Blue Bird Corporation — Q1 FY2016 10-Q
Business context and reporting period
Blue Bird designs and manufactures school buses and sells replacement parts. The quarter ended January 2, 2016; comparison is with the quarter ended January 3, 2015. The current quarter had 13 weeks versus 14 weeks in the prior-year quarter, limiting direct comparability. Sales are seasonal, typically stronger in fiscal Q3 and Q4.
Key financial results
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Net sales | $131.3 million | $165.8 million |
| Gross profit / margin | $18.8 million / 14.3% | $19.5 million / 11.7% |
| Operating income / margin | $1.7 million / 1.3% | $4.0 million / 2.4% |
| Net loss | $2.3 million | $0.6 million |
| Net loss per common share | $0.16 | $0.03 |
| Adjusted EBITDA / margin | $5.2 million / 4.0% | $7.6 million / 4.6% |
| Operating cash flow | $(41.6) million | $(31.0) million |
| Capital expenditures | $1.7 million | $0.9 million |
| Cash at quarter-end | $16.6 million | $23.5 million |
Bus-segment sales fell 22.0% and parts sales fell 7.2%. Bus bookings declined to 1,408 units from 1,824. Bus average selling price per unit increased 1.0%, while average bus cost per unit declined 1.5%, primarily reflecting material-cost improvements. Gross margin improved despite lower gross profit in dollars; SG&A rose 10.5% to $17.1 million, principally from stock-based compensation and other employment costs.
Cash used in operations increased by $10.6 million year over year, driven primarily by a $22.3 million inventory increase (notably work in process) and working-capital outflows. Free cash flow, a company-defined non-GAAP measure, was negative $43.2 million versus negative $31.8 million.
Debt, liquidity and balance sheet
At January 2, 2016, the company had $16.6 million in cash and $44.9 million of additional revolver availability. It had drawn $10.0 million on its $60.0 million revolving facility; $5.1 million of letters of credit were outstanding. Term-loan principal was approximately $184.9 million; total outstanding under the term and revolving facilities was approximately $195.3 million. The term loan rate was 6.5%; weighted-average effective borrowing rate was 8.0%. The facilities mature in 2020, with a substantial scheduled principal maturity of $161.3 million in 2020. The debt is secured by substantially all company and guarantor assets.
Management reported compliance with credit covenants and said cash balances and expected operating cash flows should fund operating requirements for at least the next 12 months. Covenants include maximum total net leverage ratios that tighten over time; failure to comply could trigger default. Current liabilities were $112.0 million and current assets were $113.5 million. Stockholders’ deficit was $121.5 million.
Outlook, risks and unusual items
- No specific revenue, earnings or other numerical guidance was provided. Management cautioned that interim results may not indicate full-year performance and noted seasonality and dependence on school-district funding, enrollment, product mix, pricing, dealer performance and fleet purchasing patterns.
- Series A preferred shares carry a 7.625% annual dividend; the quarter included a $1.0 million preferred dividend deducted in calculating loss available to common shareholders. Preferred stock has a $50 million liquidation preference and is convertible into common shares under specified terms.
- A Colombian tax agency audit concerns the import treatment of certain buses sold through a dealer. The importer’s challenge to an adverse ruling was denied; any final adverse outcome could make Blue Bird buses less competitive in Colombia. Management reported no other pending litigation or environmental matters expected to materially affect results.
- Other stated risks include competition, economic and regulatory changes, business-combination integration and execution, uncertain tax positions, and estimates for warranty, pension, inventory and other reserves. The company disclosed $6.4 million of gross unrecognized tax benefits that would affect its effective tax rate if realized.
- Management reported disclosure controls were effective as of quarter-end and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the decline in bus bookings and sales reflects the shorter quarter and seasonal timing or a sustained change in demand.
- Inventory conversion, working-capital cash use and the company’s ability to rebuild cash during peak selling quarters.
- Debt-service capacity, covenant headroom, revolver availability and the large 2020 maturity.
- Whether gross-margin improvement can persist while sales volume is lower and SG&A remains elevated.
- Developments in the Colombian audit, preferred dividends and any material changes in tax or warranty exposures.