Blue Bird Corporation — Q1 FY2018 10-Q
Reporting period: 13 weeks ended December 30, 2017; comparisons are with the 13 weeks ended December 31, 2016. Blue Bird designs and manufactures school buses and sells replacement parts. Results are unaudited.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $162.5 million | $136.7 million |
| Gross profit | $20.6 million; 12.7% margin | $18.2 million; 13.3% margin |
| Operating income (loss) | $(5.3) million | $0.0 million (reported as $6,000 profit) |
| Net loss | $(7.8) million | $(8.5) million |
| Basic and diluted loss per share | $(0.36) | $(0.42) |
| Adjusted EBITDA, a non-GAAP measure | $5.3 million; 3.3% margin | $2.6 million; 1.9% margin |
| Cash used in operating activities | $(33.8) million | $(32.2) million |
| Free cash flow, a non-GAAP measure | $(37.3) million | $(35.2) million |
Performance drivers and changes
- Sales increased 18.9%. Bus sales grew 21.0% to $148.1 million, with units booked rising to 1,705 from 1,493 and average net selling price per unit up 5.9%, mainly from product and customer mix. Parts sales increased 1.4% to $14.5 million.
- Gross profit rose $2.5 million, but cost of goods sold grew faster than sales, reducing gross margin by about 0.6 percentage points. Bus cost per unit increased 6.4%, also attributed to mix.
- SG&A rose $7.7 million to $25.9 million, principally due to operational transformation initiatives and product redesign costs. These expenses drove the swing to an operating loss despite higher sales and gross profit.
- Adjusted EBITDA improved by $2.7 million. Its calculation added back $7.0 million of operational-transformation costs, $0.7 million of product-redesign costs, and $0.6 million of share-based compensation; it is not a GAAP measure.
- Net loss narrowed year over year, but the prior-year quarter included a $10.1 million debt-extinguishment loss. Interest expense also fell to $1.5 million from $2.7 million.
Cash, debt and liquidity
- Cash declined from $62.6 million at September 30, 2017 to $23.2 million at December 30, 2017. Operating cash use was $33.8 million and capital expenditures were $3.4 million; working-capital outflows included reductions in accounts payable and accrued liabilities.
- Management identifies first-quarter working capital as typically a significant cash use and says the business is seasonal, with sales generally strongest in the third and fourth fiscal quarters. The company also typically conducts planned shutdowns in the first quarter.
- Term-loan principal outstanding was $152.0 million; reported debt carrying value was $149.4 million, including deferred financing costs. The term loan is variable-rate, with a stated rate of 3.1% at quarter-end. The balance sheet reports $8.0 million as current debt and $141.4 million as long-term debt.
- No revolving-credit borrowings were outstanding; after $7.7 million of letters of credit, $67.3 million remained available. The company reported compliance with all credit-agreement covenants.
- Current assets were $113.8 million and current liabilities $102.6 million. Stockholders’ deficit was $65.3 million; preferred stock had a $40.0 million liquidation preference.
- Management said existing cash and expected operating cash flows should cover operating requirements for at least the next 12 months, subject to business and economic conditions.
Outlook, risks and unusual items
- No specific revenue, earnings or unit-sales guidance is provided. Management estimates a 25%–30% effective tax rate for FY2018 excluding one-time tax-reform effects.
- The Tax Cuts and Jobs Act prompted a $2.4 million quarter tax expense, including deferred-tax remeasurement, $1.1 million related to uncertain tax positions and interest, and a $0.5 million valuation allowance on foreign tax-credit carryforwards. The reported effective tax rate was negative 20.7%; management estimated approximately 17% excluding the tax-reform adjustments. Estimates may change as IRS guidance and further analysis become available.
- Management cites demand factors including school-district funding and property-tax revenue, enrollment, product mix, pricing, dealer and fleet purchasing patterns, and seasonality. Costs are exposed to materials, labor, productivity, supply and logistics factors.
- Product-liability and other cases are pending; management does not expect their resolution, considering insurance and its defense, to materially adversely affect the financial statements. Environmental compliance could entail future liabilities or costs, although the company reported no material environmental proceedings.
- The company repurchased 141,577 common shares for approximately $3.0 million during the quarter under its repurchase program. The filing also notes outstanding warrants to purchase 2.1 million common shares.
Most important facts for investors to verify
- Whether higher bus volumes and selling prices persist and improve gross margin, given cost per unit rose faster than price per unit.
- How much transformation and product-redesign spending continues, and whether the expected operational benefits materialize.
- Cash use and working-capital trends through the seasonal first half, including the company’s ability to maintain liquidity and meet debt obligations.
- Final tax-reform effects, including the transition-tax estimate and any changes following IRS guidance.
- Debt-covenant headroom, variable-rate exposure, and the implications of the $40.0 million preferred-stock liquidation preference and outstanding warrants.