UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
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[X] ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29, 2019July 4, 2020
OR
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[ ]☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ................................ to ...............................................
Commission File Number 001-36267
BLUE BIRD CORPORATION
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 46-3891989 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
Delaware46-3891989
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3920 Arkwright Road, 2nd Floor, Macon, Georgia31210
(Address of principal executive offices)
(Zip Code)
(478) (478) 822-2801
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, $0.0001 par value | | BLBD | | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YesX☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes X☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o☐ | | | Accelerated filerFiler | | x☒ |
Non-accelerated filer | o☐ | | | Smaller reporting company | | o☐ |
| | | | Emerging growth company | | x☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐NoX☒
At August 5, 2019, 26,475,9187, 2020, 27,048,404 shares of the registrant’s common stock, $0.0001 par value, were outstanding.
BLUE BIRD CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) of Blue Bird Corporation (“Blue Bird” or the “Company”) contains forward-looking statements. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:
the future financial performance of the Company;
changes in the market for Blue Bird products; and
expansion plans and opportunities.
These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.
Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2018 Form 10-K, filed with the SEC on December 12, 2018. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. The following information should be read in conjunction with the financial statements included in the Company’s 2018 Form 10-K, filed with the SEC on December 12, 2018.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | (in thousands of dollars, except for share data) | June 29, 2019 | | September 29, 2018 | July 4, 2020 | | September 28, 2019 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | $ | 29,075 |
| | $ | 60,260 |
| $ | 12,538 |
| | $ | 70,959 |
|
Accounts receivable, net | 40,229 |
| | 24,067 |
| 13,694 |
| | 10,537 |
|
Inventories | 140,688 |
| | 57,333 |
| 155,717 |
| | 78,830 |
|
Other current assets | 12,036 |
| | 8,183 |
| 9,459 |
| | 11,765 |
|
Total current assets | $ | 222,028 |
| | $ | 149,843 |
| $ | 191,408 |
| | $ | 172,091 |
|
Property, plant and equipment, net | 94,727 |
| | 66,054 |
| 104,667 |
| | 100,058 |
|
Goodwill | 18,825 |
| | 18,825 |
| 18,825 |
| | 18,825 |
|
Intangible assets, net | 55,492 |
| | 55,472 |
| 52,404 |
| | 54,720 |
|
Equity investment in affiliate | 12,281 |
| | 11,123 |
| 11,946 |
| | 11,106 |
|
Deferred tax assets | 4,559 |
| | 4,437 |
| 3,882 |
| | 3,600 |
|
Finance lease right-of-use assets | | 5,790 |
| | 4,638 |
|
Other assets | 466 |
| | 1,676 |
| 1,133 |
| | 375 |
|
Total assets | $ | 408,378 |
| | $ | 307,430 |
| $ | 390,055 |
| | $ | 365,413 |
|
Liabilities and Stockholders' Deficit | | | | | | |
Current liabilities | | | | | | |
Accounts payable | $ | 135,902 |
| | $ | 95,780 |
| $ | 95,538 |
| | $ | 102,266 |
|
Warranty | 9,008 |
| | 9,142 |
| 8,123 |
| | 9,161 |
|
Accrued expenses | 28,163 |
| | 21,935 |
| 15,638 |
| | 28,697 |
|
Deferred warranty income | 8,408 |
| | 8,159 |
| 8,448 |
| | 8,632 |
|
Finance lease obligations | | 1,032 |
| | 716 |
|
Other current liabilities | 15,691 |
| | 3,941 |
| 13,425 |
| | 10,310 |
|
Current portion of long-term debt | 9,900 |
| | 9,900 |
| 9,900 |
| | 9,900 |
|
Total current liabilities | $ | 207,072 |
| | $ | 148,857 |
| $ | 152,104 |
| | $ | 169,682 |
|
Long-term liabilities | | | | | | |
Revolving credit facility | $ | 25,000 |
| | $ | — |
| $ | 45,000 |
| | $ | — |
|
Long-term debt | 175,479 |
| | 132,239 |
| 166,467 |
| | 173,226 |
|
Warranty | 13,512 |
| | 13,504 |
| 12,705 |
| | 13,182 |
|
Deferred warranty income | 15,177 |
| | 15,032 |
| 13,597 |
| | 15,413 |
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Deferred tax liabilities | 1,088 |
| | 197 |
| 792 |
| | 168 |
|
Finance lease obligations | | 4,870 |
| | 3,921 |
|
Other liabilities | 12,402 |
| | 4,924 |
| 13,251 |
| | 12,108 |
|
Pension | 19,834 |
| | 21,013 |
| 43,197 |
| | 45,524 |
|
Total long-term liabilities | $ | 262,492 |
| | $ | 186,909 |
| $ | 299,879 |
| | $ | 263,542 |
|
Guarantees, commitments and contingencies (Note 6) |
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Stockholders' deficit | | | | | | |
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 and 93,000 issued with liquidation preference of $0 and $9,300 at June 29, 2019 and September 29, 2018, respectively | $ | — |
| | $ | 9,300 |
| |
Common stock, $0.0001 par value, 100,000,000 shares authorized, 26,460,456 and 27,259,262 shares outstanding at June 29, 2019 and September 29, 2018, respectively | 3 |
| | 3 |
| |
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued at July 4, 2020 and September 28, 2019 | | $ | — |
| | $ | — |
|
Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,048,404 and 26,476,336 shares outstanding at July 4, 2020 and September 28, 2019, respectively | | 3 |
| | 3 |
|
Additional paid-in capital | 83,189 |
| | 70,023 |
| 88,930 |
| | 84,271 |
|
Accumulated deficit | (57,241 | ) | | (69,235 | ) | (45,405 | ) | | (45,649 | ) |
Accumulated other comprehensive loss | (36,855 | ) | | (38,427 | ) | (55,174 | ) | | (56,154 | ) |
Treasury stock, at cost, 1,782,568 and 0 shares at June 29, 2019 and September 29, 2018, respectively | (50,282 | ) | | — |
| |
Treasury stock, at cost, 1,782,568 shares at July 4, 2020 and September 28, 2019 | | (50,282 | ) | | (50,282 | ) |
Total stockholders' deficit | $ | (61,186 | ) | | $ | (28,336 | ) | $ | (61,928 | ) | | $ | (67,811 | ) |
Total liabilities and stockholders' deficit | $ | 408,378 |
| | $ | 307,430 |
| $ | 390,055 |
| | $ | 365,413 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars except for share data) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Net sales | $ | 308,774 |
| | $ | 314,186 |
| | $ | 675,342 |
| | $ | 693,363 |
|
Cost of goods sold | 266,992 |
| | 277,213 |
| | 588,496 |
| | 614,074 |
|
Gross profit | $ | 41,782 |
| | $ | 36,973 |
| | $ | 86,846 |
| | $ | 79,289 |
|
Operating expenses | | | | | | | |
Selling, general and administrative expenses | 20,996 |
| | 20,489 |
| | 61,197 |
| | 64,226 |
|
Operating profit | $ | 20,786 |
| | $ | 16,484 |
| | $ | 25,649 |
| | $ | 15,063 |
|
Interest expense | (3,369 | ) | | (1,834 | ) | | (10,241 | ) | | (5,112 | ) |
Interest income | — |
| | 25 |
| | 9 |
| | 42 |
|
Other expense, net | (410 | ) | | (667 | ) | | (1,034 | ) | | (399 | ) |
Income before income taxes | $ | 17,007 |
| | $ | 14,008 |
| | $ | 14,383 |
| | $ | 9,594 |
|
Income tax (expense) benefit | (3,248 | ) | | 7,485 |
| | (2,833 | ) | | 5,662 |
|
Equity in net income of non-consolidated affiliate | 842 |
| | 398 |
| | 1,158 |
| | 632 |
|
Net income | $ | 14,601 |
| | $ | 21,891 |
| | $ | 12,708 |
| | $ | 15,888 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Net income (from above) | $ | 14,601 |
| | $ | 21,891 |
| | $ | 12,708 |
| | $ | 15,888 |
|
Less: preferred stock dividends | — |
| | 182 |
| | — |
| | 1,715 |
|
Net income available to common stockholders | $ | 14,601 |
| | $ | 21,709 |
| | $ | 12,708 |
| | $ | 14,173 |
|
| | | | | | | |
Basic weighted average shares outstanding | 26,451,107 |
| | 26,209,697 |
| | 26,449,751 |
| | 24,677,838 |
|
Diluted weighted average shares outstanding | 26,720,110 |
| | 28,556,914 |
| | 26,920,285 |
| | 25,809,491 |
|
| | | | | | | |
Basic earnings per share | $ | 0.55 |
| | $ | 0.83 |
| | $ | 0.48 |
| | $ | 0.57 |
|
Diluted earnings per share | $ | 0.55 |
| | $ | 0.77 |
| | $ | 0.47 |
| | $ | 0.55 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Net income | $ | 14,601 |
| | $ | 21,891 |
| | $ | 12,708 |
| | $ | 15,888 |
|
Other comprehensive income, net of tax | | | | | | | |
Net change in defined benefit pension plan | 524 |
| | 669 |
| | 1,572 |
| | 1,901 |
|
Total other comprehensive income | $ | 524 |
| | $ | 669 |
| | $ | 1,572 |
| | $ | 1,901 |
|
Comprehensive income | $ | 15,125 |
| | $ | 22,560 |
| | $ | 14,280 |
| | $ | 17,789 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars except for share data) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Net sales | $ | 189,181 |
| | $ | 308,774 |
| | $ | 597,810 |
| | $ | 675,342 |
|
Cost of goods sold | 168,099 |
| | 266,992 |
| | 531,259 |
| | 588,496 |
|
Gross profit | $ | 21,082 |
| | $ | 41,782 |
| | $ | 66,551 |
| | $ | 86,846 |
|
Operating expenses | | | | | | | |
Selling, general and administrative expenses | 17,793 |
| | 20,996 |
| | 58,146 |
| | 61,197 |
|
Operating profit | $ | 3,289 |
| | $ | 20,786 |
| | $ | 8,405 |
| | $ | 25,649 |
|
Interest expense | (2,406 | ) | | (3,369 | ) | | (9,961 | ) | | (10,241 | ) |
Interest income | 27 |
| | — |
| | 27 |
| | 9 |
|
Other income (expense), net | 181 |
| | (410 | ) | | 555 |
| | (1,034 | ) |
Income (loss) before income taxes | $ | 1,091 |
| | $ | 17,007 |
| | $ | (974 | ) | | $ | 14,383 |
|
Income tax (expense) benefit | (765 | ) | | (3,248 | ) | | 378 |
| | (2,833 | ) |
Equity in net income of non-consolidated affiliate | 960 |
| | 842 |
| | 840 |
| | 1,158 |
|
Net income | $ | 1,286 |
| | $ | 14,601 |
| | $ | 244 |
| | $ | 12,708 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Basic weighted average shares outstanding | 27,027,731 |
| | 26,451,107 |
| | 26,784,404 |
| | 26,449,751 |
|
Diluted weighted average shares outstanding | 27,080,015 |
| | 26,720,110 |
| | 26,980,480 |
| | 26,788,306 |
|
Basic earnings per share | $ | 0.05 |
| | $ | 0.55 |
| | $ | 0.01 |
| | $ | 0.48 |
|
Diluted earnings per share | $ | 0.05 |
| | $ | 0.55 |
| | $ | 0.01 |
| | $ | 0.47 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Net income | $ | 1,286 |
| | $ | 14,601 |
| | $ | 244 |
| | $ | 12,708 |
|
Other comprehensive income, net of tax | | | | | | | |
Net change in defined benefit pension plan | 327 |
| | 524 |
| | 980 |
| | 1,572 |
|
Total other comprehensive income | $ | 327 |
| | $ | 524 |
| | $ | 980 |
| | $ | 1,572 |
|
Comprehensive income | $ | 1,613 |
| | $ | 15,125 |
| | $ | 1,224 |
| | $ | 14,280 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Nine Months Ended | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 |
Cash flows from operating activities | | | | | | |
Net income | $ | 12,708 |
| | $ | 15,888 |
| $ | 244 |
| | $ | 12,708 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Depreciation and amortization | 7,406 |
| | 6,325 |
| 10,728 |
| | 7,406 |
|
Non-cash interest expense | 2,172 |
| | 572 |
| 3,560 |
| | 2,172 |
|
Share-based compensation | 3,146 |
| | 2,380 |
| 4,105 |
| | 3,146 |
|
Equity in net income of affiliate | (1,158 | ) | | (632 | ) | |
Loss on disposal of fixed assets | 50 |
| | 115 |
| |
Equity in net income of non-consolidated affiliate | | (840 | ) | | (1,158 | ) |
(Gain) loss on disposal of fixed assets | | (100 | ) | | 50 |
|
Deferred taxes | 500 |
| | 8,422 |
| 32 |
| | 500 |
|
Amortization of deferred actuarial pension losses | 2,068 |
| | 2,640 |
| 1,289 |
| | 2,068 |
|
Foreign currency hedges | 109 |
| | (828 | ) | — |
| | 109 |
|
Changes in assets and liabilities: | | | | | | |
Accounts receivable | (16,162 | ) | | (12,422 | ) | (3,157 | ) | | (16,162 | ) |
Inventories | (83,355 | ) | | (36,872 | ) | (76,887 | ) | | (83,355 | ) |
Other assets | (5,014 | ) | | (1,502 | ) | 2,480 |
| | (5,014 | ) |
Accounts payable | 42,429 |
| | 41,959 |
| (3,115 | ) | | 42,429 |
|
Accrued expenses, pension and other liabilities | 15,988 |
| | (19,023 | ) | (16,644 | ) | | 15,988 |
|
Total adjustments | $ | (31,821 | ) | | $ | (8,866 | ) | $ | (78,549 | ) | | $ | (31,821 | ) |
Total cash (used in) provided by operating activities | $ | (19,113 | ) | | $ | 7,022 |
| |
Total cash used in operating activities | | $ | (78,305 | ) | | $ | (19,113 | ) |
Cash flows from investing activities | | | | | | |
Cash paid for fixed and acquired intangible assets | $ | (30,154 | ) | | $ | (15,572 | ) | |
Cash paid for fixed assets | | $ | (16,724 | ) | | $ | (30,154 | ) |
Proceeds from sale of fixed assets | — |
| | 12 |
| 150 |
| | — |
|
Total cash used in investing activities | $ | (30,154 | ) | | $ | (15,560 | ) | $ | (16,574 | ) | | $ | (30,154 | ) |
Cash flows from financing activities | | | | | | |
Borrowings under the revolving credit facility | $ | 25,000 |
| | $ | — |
| $ | 45,000 |
| | $ | 25,000 |
|
Borrowings under the senior term loan | 50,000 |
| | — |
| — |
| | 50,000 |
|
Repayments under the senior term loan | (7,425 | ) | | (6,000 | ) | (7,425 | ) | | (7,425 | ) |
Cash paid for capital leases | — |
| | (118 | ) | |
Payment of dividends on preferred stock | — |
| | (1,715 | ) | |
Principal payments on finance leases | | (854 | ) | | — |
|
Cash paid for debt issuance costs | | (935 | ) | | — |
|
Cash paid for employee taxes on vested restricted shares and stock option exercises | (622 | ) | | (571 | ) | (3,568 | ) | | (622 | ) |
Proceeds from exercises of warrants | 1,499 |
| | 15,114 |
| 4,240 |
| | 1,499 |
|
Common stock repurchases under share repurchase programs | — |
| | (18,864 | ) | |
Tender offer repurchase of common stock and preferred stock | (50,370 | ) | | — |
| — |
| | (50,370 | ) |
Total cash provided by (used in) financing activities | $ | 18,082 |
| | $ | (12,154 | ) | |
Total cash provided by financing activities | | $ | 36,458 |
| | $ | 18,082 |
|
Change in cash and cash equivalents | (31,185 | ) | | (20,692 | ) | (58,421 | ) | | (31,185 | ) |
Cash and cash equivalents, beginning of period | 60,260 |
| | 62,616 |
| 70,959 |
| | 60,260 |
|
Cash and cash equivalents, end of period | $ | 29,075 |
| | $ | 41,924 |
| $ | 12,538 |
| | $ | 29,075 |
|
| | | | | | |
Supplemental disclosures of cash flow information | | | | | | |
Cash paid during the period for: | | | | | | |
Interest paid, net of interest received | $ | 7,916 |
| | $ | 4,549 |
| $ | 6,616 |
| | $ | 7,916 |
|
Income tax paid, net of tax refunds | 2,431 |
| | 3,665 |
| (1,668 | ) | | 2,431 |
|
Non-cash investing and financing activities: | | | | | | |
Changes in accounts payable for capital additions to property, plant and equipment and other current assets for capitalized intangible assets | $ | (1,307 | ) | | $ | 3,574 |
| |
Changes in accounts payable for capital additions to property, plant and equipment | | $ | (3,613 | ) | | $ | (1,307 | ) |
Cashless exercise of stock options | 295 |
| | 897 |
| 5,246 |
| | 295 |
|
Right-of-use assets obtained in exchange for finance lease obligations | | 1,942 |
| | — |
|
Right-of-use assets obtained in exchange for operating lease obligations | 8,040 |
| | — |
| — |
| | 8,040 |
|
Conversion of preferred stock into common stock | 9,264 |
| | 30,700 |
| — |
| | 9,264 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Unaudited)
| | | Three Months Ended | Three Months Ended |
(in thousands of dollars, except for share data) | Common Stock | | Convertible Preferred Stock | | | | | | Treasury Stock | | | Common Stock | | Convertible Preferred Stock | | | | | | Treasury Stock | | |
| | Shares | | Par Value | | Additional Paid-In-Capital | | Shares | | Amount | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Shares | | Amount | | Total Stockholders' Deficit |
Balance, April 4, 2020 | | 27,027,272 |
| | $ | 3 |
| | $ | 87,408 |
| | — |
| | $ | — |
| | $ | (55,501 | ) | | $ | (46,691 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (65,063 | ) |
Restricted stock activity | | — |
| | — |
| | (255 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (255 | ) |
Stock option activity | | 21,132 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | | — |
| | — |
| | 1,777 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,777 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,286 |
| | — |
| | — |
| | 1,286 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 327 |
| | — |
| | — |
| | — |
| | 327 |
|
Balance, July 4, 2020 | | 27,048,404 |
| | $ | 3 |
| | $ | 88,930 |
| | — |
| | $ | — |
