Blue Bird Corporation — Q2 FY2019 Form 10-Q
Reporting period: The fiscal second quarter and six months ended March 30, 2019; comparable periods ended March 31, 2018. Amounts are in U.S. dollars. Blue Bird manufactures and sells school buses and replacement parts, primarily through a dealer network.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $211.6 million | $216.6 million | $366.6 million | $379.2 million |
| Gross profit | $26.0 million | $21.7 million | $45.1 million | $42.3 million |
| Gross margin | 12.3% | 10.0% | 12.3% | 11.2% |
| Operating income (loss) | $3.0 million | $3.4 million | $4.9 million | $(1.4) million |
| Net income (loss) | $(0.7) million | $1.8 million | $(1.9) million | $(6.0) million |
| Adjusted EBITDA and margin | $12.2 million; 5.8% | $10.0 million; 4.6% | $19.4 million; 5.3% | $17.1 million; 4.5% |
Q2 basic and diluted loss per share was $0.03; six-month loss per share was $0.07. Interest expense rose to $4.0 million in Q2 and $6.9 million for six months, principally reflecting higher borrowing and rates, plus changes in the interest-rate collar’s fair value.
For the six months, operating cash flow was negative $26.8 million, investing cash flow negative $22.7 million, and free cash flow negative $49.5 million. Cash declined from $60.3 million at fiscal year-end to $25.6 million. Capital spending was $22.7 million, including increased investment in manufacturing assets, primarily a new paint facility.
At March 30, cash was $25.6 million and revolving-credit availability was $73.1 million. The company had $20.0 million drawn on its revolver and $6.9 million of letters of credit. Term-loan principal outstanding was $191.2 million; total principal debt including the revolver was approximately $211.2 million. Reported debt carrying values differ due to deferred financing costs. Current assets were $171.4 million versus current liabilities of $174.1 million. Stockholders’ deficit was $77.6 million.
Changes and management commentary
- Q2 sales fell 2.3%; bus sales declined 3.3% while parts sales rose 11.6%. Six-month sales fell 3.3%; bus sales declined 4.5% while parts sales rose 10.2%.
- Bus bookings were 2,271 in Q2 versus 2,441 a year earlier, and 3,871 for six months versus 4,146. Management cited supplier delays as a constraint on bus volumes; higher average selling prices partly offset the decline.
- Gross margin improved as cost of goods sold declined as a share of sales. Q2 operating income nevertheless decreased, with higher SG&A costs for operational transformation and product redesign initiatives partly offsetting gross-profit improvement. Six-month operating results improved from a loss to income.
- Management described the business as seasonal, with sales typically highest in the third and fourth fiscal quarters. It expects cash balances and operating cash flows to meet operating requirements for at least the next 12 months, based on current operations; the filing provides no quantified earnings or sales guidance.
Debt, liquidity, risks and unusual items
- A $50 million incremental term loan funded in October 2018; substantially all proceeds funded a tender offer. The company repurchased common and preferred shares for approximately $50.4 million, including fees. All remaining preferred stock was converted into 799,615 common shares.
- The amended credit facilities mature September 13, 2023. The company reported compliance with all credit-agreement covenants at March 30, 2019. Its variable-rate debt exposes it to interest-rate risk; a $150 million notional four-year collar sets a 1.5% LIBOR floor and 3.3% ceiling.
- Risks highlighted include supplier delays, seasonal and variable school-district demand, pricing and product mix, input and labor costs, interest rates, and reliance on dealers and major fleet customers. The company also notes risks associated with estimates for inventory, warranty, pensions, taxes and contingencies.
- Product liability and other cases were pending; management did not expect their resolution to materially adversely affect the financial statements. Management also considered environmental matters not materially adverse and viewed the likelihood of payment under $4.0 million of dealer guarantees as remote.
- New accounting standards adopted in FY2019 included revenue recognition and lease accounting. Revenue-standard adoption created a $0.7 million reduction to opening retained earnings; lease adoption added right-of-use assets and lease liabilities. Neither adoption was described as materially affecting current-period results or cash flows.
Investor verification priorities
- Track whether supplier delays ease and bus bookings and deliveries recover, especially during the seasonally stronger second half.
- Assess whether gross-margin gains can offset transformation and redesign spending, and distinguish GAAP losses from management’s non-GAAP Adjusted EBITDA.
- Monitor operating cash generation, inventory buildup, capital spending and liquidity; six-month free cash flow was negative $49.5 million.
- Review debt repayment, interest expense, leverage and covenant headroom; verify the impact of variable rates and the interest-rate collar.
- Check subsequent disclosures for material developments in litigation, dealer guarantees, warranty obligations and other contingencies.