Blue Bird Corporation — Q3 Fiscal 2015 Form 10-Q
Reporting period: Quarter ended July 4, 2015 (13 weeks); year-to-date period was 40 weeks, compared with 39 weeks in the prior-year period. Blue Bird designs and manufactures school buses and sells replacement parts. The February 24, 2015 business combination with School Bus Holdings was accounted for as a reverse acquisition; the financial statements principally reflect School Bus Holdings’ historical results.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $262.7m | $240.3m | $611.5m | $582.0m |
| Gross profit / margin | $36.7m / 14.0% | $33.8m / 14.1% | $79.2m / 12.9% | $80.2m / 13.8% |
| Operating income (loss) | $19.3m | $(4.6)m | $12.4m | $13.3m |
| Net income (loss) | $10.7m | $(8.1)m | $(1.0)m | $3.6m |
| Adjusted EBITDA / margin | $22.9m / 8.7% | $23.4m / 9.8% | $40.5m / 6.6% | $47.8m / 8.2% |
Q3 basic and diluted EPS were $0.46 and $0.38, respectively; the $1.2m preferred dividend reduced income available to common shareholders. Nine-month loss per share was $0.11.
- Revenue and margins: Q3 sales increased 9.3%, with bus bookings rising to 2,993 from 2,770 units; average bus selling price increased 1.7%, mainly from customer mix. Nine-month sales rose 5.1% as bookings increased to 6,910 from 6,538, but average bus price fell 0.7%. Nine-month gross margin contracted as cost of goods sold rose faster than sales; overtime and lower labor productivity contributed.
- Profitability: Q3 operating results improved sharply versus a prior-year loss, in part because prior-year SG&A included $24.7m of special compensation payments. Nine-month operating income declined 7.3%. Adjusted EBITDA fell 15.3% year to date, with margin down from 8.2% to 6.6%.
- Cash flow: Nine-month operating cash flow was $(31.6)m versus $8.0m provided a year earlier; free cash flow, as defined by the company, was $(35.1)m versus $4.9m. Working-capital growth, including inventory and receivables, contributed to cash use. Management also cited $13.8m of special compensation, $12.5m of business-combination expenses, and $15.9m of cash interest paid.
- Liquidity and debt: Cash was $27.8m at July 4, down from $61.1m at fiscal year-end. Current assets were $175.1m and current liabilities $169.7m. Term debt had approximately $226.2m principal outstanding ($215.9m net carrying value after discount); $11.8m was current. The $60m revolving facility had no borrowings, $5.1m of letters of credit outstanding, and $54.9m available. The term loan rate was 6.5%. The company reported covenant compliance.
Material changes and business developments
- The Business Combination closed February 24, 2015. Consideration included $100m cash and 12m common shares valued at $120m. The transaction also included $50m of Series A preferred stock and a $25m common-stock placement. Blue Bird recorded the combination as a reverse acquisition and did not record a step-up in goodwill or intangible assets.
- Balance-sheet inventory rose to $106.5m from $71.3m, accounts receivable to $33.8m from $21.2m, and accounts payable to $115.9m from $94.3m. Management attributed working-capital patterns in part to seasonal production and demand.
- Warrants ceased Nasdaq trading and began trading on OTCQB after the company did not meet Nasdaq’s 400-round-lot-holder requirement. Common stock continued on Nasdaq.
- Series A preferred stock carries a 7.625% annual dividend and a $50m liquidation preference; it is initially convertible into approximately 4.3m common shares in aggregate.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said cash balances and expected operating cash flows should be sufficient for operating needs for at least the next 12 months. The company was negotiating a credit-facility amendment, including seeking lower interest rates and reduced excess-cash-flow sweep percentages.
- Debt is secured by substantially all assets and bears variable interest. A 100-basis-point rate change would alter annual expense by approximately $2.3m. The company’s debt burden drove a substantial increase in interest expense versus the prior-year periods.
- Management identified seasonality, school-district funding and enrollment, product/customer mix, dealer performance, commodity costs, supplier availability, labor productivity, and competition as factors affecting results. Sales historically peak in the third and fourth fiscal quarters.
- Disclosure controls were deemed ineffective due to continuing material weaknesses in financial reporting capacity, accounting review and IT user access. Remediation efforts included additional personnel, training, enhanced monitoring and external assistance; management cautioned remediation may take time.
- The business combination limits use of federal net operating losses and tax credits under Section 382. Gross unrecognized tax benefits were $6.4m; accrued interest and penalties were $0.8m.
- Product-liability and other legal matters were pending; management did not expect them to have a material adverse effect. No material environmental proceedings were reported. The filing also describes a historical discontinued coach business, with current discontinued-operation losses primarily related to legal expenses.
Key facts for investors to verify
- Whether operating cash flow and free cash flow recover as seasonal working capital unwinds, and how inventory, receivables and payables evolve.
- Progress and terms of the proposed credit-facility amendment, ongoing covenant compliance, and the company’s capacity to service and repay its debt.
- Whether weaker nine-month gross margin and Adjusted EBITDA reflect temporary overtime and mix effects or continuing cost and productivity pressure.
- Remediation of the disclosed material weaknesses and the effectiveness of financial-reporting and IT controls.
- The impact of preferred dividends and potential conversion dilution, as well as warrant trading status and the applicable Nasdaq listing requirements.