| | $ | (55,174 | ) | | $ | (45,405 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,928 | ) |
| Shares | | Par Value | | Additional Paid-In-Capital | | Shares | | Amount | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Shares | | Amount | | Total Stockholders' Deficit | | | | | | | | | | | | | | | | | | | |
Balance, March 30, 2019 | 26,440,663 |
| | $ | 3 |
| | $ | 81,889 |
| | — |
| | $ | — |
| | $ | (37,379 | ) | | $ | (71,842 | ) | | 1,782,568 |
| | $ | (50,261 | ) | | $ | (77,590 | ) | 26,440,663 |
| | $ | 3 |
| | $ | 81,889 |
| | — |
| | $ | — |
| | $ | (37,379 | ) | | $ | (71,842 | ) | | 1,782,568 |
| | $ | (50,261 | ) | | $ | (77,590 | ) |
Warrant exercises | 17,750 |
| | — |
| | 204 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 204 |
| 17,750 |
| | — |
| | 204 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 204 |
|
Stock option activity | 2,043 |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20 | ) | 2,043 |
| | — |
| | (20 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (20 | ) |
Share-based compensation expense | — |
| | — |
| | 1,095 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,095 |
| — |
| | — |
| | 1,095 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,095 |
|
Tender offer share repurchases | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21 | ) | | — |
| — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (21 | ) | | — |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,601 |
| | — |
| | — |
| | 14,601 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14,601 |
| | — |
| | — |
| | 14,601 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 524 |
| | — |
| | — |
| | — |
| | 524 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 524 |
| | — |
| | — |
| | — |
| | 524 |
|
Balance, June 29, 2019 | 26,460,456 |
| | $ | 3 |
| | $ | 83,189 |
| | — |
| | $ | — |
| | $ | (36,855 | ) | | $ | (57,241 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,186 | ) | 26,460,456 |
| | $ | 3 |
| | $ | 83,189 |
| | — |
| | $ | — |
| | $ | (36,855 | ) | | $ | (57,241 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,186 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2018 | 23,912,188 |
| | $ | 2 |
| | $ | 38,748 |
| | 400,000 |
| | $ | 40,000 |
| | $ | (42,643 | ) | | $ | (106,058 | ) | | — |
| | $ | — |
| | $ | (69,951 | ) | |
Warrant exercises | 487,810 |
| | — |
| | 5,610 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,610 |
| |
Preferred stock dividends | — |
| | — |
| | (182 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (182 | ) | |
Share-based compensation expense | — |
| | — |
| | 839 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 839 |
| |
Share repurchase program | (151,693 | ) | | — |
| | (3,353 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,353 | ) | |
Preferred stock conversion | 2,649,962 |
| | — |
| | 30,700 |
| | (307,000 | ) | | (30,700 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21,891 |
| | — |
| | — |
| | 21,891 |
| |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 669 |
| | — |
| | — |
| | — |
| | 669 |
| |
Balance, June 30, 2018 | 26,898,267 |
| | $ | 2 |
| | $ | 72,362 |
| | 93,000 |
| | $ | 9,300 |
| | $ | (41,974 | ) | | $ | (84,167 | ) | | — |
| | $ | — |
| | $ | (44,477 | ) | |
| | | Nine Months Ended | Nine Months Ended |
(in thousands of dollars, except for share data) | Common Stock | | Convertible Preferred Stock | | | | | | Treasury Stock | | | Common Stock | | Convertible Preferred Stock | | | | | | Treasury Stock | | |
| | Shares | | Par Value | | Additional Paid-In-Capital | | Shares | | Amount | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Shares | | Amount | | Total Stockholders' Deficit |
Balance, September 28, 2019 | | 26,476,336 |
| | $ | 3 |
| | $ | 84,271 |
| | — |
| | $ | — |
| | $ | (56,154 | ) | | $ | (45,649 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (67,811 | ) |
Warrant exercises | | 368,712 |
| | — |
| | 4,240 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,240 |
|
Restricted stock activity | | 94,724 |
| | — |
| | (1,623 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,623 | ) |
Stock option activity | | 108,632 |
| | — |
| | (1,945 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,945 | ) |
Share-based compensation expense | | — |
| | — |
| | 3,987 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,987 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 244 |
| | — |
| | — |
| | 244 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 980 |
| | — |
| | — |
| | — |
| | 980 |
|
Balance, July 4, 2020 | | 27,048,404 |
| | $ | 3 |
| | $ | 88,930 |
| | — |
| | $ | — |
| | $ | (55,174 | ) | | $ | (45,405 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,928 | ) |
| Shares | | Par Value | | Additional Paid-In-Capital | | Shares | | Amount | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Shares | | Amount | | Total Stockholders' Deficit | | | | | | | | | | | | | | | | | | | |
Balance, September 29, 2018 | 27,259,262 |
| | $ | 3 |
| | $ | 70,023 |
| | 93,000 |
| | $ | 9,300 |
| | $ | (38,427 | ) | | $ | (69,235 | ) | | — |
| | $ | — |
| | $ | (28,336 | ) | 27,259,262 |
| | $ | 3 |
| | $ | 70,023 |
| | 93,000 |
| | $ | 9,300 |
| | $ | (38,427 | ) | | $ | (69,235 | ) | | — |
| | $ | — |
| | $ | (28,336 | ) |
Adoption of new revenue recognition standard (ASC 606) adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (714 | ) | | — |
| | — |
| | (714 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (714 | ) | | — |
| | — |
| | (714 | ) |
Warrant exercises | 130,385 |
| | — |
| | 1,499 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,499 |
| 130,385 |
| | — |
| | 1,499 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,499 |
|
Restricted stock activity | 51,195 |
| | — |
| | (596 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (596 | ) | 51,195 |
| | — |
| | (596 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (596 | ) |
Stock option activity | 2,567 |
| | — |
| | (26 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26 | ) | 2,567 |
| | — |
| | (26 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26 | ) |
Share-based compensation expense | — |
| | — |
| | 3,077 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,077 |
| — |
| | — |
| | 3,077 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,077 |
|
Tender offer share repurchases | (1,782,568 | ) | | — |
| | (52 | ) | | (364 | ) | | (36 | ) | | — |
| | — |
| | 1,782,568 |
| | (50,282 | ) | | (50,370 | ) | (1,782,568 | ) | | — |
| | (52 | ) | | (364 | ) | | (36 | ) | | — |
| | — |
| | 1,782,568 |
| | (50,282 | ) | | (50,370 | ) |
Preferred stock conversion | 799,615 |
| | — |
| | 9,264 |
| | (92,636 | ) | | (9,264 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| 799,615 |
| | — |
| | 9,264 |
| | (92,636 | ) | | (9,264 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,708 |
| | — |
| | — |
| | 12,708 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,708 |
| | — |
| | — |
| | 12,708 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 1,572 |
| | — |
| | — |
| | — |
| | 1,572 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,572 |
| | — |
| | — |
| | — |
| | 1,572 |
|
Balance, June 29, 2019 | 26,460,456 |
| | $ | 3 |
| | $ | 83,189 |
| | — |
| | $ | — |
| | $ | (36,855 | ) | | $ | (57,241 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,186 | ) | 26,460,456 |
| | $ | 3 |
| | $ | 83,189 |
| | — |
| | $ | — |
| | $ | (36,855 | ) | | $ | (57,241 | ) | | 1,782,568 |
| | $ | (50,282 | ) | | $ | (61,186 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2017 | 23,739,344 |
| | $ | 2 |
| | $ | 45,418 |
| | 400,000 |
| | $ | 40,000 |
| | $ | (43,875 | ) | | $ | (100,055 | ) | | — |
| | $ | — |
| | $ | (58,510 | ) | |
Warrant exercises | 1,314,224 |
| | — |
| | 15,114 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,114 |
| |
Restricted stock activity | 33,963 |
| | — |
| | (370 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (370 | ) | |
Stock option activity | 18,680 |
| | — |
| | (201 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (201 | ) | |
Preferred stock dividends | — |
| | — |
| | (1,715 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,715 | ) | |
Share-based compensation expense | — |
| | — |
| | 2,280 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,280 |
| |
Share repurchase program | (857,906 | ) | | — |
| | (18,864 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,864 | ) | |
Preferred stock conversion | 2,649,962 |
| | — |
| | 30,700 |
| | (307,000 | ) | | (30,700 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15,888 |
| | — |
| | — |
| | 15,888 |
| |
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | 1,901 |
| | — |
| | — |
| | — |
| | 1,901 |
| |
Balance, June 30, 2018 | 26,898,267 |
| | $ | 2 |
| | $ | 72,362 |
| | 93,000 |
| | $ | 9,300 |
| | $ | (41,974 | ) | | $ | (84,167 | ) | | — |
| | $ | — |
| | $ | (44,477 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
BLUE BIRD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Basis of Presentation
Nature of Business
Blue Bird Body Company, a wholly-owned subsidiary of Blue Bird Corporation, was incorporated in 1958 and has manufactured, assembled and sold school buses to a variety of municipal, federal and commercial customers since 1927. The majority of Blue Bird’s sales are made to an independent distributor network, which in turn sells buses to ultimate end users. We are headquartered in Macon, Georgia. References in these notes to financial statements to “Blue Bird”, the “Company,” “we,” “our,” or “us” refer to Blue Bird Corporation and its wholly-owned subsidiaries, unless the context specifically indicates otherwise.
COVID-19
During our third quarter of fiscal 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic. The pandemic materially impacted our third quarter of fiscal 2020 results causing lower customer orders for both buses and bus parts, supply disruptions, higher rates of absenteeism among our hourly production workforce and a temporary shutdown of manufacturing. The continuing development and fluidity of the pandemic precludes any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity. A prolonged economic downturn resulting from the continuing pandemic would likely have a material adverse impact on our financial results.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Article 8 of Regulation S-X. The Company’s fiscal year ends on the Saturday closest to September 30 with its quarters consisting of thirteen weeks in most years. In fiscal year 2019,2020, there is a total of 5253 weeks. ForThe third quarters of fiscal years2020 and 2019 and 2018, the third quarters both included 13 weeks. The nine month periods in fiscal 2020 and 2019 included 40 and 39 weeks, and the nine months ended both included 39 weeks.respectively.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for any interim period are not necessarily indicative of the results that may be expected for the entire year. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The Condensed Consolidated Balance Sheet data as of September 29, 201828, 2019 was derived from the Company’s audited financial statements but does not include all disclosures required by generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the fiscal year ended September 29, 201828, 2019 as set forth in the Company's 20182019 Form 10-K filed on December 12, 2018.2019.
Preferred Stock Conversion
On November 13, 2018, the Company converted all remaining outstanding shares of Preferred Stock, and issued 799,615 shares of Common Stock. There were no dividends paid with the conversion.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions. At the date of the financial statements, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, and during the reporting period, these estimates and assumptions affect the reported amounts of revenues and expenses. For example, significant management judgments are required in determining excess, obsolete, or unsalable inventory, allowance for doubtful accounts, potential impairment of long-lived assets, goodwill and intangibles, the accounting for self-insurance reserves, warranty reserves, pension obligations, income taxes, environmental liabilities and contingencies. Future events, including the extent and duration of COVID-19 related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in the Company’s evaluations. Actual results could differ from the estimates that the Company has used.
2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards
The Company’s significant accounting policies are described in the Company’s 20182019 Form 10-K, filed with the SEC on December 12, 2018.2019. Our senior management has reviewed these significant accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the nine months ended June 29, 2019,July 4, 2020, except as follows (as also(and as discussed in the Recently Adopted Accounting Standards section of this Note 2):
Revenue RecognitionAmortization of Deferred Pension Losses
TheHistorically, the Company records revenue, nethas amortized deferred losses from our frozen defined benefit pension plan accounted for under ASC 715, Compensation - Retirement Benefits, over the expected remaining employment period of tax, when the following five steps have been completed:
| |
1. | Identification of the contract(s) with a customer; |
| |
2. | Identification of the performance obligation(s) in the contract; |
| |
3. | Determination of the transaction price; |
| |
4. | Allocation of the transaction price to the performance obligations in the contract; and |
| |
5. | Recognition of revenue when, or as, we satisfy performance obligations. |
The Company records revenue when performance obligations are satisfied by transferring controlparticipants who remained employed with the Company. ASC 715 states that if all or almost all of a promised good or service toplan's participants are inactive, the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of, and obtain substantially allaverage remaining life expectancy of the remaining benefits from, that goodinactive participants shall be used to amortize the unrecognized net gain or service.
Our product revenue includes sales of buses and bus parts, each of which are generally recognized as revenue at a point in time, once all conditions for revenue recognition have been met, as they represent our performance obligations in a sale. For buses, control is generally transferred and the customer has the ability to direct the use of and obtain substantially allloss instead of the average remaining benefitsservice period of active plan participants. In the product whenfirst quarter of 2020, the product is delivered or whenratio of active (employed) to inactive participants in our plan declined to less than 10%, a figure we believe meets the product has been completed, is ready for delivery, has been paid for, its title has transferred and it is awaiting pickup bydefinition of almost all participants as inactive. Accordingly, we have changed the customer. For certain bus sale transactions, we may provide incentives including payment of a limited amount of future interest charges our customers may incur relatedamortization period from approximately seven years in 2019 to their purchase and financing of the bus with third party financing companies. We reduce revenue at the recording date by the full amount of potential future interest we mayapproximately 23 years in 2020. Future amortization periods (remaining life expectancy) will be obligated to pay, which is an application of the "most likely amount" method. For parts sales, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with the point in time when the customer has assumed risk of loss and title has passed for the goods sold.
The Company sells extended warranties related to its products. Revenue related to these contracts is recognizeddetermined based on the stand-alone selling price of the arrangement, on a straight-line basis over the contract period,participant and costs thereunder are expensed as incurred.actuarial data at that time.
The Company includes shipping and handling revenues, which represents costs billed to customers, in net sales on the Condensed Consolidated Statements of Operations. The related costs incurred by the Company are included in cost of goods sold on the Condensed Consolidated Statements of Operations.
