Blue Bird Corporation — Q2 FY2016 Form 10-Q
Reporting period: Fiscal quarter and six months ended April 2, 2016. Quarterly comparisons are against the 13 weeks ended April 4, 2015; the six-month prior period contained 27 weeks versus 26 weeks in 2016. Blue Bird designs and manufactures school buses and sells replacement parts, primarily through dealer networks.
Financial results
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $191.2m | $183.0m | $322.5m | $348.9m |
| Gross profit | $25.1m | $23.0m | $43.9m | $42.5m |
| Operating income (loss) | $6.4m | $(10.9)m | $8.0m | $(6.9)m |
| Net income (loss) | $1.4m | $(11.1)m | $(0.9)m | $(11.7)m |
| Adjusted EBITDA | $10.1m | $9.9m | $15.4m | $17.5m |
| Adjusted EBITDA margin | 5.3% | 5.4% | 4.8% | 5.0% |
Gross margin was approximately 13.1% in Q2 versus 12.6% a year earlier, and 13.6% for the six months versus 12.2%. Q2 basic and diluted EPS from continuing operations was $0.02; six-month EPS was a loss of $0.14 per share. Q2 net income available to common shareholders was $0.4m after a $1.0m preferred dividend.
For the six months, operating cash flow was negative $13.4m and capital expenditures were $3.9m, resulting in company-defined free cash flow of negative $17.3m. Cash declined $24.2m to $28.6m. Working capital was affected by seasonal inventory buildup: inventory rose $43.7m from October 3, 2015, to $92.9m.
At April 2, 2016, total assets were $279.4m and current liabilities were $150.9m, compared with current assets of $140.7m. Term debt had a carrying amount of $182.7m; principal outstanding was approximately $192.4m. The term-loan rate was 6.5%, with an 8.0% weighted-average effective rate. No revolver borrowings were outstanding; $54.9m of additional borrowing capacity was available, and $5.1m of letters of credit were outstanding.
Changes versus comparable periods
- Q2 sales increased 4.5%, with bus bookings rising to 2,132 from 2,093 and bus average selling price per unit up 2.6%, primarily due to product and customer mix. Parts sales also increased.
- Six-month sales decreased 7.5%; bookings fell to 3,540 from 3,917. Higher average bus selling prices and improved gross margin partly offset lower volume.
- Q2 operating results improved substantially, chiefly because SG&A was $15.2m lower. The prior-year quarter included a $13.8m special compensation payment, along with non-recurring public-company and business-combination costs. Adjusted EBITDA increased only 1.5% in Q2.
- Six-month adjusted EBITDA declined 12.2%, and its margin declined from 5.0% to 4.8%, despite higher gross profit; management attributed the decrease mainly to higher adjusted SG&A.
- Net cash used in operations improved from $41.4m to $13.4m, largely because the prior-year period included special compensation and business-combination cash costs. Cash use remained significant in the current period.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said existing cash and expected operating cash flows should meet operating requirements for at least the next 12 months, based on current operations.
- Management identifies school-district funding, student enrollment, product and customer mix, pricing, dealer and fleet purchasing patterns, supplier/material costs, and seasonality as important business drivers. Sales typically peak in the third and fourth fiscal quarters.
- The company reported compliance with credit-agreement covenants at April 2, 2016. The maximum total net leverage covenant was 4.50:1 through July 2, 2016; the filing does not state the company’s actual covenant ratio. Debt is secured by substantially all assets, and the term loan has substantial principal due in 2020.
- The six-month effective tax rate was an unusual negative 224.7%, reflecting discrete tax items and tax expense despite a pretax loss. Gross unrecognized tax benefits were $6.4m; accrued interest and penalties were $1.7m.
- The company entered a $10.8m Canadian-dollar foreign-exchange swap maturing January 31, 2017. Its fair value was a $0.3m liability, with the loss recorded in other comprehensive income.
- The company disclosed an immaterial EPS calculation error and revised prior-period 2015 EPS to deduct cumulative preferred dividends. Q2 FY2016 discontinued-operations loss was $0.015m, primarily related to legal expenses from the former coach business.
- Product-liability and other legal matters are pending; management does not expect their resolution to materially affect results. The filing also cites environmental-compliance, competition, economic, and regulatory risks. Management reported disclosure controls were effective.
Key facts for investors to verify
- Whether the seasonal inventory increase converts into sales and cash, and whether operating cash flow and liquidity improve in the next quarters.
- Bus bookings, realized pricing and mix, gross-margin trends, and the sustainability of adjusted EBITDA after excluding prior-year unusual costs.
- Debt principal, interest burden, revolving availability, covenant headroom, and the large 2020 maturity.
- The cash and share form and ongoing accrual of the 7.625% Series A preferred dividend, and its effect on common-stockholder earnings and dilution.
- Tax exposures, including uncertain tax positions and the factors behind the unusually high tax expense relative to pretax results.