% lower average net selling price, attributed primarily to product and customer mix. Year-to-date sales rose 2.3%, with bus bookings of 7,892 versus 7,709 a year earlier. Parts sales increased in both periods.
Quarterly operating profit declined $12.7 million, reflecting an $8.0 million gross-profit decrease and $4.6 million higher SG&A. For the nine months, operating profit fell $20.4 million: gross profit decreased $8.6 million and SG&A rose $11.8 million, including costs for operational initiatives and product redesign. Rising commodity costs were a headwind to bus costs. Quarterly net income increased despite lower pretax income principally because of unusual tax benefits.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $7.0 million, capital expenditures were $15.6 million, and reported free cash flow was negative $8.6 million, compared with negative $1.4 million a year earlier. Higher manufacturing-asset spending was the primary reason free cash flow worsened.
- Cash was $41.9 million at June 30, 2018, down from $62.6 million at September 30, 2017. The company reported $68.1 million available on its revolving facility, net of $6.9 million of letters of credit.
- Term-loan principal outstanding was $148.0 million; the balance-sheet carrying amount was $145.8 million, including deferred financing costs. The stated rate was 3.8%, versus 2.8% at September 30, 2017. No revolver borrowings were outstanding.
- Current assets were $191.8 million and current liabilities $181.0 million. Inventory increased to $113.0 million from $76.2 million at September 30, 2017, while accounts payable increased to $132.9 million from $87.3 million.
- Blue Bird repurchased $18.9 million of common stock during the nine months. A new board-authorized program permits up to $25.0 million of common or preferred stock repurchases through June 2019.
Material changes, outlook and risks
- On April 24, 2018, the company converted 307,000 Series A preferred shares into approximately 2.65 million common shares; 93,000 preferred shares remained outstanding at June 30.
- Quarterly and year-to-date tax benefits included an $8.0 million release of uncertain-tax-position reserves, $1.7 million of benefits related to prior-year tax returns, and a $0.5 million valuation-allowance release. The nine-month effective tax rate was negative 59.0%; it also reflected $2.4 million of Tax Act-related expense recorded in an earlier quarter. The company said its federal statutory rate would be 21% in fiscal 2019.
- Management said existing cash and expected operating cash flows should fund operating requirements for at least the next 12 months. The company was compliant with credit-agreement covenants at quarter-end. No numerical earnings or revenue guidance was provided.
- Management emphasized seasonality: sales are typically strongest in the third and fourth fiscal quarters as school districts prepare for the school year. Results can also vary with school funding, enrollment, product mix, dealer performance and fleet purchasing patterns.
- Risks and uncertainties include commodity and material costs, production and supply-chain factors, customer and product mix, warranty estimates, variable-rate debt, and tax-law implementation. The company disclosed ordinary-course product-liability and other litigation, but management did not expect pending cases or environmental matters to have a material adverse effect.
Important facts for investors to verify
- Whether bus pricing, unit bookings and gross margins recover after the Q3 decline, and how commodity inflation affects costs.
- Whether operational-transformation and product-redesign spending is temporary and delivers the expected operating benefits.
- How much of reported earnings reflects recurring operations versus the discrete tax benefits; quarterly net income was boosted by these tax items.
- Whether seasonal fourth-quarter sales convert elevated inventory and working capital into cash, given negative year-to-date free cash flow.
- Debt amortization, interest-rate exposure, covenant headroom and the company’s use of remaining repurchase authorization.
- The duration and resolution of pending legal matters and the adequacy of warranty and self-insurance reserves.