Leases
We determine if an arrangement is a lease at inception. Operating leases include lease right-of-use (“ROU”) assets, which we include in property, plant and equipment on our Condensed Consolidated Balance Sheets. The lease liabilities associated with operating leases are included in other current liabilities and other liabilities on our Condensed Consolidated Balance Sheets. We do not have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the leases recorded do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any base rental or lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term as a component of selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
Derivative Instruments
In limited circumstances, we may utilize derivative instruments to manage certain exposures to changes in foreign currency exchange rates or as cash flow hedges for variable rate debt. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our operating results or included in other comprehensive income (loss), depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting treatment. If realized, gains and losses on derivative instruments are recognized in the operating results line item that reflects the underlying exposure that was hedged. The exchange of cash, if any, associated with derivative transactions is classified in the same category as the cash flows from the items subject to the economic hedging relationships.
Statement of Cash Flows
We classify distributions received from our equity method investment using the nature of distribution approach, such that distributions received are classified based on the nature of the activity of the investee that generated the distribution. Returns on investment are classified within operating activities, while returns of investment are classified within investing activities.
Recently Issued Accounting Standards
We believe that no new accounting guidance was issued during the three months ended June 29, 2019 that is relevant to our financial statements.
Recently Adopted Accounting Standards
ASU 2017-07 —2018-02 – In March 2017,February 2018, the Financial Accounting Standards Board ("FASB")FASB issued ASU No. 2017-07, Compensation—Retirement Benefits2018-02, Income Statement - Reporting Comprehensive Income (Topic 715), Improving220). This ASU provides guidance on a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the Presentationeffect of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component (if any) of pension expense in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separatelytax rate change resulting from the service cost componentTax Cuts and outside a subtotalJobs Act (H.R.1) (the "Tax Act"). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of income from operations, if oneinformation reported to financial statement users. This ASU is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We adopted this new standardASU, in the first quarter of fiscal 2019 on2020, and did not elect to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. We use a retrospective basis, as required. There is no service cost componentspecific identification approach to our periodic pension expense. Previously all components of our pension expense were recorded as a component of operating expenses, andrelease the new standard requires these expenses to be outside a subtotal of operating profit. As a result, we have revised previously reported results of operations, as follows:income tax effects in AOCI.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | As Previously Reported | | New Standard Adjustment | | As Restated | | As Previously Reported | | New Standard Adjustment | | As Restated |
Selling, general and administrative expenses | $ | 20,950 |
| | $ | (461 | ) | | $ | 20,489 |
| | $ | 65,609 |
| | $ | (1,383 | ) | | $ | 64,226 |
|
Operating profit | 16,023 |
| | 461 |
| | 16,484 |
| | 13,680 |
| | 1,383 |
| | 15,063 |
|
Other expense, net | (206 | ) | | (461 | ) | | (667 | ) | | 984 |
| | (1,383 | ) | | (399 | ) |
Net income | 21,891 |
| | — |
| | 21,891 |
| | 15,888 |
| | — |
| | 15,888 |
|
ASU 2018-15 — 2019-12 – In August 2018,December 2019, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s2019-12, Simplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ContractIncome Taxes, which alignssimplifies the requirementsprocess for capitalizing implementation costs incurred in a hosting arrangement that is a service contract withcalculating interim (intraperiod) income taxes and the requirementsaccounting for capitalizing implementation costs incurred to develop or obtain internal-use software.deferred tax liabilities for foreign equity-method investments, among other simplifications. We have early adopted this standard on a prospective (applies only to eligible costs incurred after adoption) basis ineffective the first quarter of fiscal 2019,2020. The impacts of adopting this standard were not material to us.
Recently Issued Accounting Standards
ASU 2020-04– On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR, which is currently expected to occur on December 31, 2021. The amendments in ASU 2020-04 are elective and there was not a significantapply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. An entity may elect to apply the amendments prospectively from March 12, 2020 through December 31, 2022. Our debt and derivative agreements currently reference LIBOR. Contract language is expected to be incorporated into these agreements to address the transition to an alternative reference rate. We are currently evaluating the impact this ASU may have on our consolidated financial statements.
ASU 2017-12 — In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which intends to simplify the application of hedge accounting guidance and better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. We adopted this amended guidance in the first quarter of fiscal 2019 using the required modified retrospective approach; however we had no hedging relationships in effect at the adoption date that were impacted by the guidance. We do not expect the impact on the Company's consolidated financial statements to be material.
ASU 2016-12 and 2016-10 — In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and in April 2016 issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, both of which provide further clarification to be considered when implementing ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We adopted this standard in the first quarter of fiscal 2019 using the modified retrospective transition approach, which we applied to all contracts impacted by the new standard at the date of initial application. At adoption, we accounted for specific sales incentives offered to our customers by recording an increase of $0.9 million in accrued liabilities, a $0.7 million adjustment to retained earnings, and a $0.2 million deferred tax asset. Amounts recorded in prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Please see Note 8, Revenue, for additional information regarding the adoption of this new accounting standard.
ASU 2018-05— In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates income tax accounting to reflect the SEC's interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. For more information regarding the impact of the Tax Act, see Note 5, Income Taxes.
ASU 2016-02 — In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize assets on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. The standard will also require certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. We adopted this standard in the first quarter of fiscal 2019 using the modified retrospective adoption approach with a cumulative-effect adjustment recognized on the balance sheet on the adoption date with prior periods not recast, and electing the practical expedients allowed under the standard. At adoption, we recognized right-of-use assets totaling $7.3 million and operating lease liabilities totaling $9.2 million. The impact on our results of operations and cash flows was not material.
ASU 2016-15 — In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which made targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this standard in the first quarter of fiscal 2019 and contemporaneous with adoption made a policy election to classify distributions received from our equity method investment using the nature of distribution approach. Adoption of the standard had no current impact on the Company's consolidated financial statements, as this is the manner in which we have recorded previous distributions from our equity method investee. There were no distributions in the nine months ended June 29, 2019.
3. Supplemental Financial Information
Inventories
The following table presents the components of inventories at the dates indicated:
|
| | | | | | | |
(in thousands of dollars) | July 4, 2020 | | September 28, 2019 |
Raw materials | $ | 108,041 |
| | $ | 60,033 |
|
Work in process | 29,790 |
| | 16,663 |
|
Finished goods | 17,886 |
| | 2,134 |
|
Total inventories | $ | 155,717 |
| | $ | 78,830 |
|
|
| | | | | | | |
(in thousands of dollars) | June 29, 2019 | | September 29, 2018 |
Raw materials | $ | 94,452 |
| | $ | 42,439 |
|
Work in process | 34,730 |
| | 13,141 |
|
Finished goods | 11,506 |
| | 1,753 |
|
Total inventories | $ | 140,688 |
| | $ | 57,333 |
|
Product Warranties
The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Balance at beginning of period | $ | 21,398 |
| | $ | 21,520 |
| | $ | 22,343 |
| | $ | 22,646 |
|
Add current period accruals | 1,947 |
| | 3,358 |
| | 6,076 |
| | 7,196 |
|
Current period reductions of accrual | (2,517 | ) | | (2,358 | ) | | (7,591 | ) | | (7,322 | ) |
Balance at end of period | $ | 20,828 |
| | $ | 22,520 |
| | $ | 20,828 |
| | $ | 22,520 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Balance at beginning of period | $ | 21,520 |
| | $ | 19,283 |
| | $ | 22,646 |
| | $ | 20,910 |
|
Add current period accruals | 3,358 |
| | 3,421 |
| | 7,196 |
| | 7,786 |
|
Current period reductions of accrual | (2,358 | ) | | (2,853 | ) | | (7,322 | ) | | (8,845 | ) |
Balance at end of period | $ | 22,520 |
| | $ | 19,851 |
| | $ | 22,520 |
| | $ | 19,851 |
|
Extended Warranties
The following table reflects activity in deferred warranty income (current and long-term portions combined), for the sale of extended warranties of two to five years, for the periods presented: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Balance at beginning of period | $ | 22,948 |
| | $ | 22,901 |
| | $ | 24,045 |
| | $ | 23,191 |
|
Add current period deferred income | 1,769 |
| | 2,880 |
| | 5,058 |
| | 6,686 |
|
Current period recognition of income | (2,672 | ) | | (2,196 | ) | | (7,058 | ) | | (6,292 | ) |
Balance at end of period | $ | 22,045 |
| | $ | 23,585 |
| | $ | 22,045 |
| | $ | 23,585 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Balance at beginning of period | $ | 22,901 |
| | $ | 20,461 |
| | $ | 23,191 |
| | $ | 19,295 |
|
Add current period deferred income | 2,880 |
| | 2,974 |
| | 6,686 |
| | 7,800 |
|
Current period recognition of income | (2,196 | ) | | (1,434 | ) | | (6,292 | ) | | (5,094 | ) |
Balance at end of period | $ | 23,585 |
| | $ | 22,001 |
| | $ | 23,585 |
| | $ | 22,001 |
|
With the adoption of ASU No. 2016-12 (as described in Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards), theThe outstanding balance of deferred warranty income in the table above is considered a "contract liability", and represents a performance obligation of the Company that we satisfy over the term of the arrangement but for which we have been paid in full at the time the warranty was sold. We expect to recognize $3.0$2.3 million of the outstanding contract liability during the remainder of fiscal 2019, $7.52020, $7.8 million in fiscal 2020,2021, and the remaining balance thereafter.
Self-Insurance
The following table reflects our total accrued self-insurance liability, comprised of workersworkers' compensation and health insurance related claims, at the dates indicated: |
| | | | | | | |
(in thousands of dollars) | July 4, 2020 | | September 28, 2019 |
Current portion | $ | 2,732 |
| | $ | 2,933 |
|
Long-term portion | 1,794 |
| | 1,775 |
|
Total accrued self-insurance | $ | 4,526 |
| | $ | 4,708 |
|
|
| | | | | | | |
(in thousands of dollars) | June 29, 2019 | | September 29, 2018 |
Current portion | $ | 2,882 |
| | $ | 3,332 |
|
Long-term portion | 1,757 |
| | 1,901 |
|
Total accrued self-insurance | $ | 4,639 |
| | $ | 5,233 |
|
The current and long-term portions of the accrued self-insurance liability are reflected in accrued expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Shipping and Handling Revenues
Shipping and handling revenues were $6.0$3.9 million and $6.5$6.0 million for the three months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively, and $12.5$11.5 million and $13.5$12.5 million for the nine months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively. The related cost of goods sold was $5.3$3.4 million and $5.8$5.3 million for the three months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively, and $11.0$10.0 million and $11.7$11.0 million for the nine months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively.
Pension Expense
Components of net periodic pension benefit cost were as follows for the periods presented: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Interest cost | $ | 1,237 |
| | $ | 1,512 |
| | $ | 3,711 |
| | $ | 4,535 |
|
Expected return on plan assets | (1,846 | ) | | (1,905 | ) | | (5,538 | ) | | (5,714 | ) |
Amortization of prior loss | 430 |
| | 689 |
| | 1,289 |
| | 2,068 |
|
Net periodic benefit cost | $ | (179 | ) | | $ | 296 |
| | $ | (538 | ) | | $ | 889 |
|
Amortization of prior loss, recognized in other comprehensive income | 430 |
| | 689 |
| | 1,289 |
| | 2,068 |
|
Total recognized in net periodic pension benefit cost and other comprehensive income | $ | (609 | ) | | $ | (393 | ) | | $ | (1,827 | ) | | $ | (1,179 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Interest cost | $ | 1,512 |
| | $ | 1,357 |
| | $ | 4,535 |
| | $ | 4,071 |
|
Expected return on plan assets | (1,905 | ) | | (1,776 | ) | | (5,714 | ) | | (5,328 | ) |
Amortization of prior loss | 689 |
| | 880 |
| | 2,068 |
| | 2,640 |
|
Net periodic benefit cost | $ | 296 |
| | $ | 461 |
| | $ | 889 |
| | $ | 1,383 |
|
Amortization of prior loss, recognized in other comprehensive income | 689 |
| | 880 |
| | 2,068 |
| | 2,640 |
|
Total recognized in net periodic pension benefit cost and other comprehensive income | $ | (393 | ) | | $ | (419 | ) | | $ | (1,179 | ) | | $ | (1,257 | ) |
Pension expense is recognized as a component of other expense, net on our Condensed Consolidated Statement of Operations. As disclosed in Note 2, we reclassified previously reported pension expense amounts of $0.5 million and $1.4 million from selling, general and administrative expenses to other expense, net for the three and nine months ended June 30, 2018, respectively.
Warrants
At June 29, 2019, there were a total of 820,614 warrants outstanding to purchase 410,307 shares of our Common Stock.
Derivative Instruments
We are charged variable rates of interest on our indebtedness outstanding under the Amended Credit Agreement (defined below) which exposes us to fluctuations in interest rates. On October 24, 2018, the Company entered into a four-year interest rate collar with a $150.0 million notional value with an effective date of November 30, 2018. The collar was entered into in order to partially mitigate our exposure to interest rate fluctuations on our variable rate debt. The collar establishes a range where we will pay the counterparty if the three-month LIBOR rate falls below the established floor rate of 1.5%, and the counterparty will pay us if the three-month LIBOR rate exceeds the ceiling rate of 3.3%. The collar settles quarterly through the termination date of September 30, 2022. No payments or receipts are exchanged on the interest rate collar contracts unless interest rates rise above or fall below the contracted ceiling or floor rates. During the three-months ended July 4, 2020, the three-month LIBOR rate fell below the established floor, which required an immaterial payment to the counterparty.
Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At June 29, 2019,July 4, 2020, the fair value of the interest rate collar contract was $(1.1)$(4.2) million and is included in "other current liabilities" on the Condensed Consolidated Balance Sheets. The fair value of the interest rate collar is a Level 2 fair value measurement, based on quoted prices of similar items in active markets.
Equity Investment in Affiliate
The Company holds a 50% equity interest in Micro Bird Holdings, Inc. (“Micro Bird”), and accounts for Micro Bird under the equity method of accounting. The carrying amount of the equity method investment is adjusted for the Company’s proportionate share of net earnings and losses and any dividends received. At July 4, 2020 and September 28, 2019, the carrying value of the Company's investment was $11.9 million and $11.1 million, respectively.
In recognizing the Company’s 50% portion of Micro Bird net income, the Company recorded $0.8 million and $1.2 million in Equity in net income of non-consolidated affiliate for the nine months ended July 4, 2020 and June 29, 2019, respectively. Summarized unaudited financial information for these periods for Micro Bird is as follows:
|
| | | | | | | |
| Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 |
Revenues | $ | 58,883 |
| | $ | 86,364 |
|
Gross profit | 7,318 |
| | 9,961 |
|
Operating income | 1,557 |
| | 3,717 |
|
Net income | 1,103 |
| | 2,409 |
|
4. Debt
Amended Credit Agreement
On September 13, 2018,May 7, 2020, the Company entered into a first amendmentSecond Amendment which amended the Credit Agreement, dated as of our December 12, 2016 credit agreement ("Amended(the “Credit Agreement”, as amended by that certain First Amendment to Credit Agreement"Agreement, dated as of September 13, 2018 (the “First Amendment”), and as further amended by the Second Amendment, the “Amended Credit Agreement”). The Second Amendment provided
for an aggregate lender commitment of $41.9 million of additional revolving commitments bringing the total revolving commitments to $141.9 million. The revolving commitments under the Amended Credit Agreement provided for additional funding of $50.0 million and was funded in the first quarter of fiscal 2019. Substantially all the proceeds were used to complete a tender offer to purchase shares of our common and preferred stock.
The Amended Credit Agreement also increased the revolving credit facility to $100.0 million from $75.0 million. The amendment extended the maturity date tomature on September 13, 2023, five years fromwhich is the fifth anniversary of the effective date of the firstFirst Amendment. The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0% to 0.75%. We incurred $0.9 million in fees related to the amendment. In connection withThe fees were capitalized to other assets on the Amended Credit Agreement, we incurred $2.0 million of debt discountConsolidated Balance Sheets and issuance costs, which were recorded as contra-debt and will beare amortized over the lifeon a straight-line basis to interest expense until maturity of the Amended Credit Agreement using the effective interest method.
Additional Disclosures
agreement.
