Blue Bird Corporation — Q2 FY2020 Form 10-Q
Reporting period: The quarter ended April 4, 2020 (13 weeks); six-month results cover 27 weeks. Comparatives are the quarter and six months ended March 30, 2019, with the prior six-month period comprising 26 weeks. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless noted.
Business context and financial performance
Blue Bird designs and manufactures school buses and sells replacement parts, principally through dealers. Its Bus and Parts segments serve school districts, fleet operators, government customers, and other buyers.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $255.4 | $211.6 | $408.6 | $366.6 |
| Gross profit / margin | $24.2 / 9.5% | $26.0 / 12.3% | $45.5 / 11.1% | $45.1 / 12.3% |
| Operating profit / margin | $4.3 / 1.7% | $3.0 / 1.4% | $5.1 / 1.3% | $4.9 / 1.3% |
| Net loss | $(0.6) | $(0.7) | $(1.0) | $(1.9) |
| Adjusted EBITDA / margin | $12.7 / 5.0% | $12.2 / 5.8% | $20.7 / 5.1% | $19.4 / 5.3% |
Q2 sales rose 20.7%, primarily on higher bus unit bookings and prices. Bus bookings were 2,594 versus 2,271; reported average unit price increased 7.1%. Alternative-fuel bus revenue grew to $113.1 million from $75.3 million, while diesel bus revenue was $113.6 million versus $110.5 million. Q2 cost of goods sold rose faster than sales, and cost per bus unit increased 10.5% amid higher manufacturing costs. SG&A declined $3.1 million, helping lift operating profit despite lower gross profit. Higher interest expense and a loss from the unconsolidated affiliate contributed to the continuing net loss.
For the six months, sales increased 11.5%; bus bookings were 4,054 versus 3,871, and average net sales price per unit rose 6.7%. Cost of goods sold as a share of sales increased to 88.9% from 87.7%. Adjusted EBITDA increased, but its margin declined. Adjusted EBITDA is a company-defined non-GAAP measure and includes add-backs for transformation and product-redesign initiatives, among other items.
Cash flow, liquidity and debt
- Cash was $34.1 million at April 4, 2020, down from $71.0 million at September 28, 2019. Current assets were $198.4 million and current liabilities $173.5 million.
- Six-month operating cash use was $48.2 million versus $26.8 million in the prior comparable period. Inventory increased $65.1 million, a substantial working-capital use. Capital expenditures were $14.3 million; reported free cash flow was negative $62.5 million versus negative $49.5 million.
- Financing provided $25.4 million, including $30.0 million of revolver borrowings. At quarter-end, $30.0 million was drawn on the revolving facility, $6.9 million of letters of credit was outstanding, and $63.1 million remained available under the facility then in place.
- Term-loan principal outstanding was $181.3 million; total remaining debt principal, including the revolver, was approximately $211.3 million. The stated term-loan rate was 3.2%; its weighted-average effective rate was 4.5%. The company reported compliance with credit covenants at quarter-end.
- On May 7, after quarter-end, the company amended its credit agreement to add $41.9 million of revolving commitments, bringing total commitments to $141.9 million, with maturity September 13, 2023. The LIBOR floor changed from 0% to 0.75%; approximately $0.9 million of fees were incurred. The filing does not state the post-amendment amount then available to draw.
Outlook, risks and notable items
- COVID-19: Management said the pandemic did not materially affect Q2 results, but its future effect was uncertain. Blue Bird closed manufacturing facilities for two weeks in early April and restarted in late April. It reported reduced orders and warned that prolonged shutdowns could materially harm results, liquidity, or cash flows. Key risks include school-bus demand, school reopening and purchasing decisions, supplier and single-source component disruptions, workforce interruptions, and access to credit markets. No numerical FY2020 guidance was provided.
- Management said liquidity was adequate at the time of the filing and was evaluating cost controls, reduced hiring and discretionary spending, and possible reductions in capital spending. It elected to defer eligible employer Social Security payments, estimating up to $6.0 million of delayed payments, and expected to defer approximately $3.2 million of fiscal 2020 pension contributions.
- The company’s business is seasonal, with sales typically higher in the third and fourth fiscal quarters. Actual results may vary with municipal budgets, school enrollment, order timing, and demand.
- Q2 interest expense included changes in the fair value of an interest-rate collar; the collar had a reported fair value liability of $3.4 million. The company’s variable-rate debt and collar expose it to interest-rate movements.
- In Q1, the company changed the amortization period for deferred losses on its frozen pension plan from approximately seven years to approximately 23 years because fewer than 10% of participants remained active. Management reported no material impact from the CARES Act on income tax accounts.
- Product-liability and other litigation, environmental compliance, and ordinary-course dealer guarantees remain relevant contingencies. Management did not expect pending litigation or environmental matters to have a material adverse effect; the maximum dealer guarantee was $3.0 million, with estimated fair value of $0.3 million.
Important facts for investors to verify
- How school closures, delayed reopening, and district budget decisions affected subsequent bus orders, cancellations, and deliveries.
- Whether the two-week production shutdown or supplier constraints caused continuing production, cost, or delivery impacts.
- Cash conversion and inventory levels, operating cash use, and liquidity after the May 7 credit amendment; confirm current revolver availability and covenant headroom.
- Whether rising manufacturing costs and lower gross margins persist, and how adjusted EBITDA reconciles to GAAP results and recurring cash needs.
- Interest-rate exposure, the collar’s fair value and settlement terms, and refinancing or repayment needs before the 2023 term-loan maturity.
- Potential changes in pension assumptions and deferred losses, and developments in litigation, environmental matters, and dealer guarantees.