Blue Bird Corporation — Q1 Fiscal 2017 Form 10-Q
Business and period: Blue Bird designs and manufactures school buses and sells replacement parts. This unaudited quarter ended December 31, 2016, comprised 13 weeks; comparisons are with the 13 weeks ended January 2, 2016. The business is seasonal, with sales typically stronger in fiscal Q3 and Q4.
Financial performance and position
Amounts below are in millions of dollars, except per-share data, percentages, and units.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $136.7 | $131.3 |
| Gross profit / margin | $18.2 / 13.3% | $18.8 / 14.3% |
| Operating profit / margin | $0.006 / approximately 0% | $1.7 / 1.3% |
| Net loss | $(8.5) | $(2.3) |
| Loss per common share, basic and diluted | $(0.42) | $(0.16) |
| Adjusted EBITDA / margin (non-GAAP) | $2.6 / 1.9% | $5.3 / 4.0% |
| Cash used in operating activities | $(32.2) | $(41.6) |
| Free cash flow (non-GAAP) | $(35.0) | $(43.2) |
- Sales grew 4.1%; bus units booked increased to 1,493 from 1,408. Bus average selling price declined 2.6%, primarily due to product and customer mix. Parts sales rose 10.9%.
- Gross profit fell $0.6 million as cost of goods sold grew 5.2%, faster than sales. SG&A increased $1.1 million, primarily from product development costs, leaving operating profit nearly break-even.
- Net loss included a $10.1 million loss on extinguishment of prior debt. Excluding that item does not change the GAAP results; management reported Adjusted EBITDA of $2.6 million, down 50.8% year over year.
- Interest expense declined to $2.7 million from $4.2 million, reflecting lower average borrowings and lower rates under the replacement credit facility.
- Cash fell $39.3 million during the quarter to $13.0 million. Operating cash use was $32.2 million; capital expenditures were $3.0 million. Management attributed improved operating cash use versus prior year mainly to working-capital changes.
- Inventory increased $18.1 million from October 1, 2016, reflecting the seasonal production ramp. Net operating working capital, a company-defined non-GAAP measure, was $22.9 million versus $(6.5) million at fiscal year-end.
- At December 31, 2016, term-loan principal outstanding was $160.0 million; its carrying value, net of financing costs, was $156.7 million, including $8.0 million current. The new five-year facilities comprise a $160.0 million term loan and a $75.0 million revolver. Revolver availability was $69.7 million after $5.3 million of letters of credit; a further $5.1 million of legacy letters of credit remained outstanding.
- Total assets were $257.8 million and stockholders’ deficit was $93.1 million. Current assets were $110.1 million and current liabilities $110.4 million.
Changes, outlook, and risks
- The December 12, 2016 refinancing repaid the prior Societe Generale facility. The refinancing resulted in the $10.1 million extinguishment loss; the new agreement matures December 12, 2021, is secured by substantially all company and subsidiary assets, and includes leverage covenants and restrictions on specified activities and payments.
- Management stated that existing cash and expected operating cash flows should be sufficient for operating requirements for at least the next 12 months, based on current operations. The filing provides no specific full-year revenue or earnings guidance.
- The company was in compliance with credit-agreement covenants at quarter-end. The maximum total net leverage covenant was 4.00:1.00 through fiscal Q3 2017, stepping down thereafter. Future liquidity depends partly on cash generation, working capital, seasonality, and access to the revolver.
- Key business sensitivities described include school-district funding and property tax receipts, student enrollment, product/customer mix, dealer and fleet purchasing patterns, pricing, material and labor costs, and seasonal demand. The filing reports no material change in previously disclosed interest-rate or commodity-market risks.
- Product liability and other cases were pending; management did not expect their resolution to materially adversely affect the financial statements, considering insurance and its defense plans. The company also faces environmental regulatory obligations, but reported no material environmental proceedings. These assessments are subject to uncertainty.
- Management reported effective disclosure controls as of December 31, 2016, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bus and parts margins recover after the year-over-year decline, and whether unit growth can continue without further pricing or mix pressure.
- How the seasonal inventory build converts to sales and cash, particularly given the quarter’s substantial cash decline and negative operating cash flow.
- The new debt’s interest-rate exposure, amortization and maturity obligations, covenant headroom, and release of the remaining legacy letters of credit.
- The sustainability of the $2.6 million Adjusted EBITDA measure and the company’s reconciliation of non-GAAP measures to GAAP results.
- Potential outcomes and reserve adequacy for litigation, warranty, pension, environmental, and uncertain tax-position exposures.
- Preferred-stock terms and dividends, and potential dilution: 4.5 million shares were issuable on outstanding warrants at quarter-end; the filing excluded potentially dilutive securities from diluted EPS because their effect would have been anti-dilutive.