Term debt consisted of the following at the dates indicated:
|
| | | | | | | |
(in thousands of dollars) | July 4, 2020 | | September 28, 2019 |
2023 term loan, net of deferred financing costs of $2,458 and $3,124, respectively | $ | 176,367 |
| | $ | 183,126 |
|
Less: current portion of long-term debt | 9,900 |
| | 9,900 |
|
Long-term debt, net of current portion | $ | 166,467 |
| | $ | 173,226 |
|
|
| | | | | | | |
(in thousands of dollars) | June 29, 2019 | | September 29, 2018 |
2023 and 2021 term loans, net of deferred financing costs of $3,346 and $4,011, respectively | $ | 185,379 |
| | $ | 142,139 |
|
Less: current portion of long-term debt | 9,900 |
| | 9,900 |
|
Long-term debt, net of current portion | $ | 175,479 |
| | $ | 132,239 |
|
Term loans are recognized on the Condensed Consolidated Balance Sheets at the unpaid principal balance, and are not subject to fair value measurement; however, given the variable rates on the loans, the Company estimates that the unpaid principal balance approximates fair value. If measured at fair value in the financial statements, the term loans would be classified as Level 2 in the fair value hierarchy. At June 29, 2019July 4, 2020 and September 29, 2018, $188.728, 2019, $178.8 million and $146.2$186.3 million, respectively, were outstanding on the term loans.
At June 29, 2019July 4, 2020 and September 29, 2018,28, 2019, the stated interest rates on the term loans were 4.4%2.8% and 4.5%4.4%, respectively. At June 29, 2019July 4, 2020 and September 29, 2018,28, 2019, the weighted-average annual effective interest rates for the term loans were 5.0%4.1% and 4.1%5.0%, respectively, which includes amortization of the deferred financing costs.
At June 29, 2019, $25.0July 4, 2020, $45.0 million in borrowings were outstanding on the Revolving Credit Facility and $6.9 million of Letters of Credit were outstanding; therefore, the Company would have been able to borrow $68.1$90.0 million on the revolving line of credit.
Interest expense on all indebtedness was $3.4$2.4 million and $1.8$3.4 million for the three months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively, and $10.3$10.0 million and $5.1$10.3 million for the nine months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively.
The schedulesschedule of remaining principal maturitiespayments through maturity for total debt for the next five fiscal years areis as follows:
|
| | | | |
(in thousands of dollars) |
Year | | Principal Payments |
2020 | | $ | 2,475 |
|
2021 | | 9,900 |
|
2022 | | 14,850 |
|
2023 | | 196,600 |
|
Total remaining principal payments | | $ | 223,825 |
|
|
| | | | |
(in thousands of dollars) |
Year | | Principal Payments |
2019 | | $ | 2,475 |
|
2020 | | 9,900 |
|
2021 | | 9,900 |
|
2022 | | 14,850 |
|
2023 | | 176,600 |
|
Total remaining principal payments | | $ | 213,725 |
|
5. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the forecast pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily the United States. In periods where our operating income approximates or is equal to break-even, the effective tax rates for quarter-to-date and full-year periods may not be meaningful due to discrete period items.
On March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law. While the CARES Act has broad income tax implications for many companies, it did not have a material impact on our reported income tax accounts.
Three Months
The effective tax rate for the three-month period ended July 4, 2020 was 70.1%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.
The effective tax rate for the three monththree-month period ended June 29, 2019 was 19.1%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.
ForNine Months
The effective tax rate for the three monthnine-month period ended June 30, 2018, we recordedJuly 4, 2020 was 38.8% and differed from the statutory federal tax rate of 21%. The difference is mainly due to a net discrete period tax benefit of $8.1 millionfrom share-based compensation expenses, but also due to the lapse of statute of limitations on the underlying item that created our uncertain tax position. We also recorded a $1.7 million benefit related to the filing of our prior year tax returns. The benefit resulted from various deductions that were accelerated and reported in a highernormal tax rate year. The return filing also allowed us to reassessitems, such as the benefit from federal and reverse a $0.5 millionstate tax credits (net of valuation allowance for our foreignallowance), which were partially offset by net non-deductible compensation expenses and other tax credit carryforward that had been recorded earlier in 2018.adjustments.
The effective tax rate for the three month period ended June 30, 2018 was (53.4)%, which significantly differed from the transitional 2018 statutory federal tax rate of 24.5%. The difference is mainly due to the above noted release of uncertain tax positions and provision to return adjustments, but the rate was also favorably impacted by normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense.
Nine Months
The effective tax rate for the nine monthnine-month period ended June 29, 2019 was 19.7%, which and differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, primarily federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.
For the nine month period ended June 30, 2018, we recorded a tax benefit of $8.1 million due to the lapse of statute of limitations on the underlying item that created our uncertain tax position. We also recorded a $1.7 million benefit related to the filing of our prior year tax returns. The benefit resulted from various deductions that were accelerated and reported in a higher tax rate year. The return filing also allowed us to reassess and reverse a $0.5 million valuation allowance for our foreign tax credit carryforward that had been recorded earlier in 2018.
The effective tax rate for the nine month period ended June 30, 2018 was (59.0)% and significantly differed from the transitional 2018 statutory federal income tax rate of 24.5%. The difference is mainly due to the above noted release of uncertain tax positions and provision to return adjustments, but was partially offset by a $2.4 million expense recorded in the prior fiscal quarter to reflect the newly enacted Tax Act. The Tax Act adjustments include resetting our deferred tax accounts to the new rates as well as $1.1 million of expense from increasing the carrying value of our uncertain tax positions, and $0.5 million of additional valuation allowance for our foreign tax credit carryforward. Of this adjustment amount, the portion relating to uncertain tax positions and valuation allowance were reversed in the current quarter. The rate was also favorably impacted by normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense.
6. Guarantees, Commitments and Contingencies
Litigation
At June 29, 2019,July 4, 2020, the Company had a number of product liability and other cases pending. Management believes that, considering the Company’s insurance coverage and its intention to vigorously defend its positions, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements.
Environmental
The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company is currently not involved in any material environmental proceedings and therefore management believes that the resolution of pending environmental matters will not have a material adverse effect on the Company’s financial statements.
Guarantees
In the ordinary course of business, we may provide guarantees for certain transactions entered into by our dealers. At June 29, 2019,July 4, 2020, we had a $3.0 million in aggregate guaranteesguarantee outstanding which relaterelates to guaranteesa guarantee of indebtedness for a term loansloan with remaining maturities ofmaturity up to 3.62.5 years. The $3.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote. At June 29, 2019, $0.4July 4, 2020, $0.3 million was included in other current liabilities on our Condensed Consolidated Balance Sheets for the estimated fair value of the guarantees.guarantee.
Lease Commitments
We leasehave operating and finance leases for office andand/or warehouse space and for use in our operations, which are accounted for as operating leases. The operatingequipment. Our leases have remaining terms ranging from seven monthsof 4.4 to 8.4 years. One of our leases includes a renewal option to extend the lease for five7.4 years.
Total operating lease expense was $0.5 million and $1.4 million for the three and nine months ended June 29, 2019, respectively, and is recorded in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. Total rent expense was $0.2 million and $0.5 million for the three and nine months ended June 30, 2018, respectively, and is recorded in selling, general
and administrative expenses on the Condensed Consolidated Statements of Operations. Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows was $1.2 million for the nine months ended June 29, 2019.
At June 29, 2019, right-of-use assets totaling $7.3 million were included in property, plant and equipment, net, and lease liabilities totaling $1.4 million and $8.0 million were included in other current liabilities and other liabilities (non-current), respectively.
At June 29, 2019, the weighted average remaining lease term was 7.2 years and the weighted average discount rate used to calculate the present value of future lease payments was 4.5%.
Maturities of operating lease liabilities at June 29, 2019 are as follows:
|
| | | | |
(in thousands of dollars) | | |
Fiscal Years Ended | | Amount |
2019 | | $ | 589 |
|
2020 | | 1,577 |
|
2021 | | 1,399 |
|
2022 | | 1,421 |
|
2023 | | 1,441 |
|
Thereafter | | 4,624 |
|
Total future minimum lease payments | | 11,051 |
|
Less: imputed interest | | 1,659 |
|
Total operating lease liabilities | | $ | 9,392 |
|
7. Segment Information
We manage our business in two2 operating segments: (i) the Bus segment, which includes the manufacturing and assembly of buses to be sold to a variety of customers across the United States, Canada and in international markets; and (ii) the Parts segment, which consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. The tables below present segment net sales and gross profit for the periods presented:
Net sales
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Bus (1) | $ | 292,166 |
| | $ | 297,653 |
| | $ | 626,441 |
| | $ | 647,525 |
| $ | 180,592 |
| | $ | 292,166 |
| | $ | 554,061 |
| | $ | 626,441 |
|
Parts (1) | 16,608 |
| | 16,533 |
| | 48,901 |
| | 45,838 |
| 8,589 |
| | 16,608 |
| | 43,749 |
| | 48,901 |
|
Segment net sales | $ | 308,774 |
| | $ | 314,186 |
| | $ | 675,342 |
| | $ | 693,363 |
| $ | 189,181 |
| | $ | 308,774 |
| | $ | 597,810 |
| | $ | 675,342 |
|
(1) Parts segment revenue includes $0.8 million and $1.0 million for the three months ended July 4, 2020 and June 29, 2019, respectively, and $3.2 million and $2.5 million for the three months ended June 29, 2019 and June 30, 2018, respectively, and $0.6 million and $1.9 million for the nine months ended July 4, 2020 and June 29, 2019, and June 30, 2018, respectively, related to inter-segment sales of parts that was eliminated by the Bus segment upon consolidation.
Gross profit
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Bus | $ | 18,079 |
| | $ | 35,996 |
| | $ | 50,884 |
| | $ | 69,653 |
|
Parts | 3,003 |
| | 5,786 |
| | 15,667 |
| | 17,193 |
|
Segment gross profit | $ | 21,082 |
| | $ | 41,782 |
| | $ | 66,551 |
| | $ | 86,846 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Bus | $ | 35,996 |
| | $ | 31,342 |
| | $ | 69,653 |
| | $ | 63,062 |
|
Parts | 5,786 |
| | 5,631 |
| | 17,193 |
| | 16,227 |
|
Segment gross profit | $ | 41,782 |
| | $ | 36,973 |
| | $ | 86,846 |
| | $ | 79,289 |
|
The following table is a reconciliation of segment gross profit to consolidated income (loss) before income taxes for the periods presented: |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Segment gross profit | $ | 21,082 |
| | $ | 41,782 |
| | $ | 66,551 |
| | $ | 86,846 |
|
Adjustments: | | | | | | | |
Selling, general and administrative expenses | (17,793 | ) | | (20,996 | ) | | (58,146 | ) | | (61,197 | ) |
Interest expense | (2,406 | ) | | (3,369 | ) | | (9,961 | ) | | (10,241 | ) |
Interest income | 27 |
| | — |
| | 27 |
| | 9 |
|
Other income (expense), net | 181 |
| | (410 | ) | | 555 |
| | (1,034 | ) |
Income (loss) before income taxes | $ | 1,091 |
| | $ | 17,007 |
| | $ | (974 | ) | | $ | 14,383 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Segment gross profit | $ | 41,782 |
| | $ | 36,973 |
| | $ | 86,846 |
| | $ | 79,289 |
|
Adjustments: | | | | | | | |
Selling, general and administrative expenses | (20,996 | ) | | (20,489 | ) | | (61,197 | ) | | (64,226 | ) |
Interest expense | (3,369 | ) | | (1,834 | ) | | (10,241 | ) | | (5,112 | ) |
Interest income | — |
| | 25 |
| | 9 |
| | 42 |
|
Other expense, net | (410 | ) | | (667 | ) | | (1,034 | ) | | (399 | ) |
Income before income taxes | $ | 17,007 |
| | $ | 14,008 |
| | $ | 14,383 |
| | $ | 9,594 |
|
Sales are attributable to geographic areas based on customer location and were as follows for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
United States | $ | 175,433 |
| | $ | 286,499 |
| | $ | 544,176 |
| | $ | 629,668 |
|
Canada | 13,429 |
| | 21,639 |
| | 49,331 |
| | 43,499 |
|
Rest of world | 319 |
| | 636 |
| | 4,303 |
| | 2,175 |
|
Total net sales | $ | 189,181 |
| | $ | 308,774 |
| | $ | 597,810 |
| | $ | 675,342 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
United States | $ | 286,499 |
| | $ | 274,984 |
| | $ | 629,668 |
| | $ | 628,046 |
|
Canada | 21,639 |
| | 37,490 |
| | 43,499 |
| | 59,949 |
|
Rest of world | 636 |
| | 1,712 |
| | 2,175 |
| | 5,368 |
|
Total net sales | $ | 308,774 |
| | $ | 314,186 |
| | $ | 675,342 |
| | $ | 693,363 |
|
8. Revenue
As noted in Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards, the Company adopted the new revenue recognition guidance (ASC 606) effective September 30, 2018 using the modified retrospective approach. As a result, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at September 30, 2018. Adopting the new standard primarily impacted the timing of recognition of specific sales incentives offered to our customers. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The difference in revenue recognized under the new guidance versus the previous guidance was an increase of $0.8 million for the nine months ended June 29, 2019. Under the new guidance, at adoption, we recorded $0.9 million in accrued liabilities, a deferred tax asset of $0.2 million, and a $0.7 million retained earnings adjustment. Under previous guidance, we would not have recorded any accrued liabilities or deferred tax assets resulting in no retained earnings impact to our Condensed Consolidated Balance Sheets.
The following table disaggregates revenue by product category for the periods presented: | | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Diesel buses | $ | 135,246 |
| | $ | 191,355 |
| | $ | 335,553 |
| | $ | 427,353 |
| $ | 88,299 |
| | $ | 135,246 |
| | $ | 278,698 |
| | $ | 335,553 |
|
Alternative fuel buses (1) | 141,939 |
| | 96,189 |
| | 260,340 |
| | 201,067 |
| 80,975 |
| | 141,939 |
| | 245,766 |
| | 260,340 |
|
Other (2) | 15,486 |
| | 10,593 |
| | 32,061 |
| | 20,577 |
| 11,583 |
| | 15,486 |
| | 30,931 |
| | 32,061 |
|
Parts | 16,103 |
| | 16,049 |
| | 47,388 |
| | 44,366 |
| 8,324 |
| | 16,103 |
| | 42,415 |
| | 47,388 |
|
Net sales | $ | 308,774 |
| | $ | 314,186 |
| | $ | 675,342 |
| | $ | 693,363 |
| $ | 189,181 |
| | $ | 308,774 |
| | $ | 597,810 |
| | $ | 675,342 |
|
(1) Includes buses sold with any fuel source other than diesel (e.g. gasoline, propane, CNG, electric).
(2) Includes shipping and handling revenue, extended warranty income, surcharges, chassis, and bus shell sales.
