Blue Bird Corporation — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended July 2, 2016; the comparable nine-month period in 2015 was one week longer. Blue Bird designs and manufactures school buses and sells replacement parts. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $323.1 | $262.7 | $645.6 | $611.5 |
| Gross profit (margin) | $46.8 (14.5%) | $36.7 (14.0%) | $90.7 (14.0%) | $79.2 (12.9%) |
| Operating profit (margin) | $1.3 (0.4%) | $19.3 (7.3%) | $9.3 (1.4%) | $12.4 (2.0%) |
| Net income (loss) | $(2.9) | $10.7 | $(3.9) | $(1.0) |
| Adjusted EBITDA (margin) | $32.5 (10.1%) | $23.4 (8.9%) | $47.8 (7.4%) | $40.9 (6.7%) |
| Basic EPS | $(0.18) | $0.47 | $(0.32) | $(0.12) |
Q3 sales rose 23.0%, supported by 3,768 bus units booked versus 2,993 a year earlier. Nine-month sales increased 5.6%, with 7,308 units booked versus 6,910. Bus-segment growth drove results; parts sales declined in both comparisons. Adjusted EBITDA is a non-GAAP measure and includes substantial specified add-backs.
Cash, debt and liquidity
- Cash was $42.7 at July 2, 2016, down from $52.9 at fiscal 2015 year-end. Nine-month operating cash flow was $21.3, compared with cash used of $31.6 in the prior-year period. Capital expenditures were $6.5; management-defined free cash flow was $14.8 versus $(35.1).
- Cash flow improvement reflected working-capital movements, including higher accounts payable, non-cash share compensation and a $2.3 Micro Bird dividend; it should not be read as solely earnings-driven.
- Term-loan principal outstanding was $164.4 (carrying amount, net of discount, was $154.3). The company prepaid $25.0 of principal in June. The term loan’s stated rate was 6.5%; its weighted-average effective rate, including discount and deferred-cost amortization, was 8.3%.
- No revolver borrowings were outstanding; $54.9 remained available after $5.1 of letters of credit. The company reported compliance with credit covenants. Management stated cash and expected operating cash flows should cover requirements for at least the next 12 months.
- Inventory increased to $101.4 from $49.2 at fiscal year-end, which management attributed primarily to seasonal production ramp-up. Net operating working capital was $(8.3), versus $(16.4) at year-end.
Material changes, outlook and risks
- Operating profit fell sharply in Q3 despite higher sales and gross profit: SG&A increased $28.1 to $45.5, principally due to the June change in control of the former majority stockholder, phantom compensation, share-based compensation and transaction-related costs. The $17.1 special compensation charge was primarily funded by the former majority stockholder; $1.4 remained payable and was expected to be funded by that stockholder.
- Traxis sold its 12 million Blue Bird shares to ASP for aggregate proceeds of $125.7; Blue Bird received no proceeds. The change in control triggered vesting of outstanding share-based awards and a preferred-stock fundamental-change conversion window; preferred holders did not convert during that period.
- No specific financial guidance was provided. Management noted school-bus sales are seasonal, generally strongest in the third and fourth fiscal quarters, and depend on school funding, enrollment, product mix, pricing and fleet purchasing patterns.
- Key risks include seasonal and working-capital demands, material and labor costs, customer and dealer demand, variable-rate debt, and covenant requirements that tighten over time. The company also disclosed pending product-liability and other litigation, but management did not expect the matters to have a material adverse effect. Environmental compliance could entail future costs.
- Disclosure controls were deemed ineffective because of material weaknesses in restricting access to financial systems and records, segregation of duties, and oversight of certain personnel. The weaknesses were also present at fiscal 2015 year-end; no material control changes occurred during the quarter.
- Tax expense was affected by discrete items, including uncertain-tax-position interest and penalties and share-based award tax effects. The company reported $6.4 of gross unrecognized tax benefits that would affect its effective tax rate if realized.
Most important facts for investors to verify
- Whether bus demand, production ramp-up and inventory conversion support sales and cash generation after the seasonal peak.
- How much of adjusted EBITDA reflects recurring operations versus compensation, share-based compensation and other add-backs.
- Debt repayment capacity, covenant headroom and the effect of variable interest rates; the filing does not state a clear current covenant ratio.
- Progress in remediating the disclosed material weaknesses in internal controls.
- Cash and future funding obligations associated with the $50.0 liquidation preference Series A preferred stock and its 7.625% annual dividend.
- Whether tax uncertainties, litigation, warranty claims or foreign-exchange exposures result in material costs beyond recorded amounts.