Blue Bird Corporation — Q2 fiscal 2017 Form 10-Q
Reporting period: Quarter and six months ended April 1, 2017; both comparable periods contained 13 and 26 weeks, respectively. Dollar amounts below are in millions unless stated otherwise.
Business context
Blue Bird designs and manufactures school buses and sells replacement parts through dealer and other customer channels. It reports Bus and Parts segments. Sales are seasonal, typically stronger in the third and fourth fiscal quarters as customers prepare for the school year.
Financial results and liquidity
| Metric | Three months ended Apr. 1, 2017 | Three months ended Apr. 2, 2016 | Six months ended Apr. 1, 2017 | Six months ended Apr. 2, 2016 |
|---|---|---|---|---|
| Net sales | $208.7 | $191.2 | $345.3 | $322.5 |
| Gross profit / margin | $24.6 / 11.8% | $25.1 / 13.1% | $42.8 / 12.4% | $43.9 / 13.6% |
| Operating profit | $5.4 | $6.4 | $5.4 | $8.0 |
| Net income (loss) | $2.7 | $1.4 | $(5.8) | $(0.9) |
| Diluted EPS | $0.07 | $0.02 | $(0.34) | $(0.14) |
| Adjusted EBITDA / margin | $8.1 / 3.9% | $10.1 / 5.3% | $10.7 / 3.1% | $15.4 / 4.8% |
Quarterly sales rose 9.1%, with bus units booked increasing to 2,367 from 2,132; six-month sales rose 7.1%, with units booked at 3,860 versus 3,540. Bus average selling prices declined 1.3% for the quarter and 1.8% for the six months, primarily due to product and customer mix. Higher costs relative to sales compressed gross margins. SG&A increased $0.5 million for the quarter and $1.6 million for the six months, with the six-month increase attributed primarily to product development and growth initiatives.
- Cash flow: Six-month operating cash use was $9.3 million, versus $13.4 million a year earlier. Capital expenditures were $5.2 million; defined free cash flow was negative $14.3 million, compared with negative $17.3 million.
- Cash and working capital: Cash was $38.4 million at April 1, down from $52.3 million at October 1, 2016. Inventory increased $56.6 million to $110.4 million and accounts payable rose $28.8 million, reflecting seasonal production ramp-up.
- Debt and availability: Term-loan principal was $158.0 million; the balance-sheet amount was $154.9 million net of financing costs, including $8.0 million current. No revolver borrowings were outstanding; $69.9 million remained available after $5.1 million of letters of credit. The company reported compliance with its credit agreement covenants.
- Interest: Six-month interest expense fell to $4.4 million from $8.7 million, primarily due to lower average borrowings and lower rates under the December 2016 credit facility.
Material changes, outlook and risks
- The company recorded a $10.1 million loss on extinguishment of its former debt in the six-month period, principally from writing off unamortized financing costs. This contributed to the six-month net loss despite higher sales.
- The new five-year credit agreement provides a $160 million term loan and a $75 million revolving facility, both maturing in December 2021. Debt is secured by substantially all company and subsidiary assets and is subject to leverage covenants and other restrictions.
- Management said available cash and expected operating cash flows should meet operating requirements for at least the next 12 months. No specific revenue, earnings, or margin guidance was provided.
- Management cited demand drivers and uncertainties including school funding, enrollment, product mix, pricing, dealer performance, major-fleet purchasing patterns, seasonality, materials and labor costs, and supply or logistics disruptions. Actual results may differ from forward-looking statements.
- Product-liability and other litigation was pending; management did not expect the matters, considering insurance coverage and its defense, to have a material adverse effect. The company also faces environmental compliance risks, but reported no material environmental proceedings. It hedges anticipated Canadian-dollar cash flows; five swaps had $13.9 million aggregate notional value.
- Preferred stock carries a $50 million liquidation preference and dividends; warrants outstanding could purchase 3.8 million common shares. These securities may affect future cash requirements and common-stock dilution.
Important facts for investors to verify
- Whether bus volume growth can continue without further price or product-mix pressure on gross margins and adjusted EBITDA.
- How seasonal inventory buildup converts into sales and cash, and whether operating cash flow improves through the balance of the fiscal year.
- Debt covenant headroom, scheduled principal payments, variable-rate exposure, and the availability of the revolver under the credit agreement.
- The effect of the debt-refinancing charge, preferred dividends, warrant exercises, and potential dilution on common-stock earnings and cash needs.
- Developments in litigation, warranty claims, uncertain tax positions, and environmental obligations.