9. Earnings Per Share
The following table presents the earnings per share computation for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands except for share data) | June 29, 2019 | | June 30, 2018 | | June 29, 2019 | | June 30, 2018 |
Numerator: | | | | | | | |
Net income | $ | 14,601 |
| | $ | 21,891 |
| | $ | 12,708 |
| | $ | 15,888 |
|
Less: convertible preferred stock dividends | — |
| | 182 |
| | — |
| | 1,715 |
|
Net income available to common stockholders | $ | 14,601 |
| | $ | 21,709 |
| | $ | 12,708 |
| | $ | 14,173 |
|
| | | | | | | |
Basic earnings per share (1): | | | | | | | |
Weighted average common shares outstanding | 26,451,107 |
| | 26,209,697 |
| | 26,449,751 |
| | 24,677,838 |
|
Basic earnings per share | $ | 0.55 |
| | $ | 0.83 |
| | $ | 0.48 |
| | $ | 0.57 |
|
| | | | | | | |
Diluted earnings per share (2): | | | | | | | |
Weighted average common shares outstanding | 26,451,107 |
| | 26,209,697 |
| | 26,449,751 |
| | 24,677,838 |
|
Weighted average dilutive securities, convertible preferred stock | — |
| | 1,471,902 |
| | 131,979 |
| | — |
|
Weighted average dilutive securities, restricted stock | 94 |
| | 687 |
| | 29,149 |
| | 24,403 |
|
Weighted average dilutive securities, warrants | 150,292 |
| | 607,532 |
| | 178,290 |
| | 836,932 |
|
Weighted average dilutive securities, stock options | 118,617 |
| | 267,096 |
| | 131,116 |
| | 270,318 |
|
Weighted average shares and dilutive potential common shares | 26,720,110 |
| | 28,556,914 |
| | 26,920,285 |
| | 25,809,491 |
|
Diluted earnings per share | $ | 0.55 |
| | $ | 0.77 |
| | $ | 0.47 |
| | $ | 0.55 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands except for share data) | July 4, 2020 | | June 29, 2019 | | July 4, 2020 | | June 29, 2019 |
Numerator: | | | | | | | |
Net income | $ | 1,286 |
| | $ | 14,601 |
| | $ | 244 |
| | $ | 12,708 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average common shares outstanding | 27,027,731 |
| | 26,451,107 |
| | 26,784,404 |
| | 26,449,751 |
|
Weighted-average dilutive securities, restricted stock | 50,769 |
| | 94 |
| | 135,792 |
| | 29,149 |
|
Weighted-average dilutive securities, warrants | — |
| | 150,292 |
| | — |
| | 178,290 |
|
Weighted-average dilutive securities, stock options | 1,515 |
| | 118,617 |
| | 60,284 |
| | 131,116 |
|
Weighted-average shares and dilutive potential common shares | 27,080,015 |
| | 26,720,110 |
| | 26,980,480 |
| | 26,788,306 |
|
| | | | | | | |
Earnings per share: | | | | | | | |
Basic earnings per share | $ | 0.05 |
| | $ | 0.55 |
| | $ | 0.01 |
| | $ | 0.48 |
|
Diluted earnings per share | $ | 0.05 |
| | $ | 0.55 |
| | $ | 0.01 |
| | $ | 0.47 |
|
(1) Basic earnings per share is calculated by dividing income available to common stockholders by the weighted average common shares outstanding during the period.
(2) For the nine months ended June 30, 2018, 2,791,468Potentially dilutive securities representing 0.4 million and 0.3 million shares of convertible preferredcommon stock were excluded from the dilutive calculationcomputation of diluted earnings per share for the three and nine months ended July 4, 2020, respectively, as the if-converted impacttheir effect would behave been anti-dilutive.
10. Accumulated Other Comprehensive Loss
The following table provides information on changes in accumulated other comprehensive loss for the periods presented:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | | Defined Benefit Pension Plan | | Total | | Defined Benefit Pension Plan | | Total |
July 4, 2020 | | | | | | | | |
Beginning Balance | | $ | (55,501 | ) | | $ | (55,501 | ) | | $ | (56,154 | ) | | $ | (56,154 | ) |
Amounts reclassified from other comprehensive loss and included in earnings | | 430 |
| | 430 |
| | 1,289 |
| | 1,289 |
|
Total other comprehensive income, before taxes | | 430 |
| | 430 |
| | 1,289 |
| | 1,289 |
|
Income tax expense | | (103 | ) | | (103 | ) | | (309 | ) | | (309 | ) |
Ending Balance July 4, 2020 | | $ | (55,174 | ) | | $ | (55,174 | ) | | $ | (55,174 | ) | | $ | (55,174 | ) |
| | | | | | | | |
June 29, 2019 | | | | | | | | |
Beginning Balance | | $ | (37,379 | ) | | $ | (37,379 | ) | | $ | (38,427 | ) | | $ | (38,427 | ) |
Amounts reclassified from other comprehensive loss and included in earnings | | 689 |
| | 689 |
| | 2,068 |
| | 2,068 |
|
Total other comprehensive income, before taxes | | 689 |
| | 689 |
| | 2,068 |
| | 2,068 |
|
Income tax expense | | (165 | ) | | (165 | ) | | (496 | ) | | (496 | ) |
Ending Balance June 29, 2019 | | $ | (36,855 | ) | | $ | (36,855 | ) | | $ | (36,855 | ) | | $ | (36,855 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(in thousands of dollars) | | Defined Benefit Pension Plan | | Total | | Defined Benefit Pension Plan | | Total |
June 29, 2019 | | | | | | | | |
Beginning Balance | | $ | (37,379 | ) | | $ | (37,379 | ) | | $ | (38,427 | ) | | $ | (38,427 | ) |
Amounts reclassified from other comprehensive loss and included in earnings | | 689 |
| | 689 |
| | 2,068 |
| | 2,068 |
|
Total other comprehensive income, before taxes | | 689 |
| | 689 |
| | 2,068 |
| | 2,068 |
|
Income tax expense | | (165 | ) | | (165 | ) | | (496 | ) | | (496 | ) |
Ending Balance June 29, 2019 | | $ | (36,855 | ) | | $ | (36,855 | ) | | $ | (36,855 | ) | | $ | (36,855 | ) |
| | | | | | | | |
June 30, 2018 | | | | | | | | |
Beginning Balance | | $ | (42,643 | ) | | $ | (42,643 | ) | | $ | (43,875 | ) | | $ | (43,875 | ) |
Amounts reclassified from other comprehensive loss and included in earnings | | 880 |
| | 880 |
| | 2,640 |
| | 2,640 |
|
Total other comprehensive income, before taxes | | 880 |
| | 880 |
| | 2,640 |
| | 2,640 |
|
Income tax expense | | (211 | ) | | (211 | ) | | (739 | ) | | (739 | ) |
Ending Balance June 30, 2018 | | $ | (41,974 | ) | | $ | (41,974 | ) | | $ | (41,974 | ) | | $ | (41,974 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited financial statements for the three and nine months ended July 4, 2020 and June 29, 2019 and June 30, 2018 and related notes appearing in Part I, Item 1 of this Report. Our actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.
We refer to the fiscal year ended September 29, 201828, 2019 as “fiscal 2018”2019”. We refer to the quarter ended July 4, 2020 as the “third quarter of fiscal 2020” and we refer to the quarter ended June 29, 2019 as the “third quarter of fiscal 2019” and we refer to the quarter ended June 30, 2018 as the “third quarter of fiscal 2018”. There were 13 weeks in theThe third quarters of fiscal 2020 and 2019 both included 13 weeks. The nine month periods in fiscal 2020 and 2019 included 40 and fiscal 2018.39 weeks, respectively.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) of Blue Bird Corporation (“Blue Bird” or the “Company”) contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:
the future financial performance of the Company;
negative changes in the market for Blue Bird products;
expansion plans and opportunities;
challenges or unexpected costs related to manufacturing;
future impacts from the novel coronavirus pandemic known as "COVID-19", and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which could include, among other effects:
| |
◦ | disruption in global financial and credit markets; |
| |
◦ | supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic; |
| |
◦ | negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations; |
| |
◦ | negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions; |
| |
◦ | financial difficulties of our customers impacted by the pandemic; |
| |
◦ | reductions in market demand for our products due to the pandemic; and |
| |
◦ | potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic. |
These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.
Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. The following information should be read in conjunction with the financial statements included in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.
Executive Overview
Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications, Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs. In addition, Blue Bird is the market leader in alternative to diesel fuel applications with its propane-powered, gasoline-powered, compressed natural gas (“CNG”)-powered, school buses and all-electricall-electric-powered school buses.
Blue Bird sells its buses and parts through an extensive network of United States and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and Type D school buses. Blue Bird also sells directly to major fleet operators, the United States Government, state governments, and authorized dealers in a number of foreign countries.
Impact of COVID-19 on Our Business
During our third fiscal quarter of 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic. The pandemic had triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions are expected to continue for an extended period of time. In early April, in an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, address the reduced demand from our customers and be responsive and efficient with supply chain constraints, we closed our manufacturing facilities for two weeks and requested our office employees to work from home. In late April, we successfully restarted manufacturing operations and have continued to manufacture buses since that time without further material disruption. While we have not experienced any pervasive COVID-19 illnesses to date, if we were to experience some form of outbreak within our facilities, we would take all appropriate measures to protect the health and safety of our employees, which could include another temporary halt in production.
The pandemic has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected our business. It will continue to adversely impact our business for the remainder of our fiscal year 2020 and perhaps beyond. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic and its impact on the overall U.S and global economy. While the global market downturn, closures and limitations on movement are expected to be temporary, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.
The full impacts from COVID-19 on the Company's financial results in fiscal year 2020 are uncertain as we continue to monitor and assess the level of future customer demand, the ability of school boards to make timely decisions, the ability of suppliers to resume and maintain operations, the ability of our employees to continue to work, and our ability to maintain continuous production for the remaining portion of our fiscal year. A prolonged economic downturn would likely have a material adverse impact on our sales and financial results beyond fiscal 2020. See PART II, Item 1A. Risk Factors, of this Quarterly Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.
The Company has taken actions to control spending and improve liquidity, including minor headcount rationalization and an increase in the revolving credit facility from $100.0 million to $141.9 million with a Second Amendment to the Credit Agreement. Further detail and discussion of this amendment can be found in the "Liquidity and Capital Resources" section of this Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q. Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential
longer-term impacts of business interruption from the pandemic. Our actions may include reducing hiring activities, limiting discretionary spending, limiting spending on capital investment projects or other steps necessary to preserve adequate liquidity. We will continue to actively monitor the situation and may need to take further actions required by federal, state or local authorities or enact measures we determine are in the best interests of our employees, customers, suppliers and shareholders. For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates, Recent Accounting Pronouncements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 20182019 Form 10-K, filed with the SEC on December 12, 20182019 under the caption “ Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference. Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended June 29, 2019,July 4, 2020, except as follows:
Revenue RecognitionAmortization of Deferred Pension Losses
TheHistorically, the Company records revenue, nethas amortized deferred losses from our frozen defined benefit pension plan accounted for under ASC 715, Compensation - Retirement Benefits, over the expected remaining employment period of tax, when the following five steps have been completed:
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1. | Identification of the contract(s) with a customer; |
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2. | Identification of the performance obligation(s) in the contract; |
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3. | Determination of the transaction price; |
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4. | Allocation of the transaction price to the performance obligations in the contract; and |
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5. | Recognition of revenue when, or as, we satisfy performance obligations. |
The Company records revenue when performance obligations are satisfied by transferring controlparticipants who remained employed with the Company. ASC 715 states that if all or almost all of a promised good or service toplan's participants are inactive, the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of, and obtain substantially allaverage remaining life expectancy of the remaining benefits from that goodinactive participants shall be used to amortize the unrecognized net gain or service.
Our product revenue includes sales of buses and bus parts, each of which are generally recognized as revenue at a point in time, once all conditions for revenue recognition have been met, as they represent our performance obligations in a sale. For buses, control is generally transferred and the customer has the ability to direct the use of and obtain substantially allloss instead of the average remaining benefitsservice period of active plan participants. In the product whenfirst quarter of 2020, the product is delivered or whenratio of active (employed) to inactive participants in our plan declined to less than 10%, a figure we believe meets the product has been completed, is ready for delivery, has been paid for, its title has transferred and it is awaiting pickup bydefinition of almost all participants as inactive. Accordingly, we have changed the customer. For certain bus sale transactions, we may provide incentives including payment of a limited amount of future interest charges our customers may incur relatedamortization period from approximately seven years in 2019 to their purchase and financing of the bus with third party financing companies. We reduce revenue at the recording date by the full amount of potential future interest we mayapproximately 23 years in 2020. Future years will be obligated to pay, which is an application of the "most likely amount" method. For parts sales, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with the point in time when the customer has assumed risk of loss and title has passed for the goods sold.
The Company sells extended warranties related to its products. Revenue related to these contracts is recognizeddetermined based on the stand-alone selling price of the arrangement, on a straight-line basis over the contract period and costs thereunder are expensed as incurred.participant data at that time.
The Company includes shipping and handling revenues, which represents costs billed to customers, in net sales on the Condensed Consolidated Statements of Operations. The related costs incurred by the Company are included in cost of goods sold on the Condensed Consolidated Statements of Operations.
Leases
We determine if an arrangement is a lease at inception. Operating leases include lease right-of-use (“ROU”) assets, which we include in property, plant and equipment on our Condensed Consolidated Balance Sheets. The lease liabilities associated with operating leases are included in other current liabilities and other liabilities on our Condensed Consolidated Balance Sheets. We do not have any finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the leases recorded do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any base rental or lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term as a component of selling, general and administrative expenses on Condensed Consolidated Statements of Operations.
Derivative Instruments
In limited circumstances, we may utilize derivative instruments to manage certain exposures to changes in foreign currency exchange rates or as cash flow hedges for variable rate debt. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our operating results or included in other comprehensive income (loss), depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting treatment. If realized, gains and losses on derivative instruments are recognized in the operating results line item that reflects the underlying exposure that was hedged. The exchange of cash, if any, associated with derivative transactions is classified in the same category as the cash flows from the items subject to the economic hedging relationships.
Statement of Cash Flows
We classify distributions received from our equity method investment using the nature of distribution approach, such that distributions received are classified based on the nature of the activity of the investee that generated the distribution. Returns on investment are classified within operating activities, while returns of investment are classified within investing activities.
Recent Accounting Pronouncements
See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements.
Factors Affecting Our Revenues
Our revenues are driven primarily by the following factors:
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• | Property tax revenues. Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate. |
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• | Student enrollment and delivery mechanisms for learning. Increases or decreases in the number of school bus riders have a direct impact on school district demand. Due to the COVID-19 pandemic and evolving protocols for social distancing and public health concerns, the future form of educational delivery is uncertain, and increased remote learning could reasonably be expected to decrease the number of school bus riders. |
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• | Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period. |
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• | Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district. |
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• | Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions. |
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• | Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year. |
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• | Seasonality. Historically, our sales have been subject to seasonal variation based on the school calendar with the peak season during our third and fourth fiscal quarters. Sales during the third and fourth fiscal quarters were typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality has become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of results between fiscal periods. |
Property tax revenues. Property tax revenues are one of the major sources of funding for new school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate.
Student enrollment. Increases or decreases in the number of school bus riders has a direct impact on school district demand.
Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period.
Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district.
Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.
Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year.
Seasonality. Our sales are subject to seasonal variation based on the school calendar. The peak season has historically been during our third and fourth fiscal quarters. Sales during the third and fourth fiscal quarters are typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. There are, however, variations in the seasonal demands from year to year depending in large part upon municipal budgets, distinct replacement cycles and student enrollment. This seasonality and annual variations of this seasonality could impact the ability to compare results between fiscal periods.
Factors Affecting Our Expenses and Other Items
Our expenses and other line items on our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors:
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• | Cost of goods sold. The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense, and overhead. Our cost of goods sold may vary from period to period due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities. |
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• | Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing, information technology services, and other administrative matters and functions. In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel. |
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• | Interest expense. Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt. Interest expense also includes unrealized gains or losses from interest rate hedges, if any, as well as expenses related to debt guarantees, if any. |
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• | Income taxes. We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken. |
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• | Other income (expense), net. This includes periodic pension expense as well as gains or losses on foreign currency, if any. Other immaterial amounts not associated with operating expenses may also be included here. |
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• | Equity in net income of non-consolidated affiliate. We include in this line item our 50% share of net income or loss from our investment in Micro Bird, our unconsolidated Canadian joint venture. |
Cost of goods sold. The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense and overhead. Our cost of goods sold may vary from period to period in part due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities.
Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing and information technology services, as well as other administrative matters and functions. In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel.
Interest expense. Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt.
Income taxes. We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken.
Equity in net income of non-consolidated affiliate. We include in this line item our share of income or loss from our investment in Micro Bird, our unconsolidated 50/50 Canadian joint venture.
Key Non-GAAP Financial Measures We Use to Evaluate Our Performance
This filing includes the following non-GAAP financial measuresmeasures: “Adjusted EBITDA”, “Adjusted EBITDA Margin”, and “Free Cash Flow” because managementFlow.” Management views these metrics as a useful way to look at the performance of our operations between periods and to exclude decisions on capital investment and financing that might otherwise impact the review of profitability of the business based on present market conditions.
Adjusted EBITDA is defined as net income prior to interest income, interest expense including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities, income taxes, depreciation and amortization including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets, and disposals, as adjusted to add back certain charges that we may record each year,
such as stock-compensation expense, as well as non-recurring charges such as (i) significant product design changes; (ii) transaction related costs; or (iii) discrete expenses related to major cost cutting initiatives.initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. We believe these expenses and non-recurring charges are not considered an indicator of ongoing company performance. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures of performance defined in accordance with GAAP. The measures are used as a supplement to GAAP results in evaluating certain aspects of our business, as described below.
