Blue Bird Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended October 3, 2015 (53 weeks), compared with the 52-week fiscal year ended September 27, 2014. The filing also reports unaudited quarterly results; FY2015 fourth quarter is included below. Blue Bird designs and manufactures school buses and sells aftermarket parts. Its business combination with School Bus Holdings closed February 24, 2015; the transaction is accounted for as a reverse acquisition, with School Bus Holdings’ historical results forming the basis of the annual comparison.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $919.1 million | $855.7 million | +7.4% |
| Gross profit / margin | $120.4 million / 13.1% | $109.4 million / 12.8% | +10.1% |
| Operating profit / margin | $35.8 million / 3.9% | $17.9 million / 2.1% | +99.9% |
| Net income | $14.9 million | $2.8 million | Increase of $12.2 million |
| Net income available to common / diluted EPS | $12.7 million / $0.59 | $2.8 million / $0.13 | |
| Adjusted EBITDA / margin | $69.8 million / 7.6% | $66.8 million / 7.8% | +4.5%; margin down 0.2 points |
| Operating cash flow | $23.4 million | $36.8 million | Down $13.5 million |
| Free cash flow | $18.3 million | $31.9 million | Down $13.6 million |
| Capital expenditures | $5.2 million | $5.5 million |
Revenue growth reflected 10,378 bus bookings versus 9,604 in FY2014 and higher parts volume. Bus-segment average selling price per unit declined 0.6%, primarily due to mix; average cost per unit declined 1.0%. Parts revenue was $57.5 million, 6.6% higher. The filing attributes improved operating profit to higher gross profit and a $6.9 million reduction in selling, general and administrative expenses, principally lower special compensation payments. Interest expense rose to $19.1 million from $6.2 million, mainly reflecting higher average borrowings. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
FY2015 fourth quarter: Revenue was $307.6 million versus $273.7 million in the prior-year quarter; gross profit was $41.2 million versus $29.1 million; operating profit was $23.5 million versus $4.6 million; and net income was $16.0 million versus a net loss of $0.9 million. Diluted EPS was $0.63 versus a loss of $0.04.
Balance sheet and liquidity: Cash was $52.9 million at year-end, down from $61.1 million. The company reported $54.9 million of additional revolver availability and no revolver borrowings. Term-loan principal was $198.3 million, including $11.75 million current; the loan carried a 6.5% stated rate at year-end and matures in 2020. Total liabilities were $389.1 million against assets of $267.9 million, resulting in a $121.2 million stockholders’ deficit. The company reported compliance with debt covenants and an actual net leverage ratio of 2.27x versus a 4.50x maximum. Management stated that cash and expected operating cash flows should cover operating requirements for at least 12 months.
Material changes and business developments
- The February 2015 business combination involved $100 million cash and 12 million shares valued at $120 million. The company also issued $50 million of Series A convertible preferred stock, carrying a 7.625% annual dividend; FY2015 preferred dividends were $2.247 million and reduced income available to common stockholders.
- Bus sales were 10,378 units; approximately 88% were sold through the 49-dealer network. Propane-powered bus sales were 1,688, up 14% year over year. Aftermarket parts represented 6.3% of company sales.
- Year-end backlog fell to 1,069 units valued at $90.1 million from 1,554 units and $129.9 million, primarily due to lower dealer backlog.
- The company amended its credit agreement in September 2015, extending the revolver maturity to June 2020 and revising certain covenant and restricted-payment terms.
- Previously identified internal-control material weaknesses were reported as remediated as of October 3, 2015. Management concluded that internal control over financial reporting was effective at year-end.
Outlook, risks, contingencies and unusual items
- Management expected continued school-bus industry recovery and forecast approximately 31,000 Type C and D registrations in 2016. This is management’s industry estimate, not company revenue or earnings guidance. Demand depends heavily on school budgets, property-tax receipts, student enrollment and fleet replacement.
- Key risks include cyclicality and seasonality, order cancellations or delays, fixed-price contracts without cost-escalation provisions, commodity-price exposure, and dependence on single-source suppliers. Competitors’ entry into propane buses may pressure Blue Bird’s share and pricing.
- The company has a $46.4 million defined-benefit pension deficit; pension assets returned a loss in FY2015, and the company expected to contribute approximately $6.1 million in FY2016. Funding needs are sensitive to investment performance and discount rates.
- Environmental investigation at the Fort Valley facility identified areas requiring further assessment and possible remediation. The recorded environmental liability was approximately $0.5 million; estimated undiscounted costs were $1.2 million over 12 years, but actual costs could exceed accruals.
- A Colombian tax agency audit concerns the treatment of certain bus imports under a free-trade agreement. The importer received an adverse ruling and appealed; a final adverse outcome could make Blue Bird buses less competitive in Colombia.
- Unrecognized tax benefits were approximately $6.4 million, with no payment expected within 12 months. A U.S. tax examination of the fiscal 2011 return was ongoing. Management did not expect pending legal matters to have a material adverse effect.
- FY2015 included $13.8 million of special compensation related to the business combination, partly funded by a $13.6 million contribution from the majority stockholder. The company also recorded $5.3 million of business-combination expenses. These items affect comparisons and Adjusted EBITDA reconciliations.
Important facts for investors to verify
- Review the debt agreement, variable-rate exposure, covenant headroom and scheduled principal payments; a 100-basis-point rate change was estimated to affect annual expense by about $2.0 million.
- Assess the lower backlog, order conversion, pricing and product mix, especially as competitors expand alternative-fuel offerings.
- Track working-capital seasonality, cash generation and the causes of lower operating and free cash flow despite higher earnings.
- Monitor pension funding, Fort Valley environmental remediation and the Colombian import audit for changes in estimated exposure.
- Evaluate potential dilution from convertible preferred stock, its accrued dividends, outstanding warrants and equity awards, as well as the controlling shareholder’s voting position.
- Reconcile quarterly results and non-GAAP Adjusted EBITDA to audited annual GAAP results; the filing notes a revision to FY2015 third-quarter diluted EPS from $0.38 to $0.42.