Blue Bird Corporation — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: 13 weeks ended June 29, 2019; year-to-date period covers 39 weeks. Comparisons are with the periods ended June 30, 2018. Blue Bird designs and manufactures school buses and sells replacement parts, principally through dealers.
Key financial results
Amounts in $ millions except per-share data; figures may not sum due to rounding.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $308.8 | $314.2 | $675.3 | $693.4 |
| Gross profit / margin | $41.8 / 13.5% | $37.0 / 11.8% | $86.8 / 12.9% | $79.3 / 11.4% |
| Operating profit / margin | $20.8 / 6.7% | $16.5 / 5.2% | $25.6 / 3.8% | $15.1 / 2.2% |
| Net income | $14.6 | $21.9 | $12.7 | $15.9 |
| Diluted EPS | $0.55 | $0.77 | $0.47 | $0.55 |
| Adjusted EBITDA / margin | $29.0 / 9.4% | $24.2 / 7.7% | $48.5 / 7.2% | $41.3 / 6.0% |
Q3 sales decreased 1.7%, while gross profit rose $4.8 million and operating profit rose $4.3 million. Q3 net income fell year over year largely in a comparison affected by a $7.5 million tax benefit in Q3 2018; FY2019 Q3 recorded $3.2 million tax expense. The 2018 benefit included releases of uncertain tax positions and prior-year return adjustments. Adjusted EBITDA is a non-GAAP measure.
Business and material changes
- Q3 bus sales declined 1.8%; units booked fell to 3,420 from 3,746, while average net selling price per unit increased 7.5%, primarily reflecting pricing actions. Parts sales increased 0.5%.
- For the nine months, bus sales declined 3.3% and units booked fell to 7,291 from 7,892; management cited supplier delays. Average net selling price per unit increased 4.7%. Parts sales rose 6.7%.
- Alternative-fuel bus revenue increased to $141.9 million from $96.2 million in Q3, while diesel bus revenue decreased to $135.2 million from $191.4 million. Alternative fuel includes gasoline, propane, CNG and electric buses.
- Cost of goods sold as a share of sales improved to 86.5% from 88.2% in Q3 and to 87.1% from 88.6% year to date. Management attributed the Q3 per-unit bus cost increase partly to product/customer mix and tariff-related commodity costs.
Cash flow, debt and liquidity
- Cash was $29.1 million at June 29, 2019, down from $60.3 million at fiscal year-end. Current assets were $222.0 million and current liabilities $207.1 million.
- Nine-month operating cash flow was negative $19.1 million, versus positive $7.0 million a year earlier. Inventory increased $83.4 million on the balance sheet; management cited working-capital effects, including inventory, as a major driver of cash use.
- Cash used for fixed and acquired intangible assets was $30.2 million, primarily for manufacturing assets including a new paint facility. Defined free cash flow was negative $49.3 million, compared with negative $8.6 million.
- At quarter-end, $25.0 million was drawn on the $100 million revolving facility; $6.9 million of letters of credit left $68.1 million available. Term-loan principal outstanding was $188.7 million; total debt principal, including the revolver, was approximately $213.7 million. The term loans’ stated rate was 4.4%, and weighted-average effective rate was 5.0%.
- Debt maturities include a large $176.6 million principal payment in fiscal 2023. The company reported compliance with credit agreement covenants at quarter-end. Management said cash, available borrowings and expected operating cash flow should meet operating requirements for at least 12 months, subject to business and economic conditions.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or full-year numerical guidance. Management emphasizes seasonality: Q3 and Q4 are typically the busiest quarters, while working capital often uses cash in Q1 and generates cash in Q4.
- Key operating sensitivities include school-district funding and enrollment, order timing, dealer and fleet purchasing, product mix and pricing, supplier delays, material and tariff costs, and seasonal demand. Supplier delays affected year-to-date bus volumes.
- Variable-rate debt exposes the company to interest-rate changes. A four-year, $150 million interest-rate collar sets a 1.5% LIBOR floor and 3.3% ceiling through September 2022; it does not qualify for hedge accounting, and fair-value changes affect interest expense.
- The company borrowed $50 million under an incremental term loan and used substantially all proceeds, together with other funds, for a tender offer. The tender offer repurchased 1,782,568 common shares and 364 preferred shares for $50.4 million including fees. All remaining preferred shares had been converted into common stock in November 2018.
- Pending product-liability and other litigation, environmental regulation, dealer guarantees of $3.0 million, and warranty obligations are disclosed. Management did not expect these matters to have a material adverse effect; guarantee performance was considered remote. Such assessments are subject to uncertainty.
- Management reported effective disclosure controls as of June 29, 2019, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether supplier constraints, booked units and delivery timing improve, and whether higher pricing can be sustained against input-cost and tariff pressures.
- How the substantial inventory build converts to sales and cash, particularly as the seasonal peak and fiscal year-end approach.
- Debt repayment capacity and covenant headroom, including the fiscal 2023 maturity concentration and sensitivity to variable interest rates.
- The sustainability of reported margin and Adjusted EBITDA gains, including the effect of adjustments for transformation and product-redesign initiatives.
- The effect of tax items and the 2018 comparison-period tax benefits on interpreting earnings trends.
- Developments in warranties, litigation, environmental matters and dealer guarantees; the filing does not quantify a clear potential maximum exposure for all contingencies.