We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful to investors in evaluating our performance because the measures consider the performance of our operations, excluding decisions made with respect to capital investment, financing, and other non-recurring charges as outlined in the preceding paragraph. We believe the non-GAAP metrics offer additional financial metrics that, when coupled with the GAAP results and the reconciliation to GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income as an indicator of our performance or as alternatives to any other measure prescribed by GAAP as there are limitations to using such non-GAAP measures. Although we believe that Adjusted EBITDA and Adjusted EBITDA margin may enhance an evaluation of our operating performance based on recent revenue generation and product/overhead cost control because they exclude the impact of prior decisions made about capital investment, financing, and other expenses, (i) other companies in Blue Bird’s industry may define Adjusted EBITDA and Adjusted EBITDA margin differently than we do and, as a result, they may not be comparable to similarly titled measures used by other companies in Blue Bird’s industry, and (ii) Adjusted EBITDA and Adjusted EBITDA margin exclude certain financial information that some may consider important in evaluating our performance.
We compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and GAAP results, including providing a reconciliation to GAAP results, to enable investors to perform their own analysis of our operating results.
Our measure of “Free Cash Flow” is used in addition to and in conjunction with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
We define free cash flow as nettotal cash provided by/used in continuing operationsoperating activities minus cash paid for fixed assets and acquired intangible assets. We use free cash flow, and ratios based on the free cash flow, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flow since purchases of fixed assets and intangible assets are a necessary component of ongoing operations. In limited circumstances in which proceeds from sales of fixed or intangible assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate being a net seller of fixed or intangible assets, we expect free cash flow to be less than operating cash flows.
Our Segments
We manage our business in two operating segments, which are also our reportable segments: (i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties; and (ii) the Parts segment, which includes the sales of replacement bus parts. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit.
Consolidated Results of Operations for the Three Months Ended July 4, 2020 and June 29, 2019 and June 30, 2018:2019:
| | | | Three Months Ended | | Three Months Ended |
(in thousands of dollars) | | June 29, 2019 | | June 30, 2018 | | July 4, 2020 | | June 29, 2019 |
Net sales | | $ | 308,774 |
| | $ | 314,186 |
| | $ | 189,181 |
| | $ | 308,774 |
|
Cost of goods sold | | 266,992 |
| | 277,213 |
| | 168,099 |
| | 266,992 |
|
Gross profit | | $ | 41,782 |
| | $ | 36,973 |
| | $ | 21,082 |
| | $ | 41,782 |
|
Operating expenses | | | | | | | | |
Selling, general and administrative expenses | | 20,996 |
| | 20,489 |
| | 17,793 |
| | 20,996 |
|
Operating profit | | $ | 20,786 |
| | $ | 16,484 |
| | $ | 3,289 |
| | $ | 20,786 |
|
Interest expense | | (3,369 | ) | | (1,834 | ) | | (2,406 | ) | | (3,369 | ) |
Interest income | | — |
| | 25 |
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Other expense, net | | (410 | ) | | (667 | ) | |
Other income (expense), net | | | 181 |
| | (410 | ) |
Income before income taxes | | $ | 17,007 |
| | $ | 14,008 |
| | $ | 1,091 |
| | $ | 17,007 |
|
Income tax (expense) benefit | | (3,248 | ) | | 7,485 |
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Income tax expense | | | (765 | ) | | (3,248 | ) |
Equity in net income of non-consolidated affiliate | | 842 |
| | 398 |
| | 960 |
| | 842 |
|
Net income | | $ | 14,601 |
| | $ | 21,891 |
| | $ | 1,286 |
| | $ | 14,601 |
|
Other financial data: | | | | | | | | |
Adjusted EBITDA | | $ | 29,041 |
| | $ | 24,152 |
| | $ | 12,481 |
| | $ | 29,041 |
|
Adjusted EBITDA margin | | 9.4 | % | | 7.7 | % | | 6.6 | % | | 9.4 | % |
The following provides the results of operations of Blue Bird’s two reportable segments:
| | (in thousands of dollars) | | Three Months Ended | | Three Months Ended |
Net Sales by Segment | | June 29, 2019 | | June 30, 2018 | | July 4, 2020 | | June 29, 2019 |
Bus | | $ | 292,166 |
| | $ | 297,653 |
| | $ | 180,592 |
| | $ | 292,166 |
|
Parts | | 16,608 |
| | 16,533 |
| | 8,589 |
| | 16,608 |
|
Total | | $ | 308,774 |
| | $ | 314,186 |
| | $ | 189,181 |
| | $ | 308,774 |
|
| | | | | | | | |
Gross Profit by Segment | | | | | | | | |
Bus | | $ | 35,996 |
| | $ | 31,342 |
| | $ | 18,079 |
| | $ | 35,996 |
|
Parts | | 5,786 |
| | 5,631 |
| | 3,003 |
| | 5,786 |
|
Total | | $ | 41,782 |
| | $ | 36,973 |
| | $ | 21,082 |
| | $ | 41,782 |
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Net sales. Net sales were $189.2 million for the third quarter of fiscal 2020, a decrease of $119.6 million, or 38.7%, compared to $308.8 million for the third quarter of fiscal 2019, a2019. The decrease in net sales is attributed to the COVID-19 pandemic which caused the unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of $5.4 million, or 1.7%, compared to $314.2 million forhow schooling will be administered in the third quarterfall of fiscal 2018.2020 and beyond.
Bus sales decreased $5.5$111.6 million, or 1.8%38.2%, reflecting a decrease in units booked, which was partially offset by higher sales prices per unit. Bus volumes reflect the timing of orders. In the third quarter of fiscal 2019, 3,4202020, 1,948 units were booked compared to 3,7463,420 units booked for the same period in fiscal 2018. Bus volumes were impacted2019. The decrease is mainly attributed to lower orders due to the uncertainties caused by the timing of orders and customer delivery requirements.COVID-19 pandemic. The average net sales8.5% increase in unit price per unit for the third quarter of fiscal 2019 was 7.5% higher than2020 compared to the price per unit for the third quarter ofsame period in fiscal 2018. The increase in unit price2019 mainly reflects pricing actions.actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.
Parts sales increased $0.1decreased $8.0 million, or 0.5%48.3%, for the third quarter of fiscal 20192020 compared to the third quarter of fiscal 2018,2019, as we had higherlower sales volumes.volume, mainly from lower school bus units in operation due to early school closures caused by the COVID-19 pandemic. Stay at home orders and school closures reduced bus repair and maintenance activities due to less bus use.
Cost of goods sold. Total cost of goods sold was $168.1 million for the third quarter of fiscal 2020, a decrease of $98.9 million, or 37.0%, compared to $267.0 million for the third quarter of fiscal 2019, a decrease of $10.2 million, or 3.7%, compared to $277.2 million for the third quarter of fiscal 2018.2019. As a percentage of net sales, total cost of goods sold improvedincreased from 88.2%86.5% to 86.5%88.9%.
Bus segment cost of goods sold decreased $10.1$93.7 million, or 3.8%36.6%, for the third quarter of fiscal 20192020 compared to the third quarter ofsame period in fiscal 2018.2019, which aligned with the decrease in sales volume noted above. The average cost of goods sold per unit for the third quarter of fiscal 20192020 was 5.4%11.4% higher compared to the third quarter of fiscal 20182019 due to changesincreases in productmanufacturing costs from several COVID-19 related factors including absenteeism amongst our hourly workforce and customer mix as well as increased commodity costs related to tariffs.supply disruptions, each of which created manufacturing inefficiencies and higher costs.
The $0.1$5.2 million, or 0.7%48.4%, decrease in parts segment cost of goods sold for the third quarter of fiscal 20192020 compared to the third quarter of fiscal 2018 was primarily attributed to product mix which was partially offset by product costs.2019 aligned with the decrease in sales volume noted above.
Operating profit. Operating profit was $3.3 million for the third quarter of fiscal 2020, a decrease of $17.5 million, compared to operating profit of $20.8 million for the third quarter of fiscal 2019, an increase2019. Profitability was negatively impacted by a decrease of $4.3$20.7 million comparedin gross profit as outlined in the revenue and cost of goods sold discussion. This was partially offset by a decrease of $3.2 million in selling, general and administrative expenses as we have taken actions to operating profit of $16.5control spending during the pandemic.
Interest expense. Interest expense was $2.4 million for the third quarter of fiscal 2018. Profitability was positively impacted by an increase2020, a decrease of $4.8$1.0 million, in gross profit, which was partially offset by an increase of $0.5 million in selling, general and administrative expenses.
Interest expense. Interest expense wasor 28.6%, compared to $3.4 million for the third quarter of fiscal 2019, an increase2019. The decrease was primarily attributed to lower interest rates and a lower average borrowing level on the senior term debt.
Income taxes. We recorded income tax expense of $1.5 million, or 83.7%, compared to $1.8$0.8 million for the third quarter of fiscal 2018. The increase was primarily attributed2020, compared to a point increase in the weighted-average annual effective interest rate on the term loan, higher average borrowing levels, and changes in the interest rate collar fair value recorded in interest expense.
Income taxes. We recorded an income tax expense of $3.2 million for the third quarter of fiscal 2019, compared to income tax benefit of $7.5 million for the same period in fiscal 2018.2019.
The effective tax rate for the three monththree-month period ended July 4, 2020 was 70.1%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments. The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.
The effective tax rate for the three-month period ended June 29, 2019 was 19.1%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.
For the three month period ended June 30, 2018, we recorded a tax benefit of $8.1 million due to the lapse of statute of limitations on the underlying item that created our uncertain tax position. We also recorded a $1.7 million benefit related to the filing of our prior year tax returns. The benefit resulted from various deductions that were accelerated and reported in a higher tax rate year. The return filing also allowed us to reassess and reverse a $0.5 million valuation allowance for our foreign tax credit carryforward that had been recorded earlier in 2018.
The effective tax rate for the three month period ended June 30, 2018 was (53.4)%, which significantly differed from the transitional 2018 statutory federal tax rate of 24.5%. The difference is mainly due to the above noted release of uncertain tax positions and provision to return adjustments, but the rate was also favorably impacted by normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense.
Adjusted EBITDA. Adjusted EBITDA was $12.5 million, or 6.6% of net sales, for the third quarter of fiscal 2020, a decrease of $16.6 million, or 57.0%, compared to $29.0 million, or 9.4% of net sales, for the third quarter of fiscal 2019, an increase of $4.9 million, or 20.2%, compared to $24.2 million, or 7.7% of net sales, for the third quarter of fiscal 2018.2019. The increasedecrease in Adjusted EBITDA is primarily the result of an increasea decrease of $4.8$20.7 million in gross profit.profit, mainly from lower sales volumes due to the COVID-19 pandemic as well as higher manufacturing costs. The decrease was partially offset by lower adjusted selling, general and administrative expenses.
The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:
| | | Three Months Ended | Three Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 |
Net income | $ | 14,601 |
| | $ | 21,891 |
| $ | 1,286 |
| | $ | 14,601 |
|
Adjustments: | | | | | | |
Interest expense, net (1) | 3,472 |
| | 1,809 |
| 2,466 |
| | 3,472 |
|
Income tax expense (benefit) | 3,248 |
| | (7,485 | ) | |
Income tax expense | | 765 |
| | 3,248 |
|
Depreciation, amortization, and disposals (2) | 2,750 |
| | 2,203 |
| 3,861 |
| | 2,750 |
|
Operational transformation initiatives | 679 |
| | 3,169 |
| 339 |
| | 679 |
|
Foreign currency hedges | — |
| | 208 |
| |
Share-based compensation | 1,101 |
| | 870 |
| 1,808 |
| | 1,101 |
|
Product redesign initiatives | 3,075 |
| | 1,497 |
| 1,071 |
| | 3,075 |
|
Restructuring charges | | 364 |
| | — |
|
Costs directly attributed to the COVID-19 pandemic (3) | | 521 |
| | — |
|
Other | 115 |
| | (10 | ) | — |
| | 115 |
|
Adjusted EBITDA | $ | 29,041 |
| | $ | 24,152 |
| $ | 12,481 |
| | $ | 29,041 |
|
Adjusted EBITDA margin (percentage of net sales) | 9.4 | % | | 7.7 | % | 6.6 | % | | 9.4 | % |
(1) Includes $0.1 million for both fiscal periods, representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.2 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.
Consolidated Results of Operations for the Nine Months Ended July 4, 2020 and June 29, 2019 and June 30, 2018:2019: | | | | Nine Months Ended | | Nine Months Ended |
(in thousands of dollars) | | June 29, 2019 | | June 30, 2018 | | July 4, 2020 | | June 29, 2019 |
Net sales | | $ | 675,342 |
| | $ | 693,363 |
| | $ | 597,810 |
| | $ | 675,342 |
|
Cost of goods sold | | 588,496 |
| | 614,074 |
| | 531,259 |
| | 588,496 |
|
Gross profit | | $ | 86,846 |
| | $ | 79,289 |
| | $ | 66,551 |
| | $ | 86,846 |
|
Operating expenses | | | | | | | | |
Selling, general and administrative expenses | | 61,197 |
| | 64,226 |
| | 58,146 |
| | 61,197 |
|
Operating profit | | $ | 25,649 |
| | $ | 15,063 |
| | $ | 8,405 |
| | $ | 25,649 |
|
Interest expense | | (10,241 | ) | | (5,112 | ) | | (9,961 | ) | | (10,241 | ) |
Interest income | | 9 |
| | 42 |
| | 27 |
| | 9 |
|
Other expense, net | | (1,034 | ) | | (399 | ) | |
Income before income taxes | | $ | 14,383 |
| | $ | 9,594 |
| |
Income tax (expense) benefit | | (2,833 | ) | | 5,662 |
| |
Other income (expense), net | | | 555 |
| | (1,034 | ) |
(Loss) income before income taxes | | | $ | (974 | ) | | $ | 14,383 |
|
Income tax benefit (expense) | | | 378 |
| | (2,833 | ) |
Equity in net income of non-consolidated affiliate | | 1,158 |
| | 632 |
| | 840 |
| | 1,158 |
|
Net income | | $ | 12,708 |
| | $ | 15,888 |
| | $ | 244 |
| | $ | 12,708 |
|
Other financial data: | | | | | | | | |
Adjusted EBITDA | | $ | 48,460 |
| | $ | 41,269 |
| | $ | 32,778 |
| | $ | 48,459 |
|
Adjusted EBITDA margin | | 7.2 | % | | 6.0 | % | | 5.5 | % | | 7.2 | % |
The following provides the results of operations of Blue Bird’s two reportable segments:
| | (in thousands of dollars) | | Nine Months Ended | | Nine Months Ended |
Net Sales by Segment | | June 29, 2019 | | June 30, 2018 | | July 4, 2020 | | June 29, 2019 |
Bus | | $ | 626,441 |
| | $ | 647,525 |
| | $ | 554,061 |
| | $ | 626,441 |
|
Parts | | 48,901 |
| | 45,838 |
| | 43,749 |
| | 48,901 |
|
Total | | $ | 675,342 |
| | $ | 693,363 |
| | $ | 597,810 |
| | $ | 675,342 |
|
| | | | | | | | |
Gross Profit by Segment | | | | | | | | |
Bus | | $ | 69,653 |
| | $ | 63,062 |
| | $ | 50,884 |
| | $ | 69,653 |
|
Parts | | 17,193 |
| | 16,227 |
| | 15,667 |
| | 17,193 |
|
Total | | $ | 86,846 |
| | $ | 79,289 |
| | $ | 66,551 |
| | $ | 86,846 |
|
Net sales. Net sales were $597.8 million for the nine months ended July 4, 2020, a decrease of $77.5 million, or 11.5%, compared to $675.3 million for the nine months ended June 29, 2019, a2019. The decrease in net sales is attributed to the COVID-19 pandemic during our second and third fiscal quarters which caused an unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of $18.0 million, or 2.6%, compared to $693.4 million forhow schooling will be administered in the nine months ended June 30, 2018.fall of 2020 and beyond.
