Blue Bird Corporation — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2018; comparatives are the 13-week quarter and six months ended April 1, 2017. Blue Bird designs and manufactures school buses and sells replacement parts. Its reportable segments are Bus and Parts.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $216.6M | $208.7M | $379.2M | $345.3M |
| Gross profit / margin | $21.7M / 10.0% | $24.6M / 11.8% | $42.3M / 11.2% | $42.8M / 12.4% |
| Operating income (loss) | $2.9M | $5.4M | $(2.3)M | $5.4M |
| Net income (loss) | $1.8M | $2.7M | $(6.0)M | $(5.8)M |
| Adjusted EBITDA / margin | $10.0M / 4.6% | $8.4M / 4.0% | $15.3M / 4.0% | $11.0M / 3.2% |
- Q2 basic and diluted EPS were $0.04, versus $0.08 and $0.07, respectively, a year earlier. Six-month basic and diluted loss per share was $0.32, compared with $0.34.
- Q2 sales rose 3.8%; bus units booked increased to 2,441 from 2,367, with average selling price up 1.0%. Six-month sales rose 9.8%, reflecting 4,146 bus units booked versus 3,860 and a 3.0% increase in average selling price.
- Bus gross profit declined to $16.3M from $19.2M in Q2; Parts gross profit was $5.3M versus $5.4M. Management attributed bus cost pressure to product/customer mix and higher raw-material costs. Q2 cost of goods sold rose 6.0%, faster than sales.
- Six-month SG&A increased $7.2M to $44.7M, driven by operational transformation initiatives and product redesign costs. Adjusted EBITDA included $10.4M of transformation costs and $1.1M of product redesign costs for the six-month period.
Cash flow, debt and liquidity
- Operating cash flow was $(33.1)M for the six months, versus $(9.3)M a year earlier; capital expenditures were $7.0M versus $5.2M. Reported free cash flow was $(40.1)M, versus $(14.5)M.
- Cash fell to $10.3M at March 31 from $62.6M at September 30, 2017. Current assets were $140.8M and current liabilities $138.2M.
- Term-loan principal outstanding was $150.0M ($147.6M carrying value, net of financing costs); the stated rate was 3.4%. No revolver borrowings were outstanding, and $68.1M remained available after $6.9M of letters of credit.
- The company repaid $4.0M of term-loan principal during the six months. It reported compliance with credit-agreement covenants at March 31. The loan is secured by substantially all company and subsidiary assets; the maximum net leverage covenant becomes 3.50:1.00 beginning in FY2019 Q2.
- Financing cash use included $15.5M of common-stock repurchases and $1.5M of preferred dividends, partly offset by $9.5M of warrant-exercise proceeds. The company repurchased 564,636 shares in Q2 at an average $21.58; approximately $0.5M remained under the repurchase program at quarter-end.
Outlook, commentary and risks
- Management said existing cash and expected operating cash flows should meet operating requirements for at least the next 12 months. No specific sales or earnings guidance was provided.
- Management estimated a FY2018 effective tax rate of 25%–30%, excluding one-time tax-reform effects. The six-month tax expense included a $2.4M Tax Act-related charge; the estimate may change with further IRS guidance and analysis.
- Q2 other income included approximately $1.0M of unrealized gains on foreign-exchange derivatives not designated as hedges. FY2018 Q2 was Blue Bird’s first quarter taking orders for all-electric school buses.
- The business is seasonal: third and fourth fiscal quarters are typically busiest as districts prepare for the school year. Demand depends in part on school funding, enrollment, product mix, dealer performance and fleet purchasing patterns. Management also identified commodity costs, labor, supplier and logistics costs as factors affecting expenses.
- Product-liability and other cases were pending; management did not expect their resolution to materially affect the financial statements. The company noted environmental-compliance exposure but reported no material environmental proceedings. Forward-looking statements remain subject to the risks described in its 2017 Form 10-K.
Other material developments
- On April 24, 2018, after quarter-end, the company converted 307,000 Series A preferred shares into 2,649,962 common shares; 93,000 preferred shares remained outstanding.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bus pricing, product mix and operating improvements can offset rising unit costs and the lower gross margin.
- Drivers of the substantial operating cash outflow, cash decline and negative free cash flow, including working-capital movements and seasonal cash patterns.
- Compliance with leverage covenants, available revolver capacity and the company’s ability to fund debt service and capital spending.
- The final impact of tax reform, including uncertain tax positions, foreign tax credits and any further IRS guidance.
- Effects of the preferred-stock conversion, remaining preferred dividends and dilution from common shares, warrants and other equity awards.