Blue Bird Corporation — FY2016 Form 10-K
Business context and period. Blue Bird designs and manufactures school buses and sells aftermarket parts. This is an annual report for the 52-week fiscal year ended October 1, 2016—not a standalone fourth-quarter report. The company reports Bus and Parts segments. FY2015 had 53 weeks, which affects comparison.
Financial performance and position
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net sales | $932.0 million | $919.1 million | Up 1.4%; bus units sold were 10,616 versus 10,378 |
| Gross profit / margin | $129.4 million / 13.9% | $120.4 million / 13.1% | Gross profit increased 7.4% |
| Operating profit / margin | $26.6 million / 2.9% | $35.8 million / 3.9% | Down 25.6% |
| Net income | $6.9 million | $14.9 million | Continuing-operations income was $7.2 million versus $15.1 million |
| Basic EPS | $0.14 | $0.59 | Includes preferred dividends and discontinued operations |
| Adjusted EBITDA / margin | $72.2 million / 7.7% | $69.9 million / 7.6% | Non-GAAP; up 3.3% |
| Operating cash flow | $25.1 million | $23.4 million | Included a $2.3 million Micro Bird dividend |
| Free cash flow | $15.7 million | $18.3 million | Non-GAAP; lower mainly due to increased capital spending |
| Cash and revolving availability | $52.3 million; $54.9 million | $52.9 million cash | Revolver availability is net of $5.1 million of letters of credit |
| Debt | $161.5 million principal | $198.3 million principal | Balance-sheet debt was $152.1 million, net of financing costs; $25 million principal prepayment in June |
| Backlog | 1,193 buses; $102.9 million | 1,069 buses; $90.1 million | Orders may be cancellable |
Bus-segment sales were $876.1 million and gross profit was $108.2 million; Parts sales were $55.9 million and gross profit was $21.1 million. Parts sales declined 2.7%. Current assets exceeded current liabilities by approximately $9.6 million, while the company’s defined net operating working capital was negative $6.5 million. Stockholders’ deficit was $87.0 million. The defined-benefit pension plan was underfunded by $56.4 million, up from $46.4 million.
Material changes versus the prior year
- Sales and bus volumes rose modestly; gross margin improved, but operating profit and GAAP net income fell.
- SG&A increased $18.2 million, principally reflecting the June 2016 change in control: higher special compensation and $11.1 million more share-based compensation expense, largely from accelerated vesting.
- Interest expense fell to $16.4 million from $19.1 million, mainly because average borrowings were lower. The effective tax rate increased to 57.9% from 26.3%, due to discrete tax items including share-based compensation and uncertain-tax-position interest and penalties.
- In June, American Securities affiliate ASP acquired the former majority owner’s 12 million shares for $125.7 million. The transaction generated no proceeds for Blue Bird; a related $17.1 million special compensation payment was primarily funded by the former majority stockholder.
Outlook, risks and unusual items
- Management’s industry model projected Type C and D school-bus registrations to grow 2%–3% annually from FY2017 through FY2020. This is an industry estimate, not company revenue or earnings guidance. Management cited replacement demand, an aging fleet and student enrollment, but noted that purchases depend on school-district funding and property-tax receipts.
- Management said existing cash and expected operating cash flows should cover operating requirements for at least 12 months; annual capital expenditures historically were below 1% of sales.
- On December 12, 2016, after year-end, Blue Bird refinanced its debt with a $160 million term loan and a $75 million revolving facility, both maturing in 2021. The filing expected a $10.1 million loss on extinguishment from unamortized financing costs. The new facility is secured and contains leverage and other restrictive covenants.
- Key exposures include cyclical and seasonal school-bus demand, fixed-price contracts and commodity costs, reliance on single-source suppliers, variable-rate debt, product warranty/liability and recall claims, and pension funding. A Fort Valley environmental investigation may require further assessment or remediation; recorded liability was $0.6 million, with estimated undiscounted costs of $1.1 million over 11 years, subject to uncertainty.
- The company disclosed product-liability and other proceedings but did not expect pending cases to have a material adverse effect. A Colombian tax ruling was under appeal and could affect competitiveness there. The Delaware, Ohio parts-warehouse sublease was due to expire in November 2017; renewal had been requested but not confirmed as of the filing.
- Management reported that previously identified material weaknesses in financial-system access and segregation of duties were remediated by year-end, and concluded internal control over financial reporting was effective. The auditor changed from PwC to BDO in September 2016; the filing also reports the prior control deficiencies and an immaterial FY2015 EPS correction.
Important facts for investors to verify
- Review the audited statements and debt note for principal debt, refinancing terms, covenant headroom, and the expected $10.1 million extinguishment charge.
- Assess how much of the FY2016 SG&A increase was one-time change-in-control compensation and the sustainability of reported GAAP profit versus Adjusted EBITDA.
- Track school-bus orders, backlog cancellations, pricing and product mix, dealer demand, and school-district funding conditions.
- Examine pension assumptions and funding needs, environmental remediation developments, and warranty/product-liability exposure.
- Confirm warehouse lease renewal status, the outcome of the Colombian appeal, and ongoing effectiveness of remediated financial controls.