Bus sales decreased $21.1$72.4 million, or 3.3%11.6%, reflecting a decrease in units booked which was partially offset byand higher sales prices per unit. In the nine months ended June 29, 2019, 7,291July 4, 2020, 6,002 units were booked compared to 7,8927,291 units booked for the same period in fiscal 2018. Bus volumes were negatively impacted2019. The decrease is mainly attributed to lower orders due to the uncertainties caused by supplier delays.the COVID-19 pandemic. The average net sales price per unit for the nine months ended June 29, 2019July 4, 2020 was 4.7%7.4% higher than the price per unit for the nine months ended June 30, 2018.29, 2019. The increase in unit price mainly reflects pricing actions.actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.
Parts sales increased $3.1decreased $5.2 million, or 6.7%10.5%, for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019, compared to the nine months ended June 30, 2018, primarilyas we had lower sales volume, mainly from lower school bus units in operation due to higher sales volumes.early school closures caused by the COVID-19 pandemic. Stay at home orders and school closures reduced bus repair and maintenance activities due to less bus use.
Cost of goods sold. Total cost of goods sold was $531.3 million for the nine months ended July 4, 2020, a decrease of $57.2 million, or 9.7%, compared to $588.5 million for the nine months ended June 29, 2019, a decrease of $25.6 million, or 4.2%, compared to $614.1 million for the nine months ended June 30, 2018.2019. As a percentage of net sales, total cost of goods sold improvedincreased from 88.6%87.1% to 87.1%88.9%.
Bus segment cost of goods sold decreased $27.7$53.6 million, or 4.7%9.6%, for the nine months ended June 29, 2019July 4, 2020 compared to the nine months ended June 30, 2018.29, 2019. The average cost of goods sold per unit for the nine months ended June 29, 2019July 4, 2020 was 3.1%9.8% higher compared to the nine months ended June 30, 2018 mainly29, 2019 due to changesincreases in productmanufacturing costs in our third fiscal quarter from several COVID-19 related factors including absenteeism amongst our hourly workforce and customer mix.supply disruptions, each of which created manufacturing inefficiencies and higher costs.
The $2.1$3.6 million, or 7.1%11.4%, increasedecrease in parts segment cost of goods sold for the nine months ended June 29, 2019July 4, 2020 compared to the nine months ended June 30, 2018 was primarily attributed to increased parts29, 2019 aligns with the decrease in sales volume.volume noted above.
Operating profit. Operating profit was $8.4 million for the nine months ended July 4, 2020, a decrease of $17.2 million compared to an operating profit of $25.6 million for the nine months ended June 29, 2019, an increase2019. Profitability was negatively impacted by a decrease of $10.6$20.3 million comparedin gross profit, which was partially offset by a decrease of $3.1 million in selling, general and administrative expenses as we have taken actions to an operating profit of $15.1control spending during the pandemic.
Interest expense. Interest expense was $10.0 million for the nine months ended June 30, 2018. Profitability was positively impacted by an increase of $7.6 million in gross profit andJuly 4, 2020, a decrease of $3.0$0.3 million, in selling, general and administrative expenses.
Interest expense. Interest expense wasor 2.7%, compared to $10.2 million for the nine months ended June 29, 2019,2019. Lower interest expense from lower borrowing rates in the nine months ended July 4, 2020 compared to the prior period were offset by the impact of an increase of $5.1$1.9 million or 100.3%, comparedin mark to $5.1market charges due to changes in the fair value of our interest rate hedge.
Income taxes. Income tax benefit was $0.4 million for the nine months ended June 30, 2018. The increase was primarily attributed to a point increase in the weighted-average annual effective interest rate on the term loan, higher average borrowing levels, and changes in the interest rate collar fair value recorded in interest expense.
Income taxes. Income tax expense was $2.8 million for the nine months ended June 29, 2019,July 4, 2020, compared to income tax benefitexpense of $5.7$2.8 million for the same period in fiscal 2018.2019.
The effective tax rate for the nine-month period ended July 4, 2020 was 38.8%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to a net discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments. The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.
The effective tax rate for the nine monthnine-month period ended June 29, 2019 was 19.7%, which and differed from the 2019transitional 2018 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, primarily federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.
For the nine month period ended June 30, 2018, we recorded a tax benefitAdjusted EBITDA. Adjusted EBITDA was $32.8 million or 5.5% of $8.1 million due to the lapse of statute of limitations on the underlying item that created our uncertain tax position. We also recorded a $1.7 million benefit related to the filing of our prior year tax returns. The benefit resulted from various deductions that were accelerated and reported in a higher tax rate year. The return filing also allowed us to reassess and reverse a $0.5 million valuation allowance for our foreign tax credit carryforward that had been recorded earlier in 2018.
The effective tax ratenet sales for the nine month periodmonths ended June 30, 2018 was (59.0)% and significantly differed from the transitional 2018 statutory federal income tax rateJuly 4, 2020, a decrease of 24.5%. The difference is mainly due$15.7 million, or 32.4%, compared to the above noted release of uncertain tax positions and provision to return adjustments, but was partially offset by a $2.4 million expense recorded in the prior fiscal quarter to reflect the newly enacted Tax Act. The Tax Act adjustments include resetting our deferred tax accounts to the new rates as well as $1.1 million of expense from increasing the carrying value of our uncertain tax positions, and $0.5 million of additional valuation allowance for our foreign tax credit carryforward. Of this adjustment amount, the portion relating to uncertain tax positions and valuation allowance were reversed in the current quarter. The rate was also favorably impacted by normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense.
Adjusted EBITDA. Adjusted EBITDA was $48.5 million or 7.2% of net sales for the nine months ended June 29, 2019, an increase of $7.2 million, or 17.4%, compared to $41.3 million or 6.0% of net sales for the nine months ended June 30, 2018.2019. The increasedecrease in Adjusted EBITDA is primarily the result of a $7.6decrease of $20.3 million improvement in gross profit.profit, mainly from lower sales volumes due the COVID-19 pandemic as well as higher manufacturing costs. The decrease was partially offset by lower adjusted selling, general and administrative expenses.
The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:
| | | Nine Months Ended | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 |
Net income | $ | 12,708 |
| | $ | 15,888 |
| $ | 244 |
| | $ | 12,708 |
|
Adjustments: | | | | | | |
Discontinued operations income | — |
| | (81 | ) | |
Interest expense, net (1) | 10,544 |
| | 5,070 |
| 10,213 |
| | 10,542 |
|
Income tax expense (benefit) | 2,833 |
| | (5,662 | ) | |
Income tax (benefit) expense | | (378 | ) | | 2,833 |
|
Depreciation, amortization, and disposals (2) | 7,989 |
| | 6,483 |
| 11,215 |
| | 7,990 |
|
Operational transformation initiatives | 4,193 |
| | 13,547 |
| 3,218 |
| | 4,193 |
|
Foreign currency hedges | 109 |
| | (828 | ) | — |
| | 109 |
|
Share-based compensation | 3,146 |
| | 2,380 |
| 4,105 |
| | 3,146 |
|
Product redesign initiatives | 6,876 |
| | 4,526 |
| 3,163 |
| | 6,876 |
|
Restructuring charges | | 364 |
| | — |
|
Costs directly attributed to the COVID-19 pandemic (3) | | 628 |
| | — |
|
Other | 62 |
| | (54 | ) | 6 |
| | 62 |
|
Adjusted EBITDA | $ | 48,460 |
| | $ | 41,269 |
| $ | 32,778 |
| | $ | 48,459 |
|
Adjusted EBITDA margin (percentage of net sales) | 7.2 | % | | 6.0 | % | 5.5 | % | | 7.2 | % |
(1) Includes $0.3 million for both fiscal periods representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.6$0.5 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash generated from its operations, available cash and cash equivalents and borrowings under its credit facility. At June 29, 2019,July 4, 2020, the Company had $29.1$12.5 million of available cash (net of outstanding checks) and $68.1$90.0 million of additional borrowings available under the revolving line of credit portion of its secured credit facility. The Company’s revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.
On May 7, 2020, the Company entered into a Second Amendment which amended the Credit Agreement, dated December 12, 2016
Onas of December 12, 2016 (the “Closing Date”)“Credit Agreement”, Blue Bird Body Company as the borrower (the "Borrower"), a wholly-owned subsidiary of the Company, executed a $235.0 million five-year credit agreement with Bank of Montreal, which acts as the administrative agent and an issuing bank, Fifth Third Bank, as co-syndication agent and an issuing bank, and Regions Bank, as Co-Syndication Agent, together with other lenders (the "Credit Agreement").
The credit facility provided for under theamended by that certain First Amendment to Credit Agreement, consistsdated as of a term loan facilitySeptember 13, 2018 (the “First Amendment”), and as further amended by the Second Amendment, the “Amended Credit Agreement”). The Second Amendment provided $41.9 million in an aggregate initial principal amount of $160.0 million (the “Term Loan Facility”) and aadditional revolving credit facility with aggregate commitments of $75.0bringing the total revolving commitments to $141.9 million. The revolving credit facility includes a $15.0 million letter of credit sub-facility and $5.0 million swingline sub-facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, each a “Credit Facility” and collectively, the “Credit Facilities”). The borrowings under the Term Loan Facility, which were made at the Closing Date, may not be re-borrowed once they are repaid. The borrowings under the Revolving Credit Facility may be repaid and reborrowed from time to time at our election. The proceeds of the loans under the Credit Facilities that were borrowed on the Closing Date were used to finance in part, together with available cash on hand, (i) the repayment of certain existing indebtedness of the Company and its subsidiaries, and (ii) transaction costs associated with the consummation of the Credit Facilities.
The obligations under the Credit Agreement and the related loan documents (including without limitation, the borrowings under the Facilities (including the Incremental Term Loan) and obligations in respect of certain cash management and hedging obligations owing to the agents, the lenders or their affiliates), are, in each case, secured by a lien on and security interest in substantially all of the assets of the Company and its subsidiaries (including the Borrower), with certain exclusions as set forth in a collateral agreement entered into on December 12, 2016.
Up to $75.0 million of additional term loans and/or revolving credit commitments may be incurred under the Credit Agreement, subject to certain limitations as set forth in the Credit Agreement, and which additional loans and/or commitments would require further commitments from the existing lenders or from new lenders.
The Credit Agreement contains negative and affirmative covenants affecting the Company and its subsidiaries including the Borrower, with certain exceptions set forth in the Credit Agreement. The negative covenants and restrictions include, among others: limitations on liens, dispositions of assets, consolidations and mergers, loans and investments, indebtedness, transactions with affiliates (including management fees and compensation), dividends, distributions and other restricted payments, change in fiscal year, fundamental changes, amendments to and subordinated indebtedness, restrictive agreements, sale and leaseback transactions and certain permitted acquisitions. Dividends, distributions, and other restricted payments are permitted in certain circumstances under the Credit Agreement, including, among other exceptions, (i) in an amount up to the cumulative available amount of excess free cash flow that is not required to be used to prepay the outstanding loans under the Credit Agreement, subject to certain adjustments, provided that there is not a continuing default, the Company maintains a Total Net Leverage Ratio on such date that is 0.25x less than the ratio required by the Credit Agreement at such date and the Company and its subsidiaries have not less than $5.0 million in the aggregate of Unrestricted Cash (as defined in the Credit Agreement) plus remaining availability under the revolving commitments, (ii) in an amount that would not cause the Total Net Leverage Ratio to exceed 2.75 to 1.00, provided that there is not a continuing default and the Company and its subsidiaries have at least $5.0 million in the aggregate of Unrestricted Cash plus remaining availability under the revolving commitments, (iii) to make payments under the Certificate of Designations of the Company's outstanding preferred stock in an amount up to the cumulative available amount of excess free cash flow that is not required to be used to prepay the outstanding loans under the Credit Agreement, subject to certain adjustments, provided that there is not a continuing default, the Company maintains a Total Net Leverage Ratio that does not exceed 3.25 to 1.00 and the Company and its subsidiaries have at least $5.0 million in the aggregate of Unrestricted Cash plus remaining availability under the revolving commitments, and (iv) in an amount not to exceed $15.0 million provided that there is not a continuing default.
Amended Credit Agreement
On September 13, 2018, the Company executed an amendment to the Credit Agreement (the "Amended Credit Agreement"), by and among the Company, the Borrower, and Bank of Montreal, acting as administrative agent together with other lenders. The Amended Credit Agreement, provides for an aggregate lender commitment of $50.0 million in additional term loan borrowings (the “Incremental Term Loan”). The Incremental Term Loan was intended to finance a portion of a tender offer to repurchase up to $50.0 million of our outstanding stock. Funding of the Incremental Term Loan was subject to the satisfaction of customary closing conditions, including the
accuracy in all material respects of the representations and warranties under the Amended Credit Agreement and the absence of a default or event of default under the Amended Credit Agreement. In October 2018, the Incremental Term Loan funded for $50.0 million and the tender offer referenced above was finalized.
After giving effect to the Amended Credit Agreement, the initial $160.0 million Term Loan Facility, with a balance of $146.2 million at September 29, 2018, increased $50.0 million, and the initial $75.0 million Revolving Credit Facility increased $25.0 million. The amended Credit Facilities eachwill mature on September 13, 2023, which is the fifth anniversary of the effective date of the First Amendment. The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0% to 0.75%.
Detailed descriptions of the Company’s original Credit Agreement dated December 12, 2016 and its Amended Credit Agreement.Agreement dated September 13, 2018 are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2019, filed with the Securities and Exchange Commission on December 12, 2019.
After giving effect toAt July 4, 2020, the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.
Short-Term and Long-Term Liquidity Requirements
Our ability to make principal and interest payments on borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the interest payable with respectfuture, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.
During our third quarter of fiscal 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic. The pandemic materially impacted our third quarter of fiscal 2020 results causing lower customer orders for both buses and parts, supply disruptions, higher rates of absenteeism among our hourly production workforce, and a temporary shutdown of manufacturing. The continuing development and fluidity of the pandemic precludes any prediction as to the Term Loan Facility is (i)ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity. A prolonged economic downturn resulting from the first amendment effective date untilcontinuing pandemic would likely have a material adverse impact on our financial results. See PART II, Item 1A. Risk Factors, of this Quarterly Report for a discussion of the first quarter ended on material risks we believe we face particularly related to the COVID-19 pandemic.
The pandemic could cause a severe contraction in our profits and/or about September 30, 2018, LIBOR plus 2.25% and (ii) commencingliquidity which could lead to issues complying with the fiscal quarter ended on or about September 30, 2018 and thereafter, dependent on theour Credit Facility covenants. Our primary financial covenant is our Total Net Leverage Ratio of the Company, an election of either base rate or LIBOR pursuant to the table below. The Company'sRatio. Our Total Net Leverage Ratio is defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, which includes certain add-backs that are not reflected in the definition of Adjusted EBITDA appearing in "Key Measures and Segments",the Company’s periodic filings on Form 10-K or Form 10-Q, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending. We may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure. We cannot assure our investors that we would be successful in amending or refinancing the existing debt. An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses not included in our historical financial statements.
|
| | | | | | |
Level | | Total Net Leverage Ratio | | ABR Loans | | Eurodollar Loans |
I | | Less than 2.00x | | 0.75% | | 1.75% |
II | | Greater than or equal to 2.00x and less than 2.50x | | 1.00% | | 2.00% |
III | | Greater than or equal to 2.50x and less than 3.00x | | 1.25% | | 2.25% |
IV | | Greater than or equal to 3.00x and less than 3.25x | | 1.50% | | 2.50% |
V | | Greater than or equal to 3.25x and less than 3.50x | | 1.75% | | 2.75% |
VI | | Greater than 3.50x | | 2.00% | | 3.00% |
UnderOn March 27, 2020 the Amended Credit Agreement, the principalPresident of the Term Facility must be paid in quarterly installments onUnited States signed the last day of each fiscal quarter, in an amount equal to:
$2,475,000 per quarter beginning on the last day of the Company’s first fiscal quarter of 2019 through the last day of the Company’s third fiscal quarter in 2021;
$3,712,500 per quarter beginning on the last day of the Company’s fourth fiscal quarter in 2021 through the last day of the Company’s third fiscal quarter in 2022;
$4,950,000 per quarter beginning on the last day of the Company’s fourth fiscal quarter in 2022 through the last day of the Company’s second fiscal quarter in 2023, with the remaining principal amount due at maturity.
