Blue Bird Corporation — Q3 FY2017 Form 10-Q
Reporting period: Third quarter ended July 1, 2017 (13 weeks); year-to-date covers nine months. Comparatives are the periods ended July 2, 2016. Amounts are in U.S. dollars unless stated otherwise.
Business context
Blue Bird designs and manufactures school buses and sells replacement parts. Its reportable segments are Bus and Parts. Sales are seasonal, typically strongest in the third and fourth fiscal quarters as customers prepare for the school year.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $332.6 million | $323.1 million | $677.9 million | $645.6 million |
| Gross profit | $45.0 million | $46.8 million | $87.9 million | $90.7 million |
| Gross margin | 13.5% | 14.5% | 13.0% | 14.0% |
| Operating profit | $28.7 million | $1.3 million | $34.1 million | $9.3 million |
| Net income (loss) | $20.0 million | $(2.9) million | $14.3 million | $(3.9) million |
| Adjusted EBITDA (non-GAAP) | $32.2 million | $32.5 million | $42.9 million | $47.9 million |
| Adjusted EBITDA margin | 9.7% | 10.1% | 6.3% | 7.4% |
- Q3 sales rose 3.0%, reflecting 3,849 units booked versus 3,768; YTD sales rose 5.0%, with 7,709 units versus 7,308.
- Q3 gross profit declined $1.8 million as cost of goods sold grew faster than sales. YTD gross profit fell $2.8 million; management cited higher bus costs per unit and higher total costs.
- Q3 operating profit improved sharply because SG&A fell $29.2 million. The prior-year quarter included $17.1 million in non-recurring special compensation and $9.8 million more share-based compensation, primarily from accelerated vesting. YTD SG&A was down $27.5 million for similar comparative-period reasons.
- Interest expense declined to $1.4 million in Q3 and $5.8 million YTD, primarily reflecting lower average borrowings and lower rates under the December 2016 refinancing. YTD results also included a $10.1 million loss on extinguishment of prior debt.
- Bus segment Q3 sales were $317.3 million and gross profit $39.8 million; Parts sales were $15.3 million and gross profit $5.2 million. Parts sales increased 12.1% in Q3 and 9.0% YTD, helped by expanded offerings and new incentive and shipping programs.
Cash flow, liquidity and debt
- Cash and cash equivalents were $50.3 million at July 1, 2017, compared with $52.3 million at October 1, 2016. Current assets were $223.2 million and current liabilities $190.4 million.
- For the nine months, operating cash flow was $6.0 million from continuing operations ($5.8 million including discontinued operations); investing cash use was $7.1 million; and financing cash use was $0.6 million. Capital expenditures were $7.2 million. Defined free cash flow was negative $1.2 million, versus positive $14.8 million in the prior-year period.
- Management attributed weaker operating cash flow and free cash flow primarily to working-capital growth, especially inventory. Inventory rose $72.8 million from year-end, while accounts payable increased $54.8 million, reflecting seasonal summer production.
- Term-loan principal outstanding was $156.0 million; carrying value, net of financing costs, was $153.0 million. The balance sheet reported $8.0 million current and $145.0 million long-term debt. The stated term-loan rate was 2.8%; weighted-average effective rate was 4.8%.
- No revolving-credit borrowings were outstanding; $5.1 million of letters of credit left $69.9 million available under the $75 million revolver. Cash plus available revolver capacity was approximately $120.2 million.
- The five-year credit agreement matures December 2021, is secured by substantially all company and subsidiary assets, and includes leverage and other covenants. The company reported covenant compliance at July 1, 2017.
Outlook, risks and unusual items
- No specific revenue, earnings, or other numerical guidance is provided. Management stated that, based on current operations, cash balances and expected operating cash flows should meet operating requirements for at least the next 12 months.
- Key business drivers and risks include school-district funding and enrollment, product and customer mix, dealer and fleet purchasing patterns, seasonality, pricing, materials and labor costs, supplier and logistics issues, and regulatory requirements.
- The company had product-liability and other litigation pending; management did not expect the matters, considering insurance and its defense plans, to materially adversely affect the financial statements. Environmental compliance may entail future liabilities or costs, though no material environmental proceedings were reported.
- Seven Canadian-dollar foreign-exchange swaps had $15.6 million aggregate notional value; management uses them to hedge anticipated cash flows. Interest-rate and commodity-risk disclosures were said to have no material changes from the 2016 Form 10-K.
- Management reported effective disclosure controls as of July 1, 2017, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the improvement in reported operating profit is sustainable after adjusting for the unusually high prior-year compensation and share-based compensation expenses.
- Whether gross-margin pressure and the decline in YTD Adjusted EBITDA continue as bus costs rise faster than sales.
- How seasonal inventory and working-capital needs affect operating cash flow, free cash flow, and cash balances in subsequent quarters.
- Term-loan amortization, leverage-covenant headroom, variable interest costs, and continued access to the undrawn revolver.
- Potential dilution from outstanding warrants, options, and convertible preferred stock, and the company’s obligations for preferred dividends.