Blue Bird Corporation — Form 10-Q Summary
Business context and reporting period
Blue Bird designs and manufactures school buses and sells replacement parts. This report covers the quarter and six months ended April 4, 2015; the quarter comprised 13 weeks, while the six-month period comprised 27 weeks versus 26 weeks in the prior-year comparison. Results primarily reflect the school-bus business, with seasonally stronger sales typically in the third and fourth fiscal quarters.
On February 24, 2015, Hennessy Capital Acquisition Corp. completed its business combination with School Bus Holdings and adopted the Blue Bird Corporation name. The transaction was accounted for as a reverse acquisition, with School Bus Holdings treated as the accounting acquirer; accordingly, the historical financial statements are those of School Bus Holdings. The transaction included $100 million cash and 12 million shares valued at $120 million as purchase consideration.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $183.0 million | $195.7 million | $348.9 million | $341.7 million |
| Gross profit | $23.0 million | $26.0 million | $42.5 million | $46.5 million |
| Gross margin | 12.6% | 13.3% | 12.2% | 13.6% |
| Operating income (loss) | $(10.9) million | $11.6 million | $(6.9) million | $17.9 million |
| Net income (loss) | $(11.1) million | $7.6 million | $(11.7) million | $11.7 million |
| Adjusted EBITDA and margin | $10.1 million; 5.5% | $14.8 million; 7.5% | $17.5 million; 5.0% | $24.4 million; 7.1% |
Basic and diluted loss per share was $0.52 for Q2 and $0.54 for the six-month period, compared with income per share of $0.35 and $0.53 in the prior-year periods. Adjusted EBITDA is a non-GAAP measure; the filing reconciles it to GAAP net income and includes specified add-backs.
At April 4, 2015, cash and cash equivalents were $22.6 million, down from $61.1 million at September 27, 2014. Total assets were $261.7 million; current assets were $129.1 million and current liabilities were $133.3 million. Net operating working capital, a company-defined non-GAAP measure, was $9.9 million, versus negative $1.8 million at fiscal year-end.
For the six months, operating cash flow was negative $41.4 million, investing cash flow was negative $1.8 million, financing cash flow was positive $4.7 million, and reported free cash flow was negative $43.2 million. The company attributed operating cash use principally to compensation and transaction-related payments, interest, previously accrued employee expenses, and working-capital movements.
Term debt was $229.1 million of principal, reported net of discount at $218.3 million; $11.8 million was current and $206.5 million long-term on the balance sheet. The $60 million revolving facility had no borrowings; $5.1 million of letters of credit left $54.9 million available. The term loan’s stated rate was 6.5%. Stockholders’ deficit was $145.6 million, including $50 million liquidation preference for Series A preferred stock.
Material changes versus prior comparable periods
- Q2 sales declined 6.5%, mainly reflecting 2,093 bus bookings versus 2,223 a year earlier; bus average selling price per unit fell 1.8%, primarily due to product and customer mix. Six-month sales rose 2.1%, with bookings of 3,917 versus 3,768, while bus average selling price per unit fell 2.5%.
- Q2 gross profit decreased 11.4%; six-month gross profit decreased 8.5%. Cost of goods sold rose as a percentage of sales in both comparisons. Management cited favorable commodity costs and lower average bus cost per unit, offset by product mix and other cost pressures.
- SG&A rose to $34.0 million in Q2 from $14.4 million and to $49.4 million for six months from $28.5 million. The increase included business-combination and public-company expenses, employment costs, and a $13.8 million phantom-plan compensation payment in Q2.
- Interest expense increased to $4.8 million in Q2 and $9.9 million for six months, primarily reflecting substantially higher borrowings following the June 2014 debt refinancing and dividend recapitalization.
- Parts sales increased 8.8% in Q2 and 11.7% for six months; bus-segment sales declined in Q2 but increased slightly for six months.
Outlook, commentary, risks and unusual items
- Management said existing cash and expected operating cash flows should be sufficient for operating requirements for at least the next 12 months. No specific revenue, earnings or production guidance was provided.
- Management expects incremental annual public-company costs of at least $2.0 million, excluding stock-based compensation, and substantially higher interest expense than before the 2014 credit agreement.
- The company was in compliance with its credit covenants at April 4, 2015. The facility has quarterly leverage tests, restrictive covenants, and provisions that may require mandatory prepayments. A 100-basis-point rate change was estimated to affect annual expense by $2.3 million.
- Disclosure controls were concluded to be ineffective because material weaknesses in financial reporting and IT user-access controls persisted. Remediation was underway, including added personnel, training, enhanced monitoring and external assistance.
- Nasdaq continued the company’s listing subject to conditions. The company believed it had met the 400-round-lot-holder requirement for common stock but was confirming this with Nasdaq; Nasdaq also advised that 400 round-lot holders of warrants were required. Failure could result in warrant delisting.
- Business-combination ownership changes limit use of U.S. tax net operating losses and credits under Section 382. The filing reported $6.4 million of gross unrecognized tax benefits that would affect the effective tax rate if realized, and $0.5 million of accrued interest and penalties.
- Product-liability and other litigation was pending; management did not expect a material adverse effect, considering insurance and its defense. The company reported no material environmental proceedings but noted potential compliance costs and liabilities.
- The $13.8 million phantom-plan payment and business-combination costs were unusual period expenses; the filing’s adjusted EBITDA calculation adds back the compensation payment and specified transaction expenses. The company also reported a $2.9 million one-time supplemental lender fee in financing cash flows.
Important facts for investors to verify
- Whether the company satisfies Nasdaq’s listing requirements, particularly the warrant-holder condition.
- Progress and effectiveness of remediation of the disclosed material weaknesses in financial reporting and IT controls.
- Cash generation, inventory and working-capital needs as production ramps for the seasonally stronger quarters, and capacity to service debt.
- Debt covenant headroom, variable-rate exposure, and the impact of the term loan’s amortization and maturity profile.
- How much of the reported earnings decline reflects recurring operating performance versus transaction-related, public-company and special compensation costs.
- Potential dilution and preferred-stock obligations: Series A preferred stock carries a 7.625% annual dividend and is convertible initially into 8.6 common shares per preferred share.