There are customary events of default under the Amended Credit Agreement, including,Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law. The CARES Act, among other things, eventsincludes provisions related to the deferment of default resulting from (i) failureemployer-side social security payments (the Employer Payroll Tax Payment Deferral Provision). We have elected to pay obligations whendefer these payments that would otherwise be due under the Amended Credit Agreement, (ii) insolvencyand payable through December 31, 2020. A 50% minimum payment of the Company or its material subsidiaries, (iii) defaults under other material debt, (iv) judgments againstdeferred amount is due on December 31, 2021 with the Company or its subsidiaries, (v) failureremainder due by December 31, 2022. We estimate between $4.0 and $6.0 million in payments could be delayed. We also have and expect to comply with certain financial maintenance covenants (as set forth in the Amended Credit Agreement), or (vi) a changedefer contributions to our defined benefit pension plan of control of the Company, in each case subject to limitations and exceptions as set forth in the Amended Credit Agreement.approximately $3.2 million for fiscal 2020. The delayed contribution payments are due on January 1, 2021.
The Amended Credit Agreement contains customary covenants and warranties including, among other things, an amended Total Net Leverage Ratio financial maintenance covenant which requires compliance as follows:
|
| | |
Period | | Maximum Total
Net Leverage Ratio
|
September 13, 2018 through the second quarter of the 2019 fiscal year | | 4.00:1.00 |
Second quarter of the 2019 fiscal year through the fourth quarter of the 2021 fiscal year | | 3.75:1.00 |
Fourth quarter of the 2021 fiscal year and thereafter | | 3.50:1.00 |
At June 29, 2019, the Borrower and the guarantors were in compliance with all covenants in the Amended Credit Agreement.
Short-Term and Long-Term Liquidity Requirements
Our ability to make principal and interest payments on borrowings under the Credit Facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on the current level of operations, we believe that our existing cash balances and expected cash flows from operations will be sufficient to meet our operating requirements for at least the next 12 months.
Seasonality
OurHistorically, our business ishas been highly seasonal. Mostseasonal with school districts seek to buybuying their new schoolschools buses so that they will be available for use on the first day of the school year, typically in mid-August to early September. As a result, our two busiest quarters areThis has resulted in our third and fourth fiscal quarters becoming our two busiest quarters, the latter ending on the Saturday closest to September 30. Our quarterly results of operations, cash flows, and liquidity have been and are likely to be impacted by thesethe seasonal patterns. For example, our revenues are typically highest in our third and fourth fiscal quarters. There are, however, variations in the seasonal demands from year to year depending, in part, on large direct sales to major fleet customers for which short-term trade credit is generally offered. Working capital on the other hand, is typicallyhas historically been a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter. We typically conductquarter with planned shutdowns during our first fiscal quarter. With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality and working capital trends have become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of working capital and liquidity results between fiscal periods.
Cash Flows
The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows: | | | Nine Months Ended | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 |
Cash and cash equivalents at beginning of period | $ | 60,260 |
| | $ | 62,616 |
| $ | 70,959 |
| | $ | 60,260 |
|
Total cash (used in) provided by operating activities | (19,113 | ) | | 7,022 |
| |
Total cash used in operating activities | | (78,305 | ) | | (19,113 | ) |
Total cash used in investing activities | (30,154 | ) | | (15,560 | ) | (16,574 | ) | | (30,154 | ) |
Total cash provided by (used in) financing activities | 18,082 |
| | (12,154 | ) | |
Total cash provided by financing activities | | 36,458 |
| | 18,082 |
|
Change in cash and cash equivalents | $ | (31,185 | ) | | $ | (20,692 | ) | $ | (58,421 | ) | | $ | (31,185 | ) |
Cash and cash equivalents at end of period | $ | 29,075 |
| | $ | 41,924 |
| $ | 12,538 |
| | $ | 29,075 |
|
Total cash (used in) provided byused in operating activities
Cash flows used in operating activities totaled $19.1$78.3 million for the nine months ended June 29, 2019,July 4, 2020, as compared with $7.0to $19.1 million of cash flows provided byused in operating activities for the nine months ended June 30, 2018.29, 2019. The $26.1$59.2 million increase in cash used was primarily attributed to an inventory increase compared to prior year's inventory change totaling $46.5a $12.5 million reduction in net income and a decreasenegative $50.3 million difference (use of cash) in the impacts of changes in accrued expenses and working capital period over period. The changes were partially offset by increased non-cash components of net income totaling $4.7 million, and lower net income of $3.2 million. The increase in cash used was partially offset by a decrease in accrued expenses and other liabilitiesthe nine months ended July 4, 2020 compared to the prior year's change totaling $35.0 million.period.
Total cash used in investing activities
Cash flows used in investing activities totaled $30.2$16.6 million for the nine months ended June 29, 2019,July 4, 2020, as compared with $15.6to $30.2 million of cash flows used in investing activities for the nine months ended June 30, 2018.29, 2019. The $14.6$13.6 million increasedecrease was due to increaseda reduction of spending on manufacturing assets primarily for ouras the new paint facility.facility was completed in fiscal 2019, and the delay of certain projects due to the COVID-19 pandemic.
Total cash provided by (used in) financing activities
Cash flows provided by financing activities totaled $18.1$36.5 million for the nine months ended June 29, 2019,July 4, 2020, as compared with $12.2to $18.1 million of cash flows used inprovided by financing activities for the nine months ended June 30, 2018.29, 2019. The $30.2$18.4 million increase was primarily attributed to $25.0a $20.0 million increase in borrowings under the revolving credit facility and a decrease of $18.9$2.7 million increase in common stock repurchases under share repurchase programs, whichcash proceeds from warrant exercises. The increases were partially offset by a decrease of $13.6$0.9 million in proceeds from warrantfees paid for the Second Amendment to the Credit Agreement, $0.9 million in finance lease payments, as well as an increase of $2.9 million in cash paid for employee taxes on vested restricted shares and stock option exercises.
In the nine months ended June 29, 2019, the Company received $50.0 million in borrowings under the senior term loan; however, the net impact on cash was not significant as the proceeds from the borrowings were used to fund a tender offer to purchase 1,782,568 shares of our common stock and 364 shares of our preferred stock at a purchase price totaling $50.4 million (which includes fees and expenses related to the tender offer).
Free cash flow
Management believes the non-GAAP measurement of free cash flow, defined as net cash (used in) provided byused in operating activities less cash paid for fixed assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business. See “Key Non-GAAP Measures We Use to Evaluate Our Performance”. The following table sets forth the calculation of free cash flow for the periods presented:
| | | Nine Months Ended | Nine Months Ended |
(in thousands of dollars) | June 29, 2019 | | June 30, 2018 | July 4, 2020 | | June 29, 2019 |
Net cash (used in) provided by operating activities | $ | (19,113 | ) | | $ | 7,022 |
| |
Cash paid for fixed and acquired intangible assets | (30,154 | ) | | (15,572 | ) | |
Net cash used in operating activities | | $ | (78,305 | ) | | $ | (19,113 | ) |
Cash paid for fixed assets | | (16,724 | ) | | (30,154 | ) |
Free cash flow | $ | (49,267 | ) | | $ | (8,550 | ) | $ | (95,029 | ) | | $ | (49,267 | ) |
Free cash flow for the nine months ended June 29, 2019July 4, 2020 was $40.7$45.8 million lower than the nine months ended June 30, 2018,29, 2019, primarily due to as discussed above, ana $59.2 million increase in cash used in operating activities, partially offset by a decrease of $14.6$13.4 million in cash paid for fixed and acquired intangible assets and a $26.1 million decrease in cash (used in) provided by operating activities.assets.
Off-Balance Sheet Arrangements
We had outstanding letters of credit totaling $6.9 million at June 29, 2019,July 4, 2020, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.
At June 29, 2019, there were 0.4 million shares of common stock issuable upon exercise of outstanding warrants.
We had a $3.0 million in aggregate guaranteesguarantee outstanding at June 29, 2019July 4, 2020 which relaterelates to guarantees dealera guarantee of indebtedness for a term loansloan with a remaining maturities ofmaturity up to 3.62.5 years. The $3.0 million represents the estimated maximum amount we would be required to pay if a debtor defaulted,upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have not been any material changes to our interest rate risks, commodity risks or currency risks previously disclosed in Part II, Item 7A of the Company’s 20182019 Form 10-K, other than as discussed below.10-K.
Interest Rate Risk
In the first quarter of fiscal 2019, we entered into a four-year interest rate collar contract with a notional value of $150.0 million to partially mitigate our exposure to interest rate fluctuations on our variable rate term loan debt. The collar establishes a range where we will pay the counterparty if the three-month LIBOR rate falls below the established floor rate of 1.5%, and the counterparty will pay us if the three-month LIBOR rate exceeds the ceiling rate of 3.3%.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on their evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 29, 2019.July 4, 2020.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 29, 2019July 4, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Items required under Part II not specifically shown below are not applicable.
Item 1. Legal Proceedings.
Blue Bird is engaged in legal proceedings in the ordinary course of its business. Although no assurances can be given about the final outcome of pending legal proceedings, at the present time management does not believe that the resolution or outcome of any of Blue Bird’s pending legal proceedings will have a material adverse effect on its financial condition, liquidity or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed in Part I, Item 1A of the Company's 20182019 Form 10-K. Such risk factors are expressly incorporated herein by reference, and could materially adversely affect our business, financial condition, cash flows or future results. The risks described in the 20182019 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or operating results.
The risk factor below is an update to our 2019 Form 10-K.
The current COVID-19 pandemic has had, and other public health crises, epidemics or pandemics could have, a material adverse effect on our business, results of operations, financial condition, and cash flows, particularly resulting from supply chain disruptions, reductions in demand for our products, disruptions or other developments negatively impacting our workforce or workplace conditions, and/or reduced access to capital markets and reductions in liquidity.
During our second fiscal quarter of 2020, the novel coronavirus known as "COVID-19" spread throughout the world creating a global pandemic and continued to spread in our third quarter of fiscal 2020. The pandemic has, among other impacts:
triggered a significant downturn in capital markets;
caused significant disruptions in global supply chains;
significantly altered global consumer demand;
halted global manufacturing operations resulting from plant shut-downs; and
changed global workplace conditions resulting from "shelter-in-place" orders and "work from home" employer policies.
The pandemic materially impacted our third quarter of fiscal 2020 results causing lower customer orders for both buses and bus parts, supply disruptions, and absenteeism among our hourly production workforce. The continuing development and fluidity of the pandemic precludes any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, or liquidity, but we have already experienced reduced orders and enacted a manufacturing plant shut-down for the first two weeks of our third quarter in fiscal 2020. A prolonged economic downturn resulting from the continuing pandemic would likely have a material adverse impact on our business, financial condition, results of operations, and liquidity. At the present time, we consider the following areas to be the most significant material risks to our business resulting from the current pandemic:
Supply Chain Disruptions
We rely on specialist suppliers, some of which are single-source suppliers, for critical components (including but not limited to engines, transmissions and axles) and replacement of any of these components with like parts from another supplier normally requires engineering and testing resources, which entail costs and take time. We also currently rely on a limited number of single-source suppliers and/or have limited alternatives for important bus parts such as diesel engines and emission components, propane and gasoline engines including powertrains, control modules, steering systems, seats, specialty resins, and other key components. In addition to protecting our employees' health, our plant shut-down was partially due to the potential for an inability to obtain critical components from our suppliers due to COVID-19. Future delays or interruptions in the supply chain due to the COVID-19 pandemic expose us to the following risks which would likely significantly increase our costs and/or impact our ability to meet customer demand:
we or our third-party suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly, and delivery or shipment of our products;
we or our third-party suppliers may not be able to respond to unanticipated changes in customer orders;
we or our suppliers may have excess or inadequate inventory of materials and components;
we or our third-party suppliers may be subject to price fluctuations due to the pandemic and a lack of long-term supply arrangements for key components;
we may experience delays in delivery by our third-party suppliers due to changes in demand from us or their other customers;
fluctuations in demand for products that our third-party suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner;
we may not be able to find new or alternative components or reconfigure our products and manufacturing processes in a timely manner if the necessary components become unavailable; and
our third-party suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.
Reductions in demand for buses and bus parts
The school bus market is predominantly driven by long-term trends in the level of spending by states, municipalities, and independent contractors. Demand for school buses is further influenced by overall acquisition priorities of municipalities, availability of school bus financing, student population changes, school district busing policies, price and other competitive factors, fuel prices and environmental regulations. In response to the pandemic, many school systems in North America canceled in-person schooling for the remainder of the 2019-2020 school year. The cancellations disrupted the seasonal order pattern for school buses. There remains uncertainty as to when traditional in-person schooling will resume, but we do know that many school systems have already declared that they will not hold in person classes for the fall of 2020. Uncertainty in the form of learning (e.g. a reduction of in-person to more remote arrangements) may lead to a reduction in bus orders until a degree of normalcy returns to the manner in which K-12 education is provided. Anticipated delays in the start of the 2020-2021 school year will likely impact at least the near-term demand for our buses. Reductions in bus orders would negatively impact revenues in our Bus segment. A reduction in bus usage will likely reduce the demand for maintenance and replacement parts, which would negatively impact revenues in our Parts segment.
Disruptions or other developments negatively impacting our workforce or workplace conditions
Almost all U.S. states, including Georgia where our headquarters and manufacturing facilities are located, have issued “shelter-in-place” orders, quarantines, executive orders and similar government orders, restrictions and recommendations for their residents to control the spread of COVID-19. Many of these orders have been and may continue to be re-issued at or after their expiration, and future orders may introduce broader restrictions. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, interruptions, slowdowns and delays, work-from-home policies and travel restrictions. While our business has been deemed essential by the State of Georgia, we have employed remote work policies when and where possible to be responsive to the health risks that may impact our employees. Given the nature of our business, we do not have the ability to manufacture a bus without our on-site manufacturing personnel. While we have not experienced any pervasive COVID-19 illnesses to date, if we were to experience some form of outbreak within our facilities, we would take all appropriate measures to protect the health and safety of our employees, which could include a temporary halt in production. Any extended production halt or diminution in production capacity would likely have a negative impact on our ability to fulfill orders and thus negatively impact our revenues.
Reduced profitability and liquidity, resulting in possible restructuring of our credit facilities, and/or inadequate access to credit and capital markets
The COVID-19 pandemic has materially adversely impacted global commercial activity and has contributed to significant volatility in financial markets. The pandemic continues to have a materially adverse impact on economic and market conditions, and may result in an extended period of global economic slowdown and significant disruptions in global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.
The continuing pandemic could cause a more severe contraction in our profits and/or liquidity which could lead to issues complying with the financial covenants in our credit facility. Our primary financial covenant is our Total Net Leverage Ratio. Our Total Net Leverage Ratio is defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, which includes certain add-backs that are not reflected in the definition of Adjusted EBITDA appearing in the Company’s periodic filings on Form 10-K or Form 10-Q, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending. We may need to seek amendment for covenant relief or even refinance the debt to a "covenant light" or "no covenant" structure. We cannot assure our investors that we would be successful in amending or refinancing our existing debt. An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses not included in our historical financial statements.
Item 6. Exhibits.
The following Exhibits are filed with this Report:
Exhibit No.Description
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101.INS*^ | XBRL Instance Document.Document |
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101.SCH*^ | XBRL Taxonomy Extension Schema Document.Document |
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101.CAL*^ | XBRL Taxonomy Extension Calculation Linkbase Document.Document |
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101.DEF*^ | XBRL Taxonomy Extension Definition Linkbase Document.Document |
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101.LAB*^ | XBRL Taxonomy Extension Label Linkbase Document.Document |
| |
101.PRE*^ | XBRL Taxonomy Extension Presentation Linkbase Document.Document |
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104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| |
†† | Management contract or compensatory plan or arrangement. |
| |
^ | In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. |
Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Blue Bird Corporation |
| | |
| | |
Dated: | August 8, 201913, 2020 | /s/ Philip Horlock |
| | Philip Horlock |
| | Chief Executive Officer |
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Dated: | August 8, 201913, 2020 | /s/ Phillip TigheJeffery Taylor |
| | Phillip TigheJeffery Taylor |
| | Chief Financial Officer |