BLUE BIRD CORPORATION The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company's audited financial statements for the fiscal years endedSeptember 28, 2019 ,September 29, 2018 andSeptember 30, 2017 and related notes appearing elsewhere in 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 subjected 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 endedSeptember 28, 2019 as "fiscal 2019". We refer to the fiscal year endedSeptember 29, 2018 as "fiscal 2018" and we refer to the fiscal year endedSeptember 30, 2017 as "fiscal 2017". Fiscal years 2019, 2018, and 2017, each contained 52 weeks.
Executive Overview
Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have madeBlue 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 fuel applications with its propane-powered, gasoline-powered, compressed natural gas ("CNG")-powered, and all-electric-powered school buses.Blue Bird sells its buses and parts through an extensive network ofUnited States and Canadian dealers that, in their territories, are exclusive toBlue 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.
Factors Affecting Our Revenues
Our revenues are driven primarily by the following factors:
• 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, based 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, Electric 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 smallnumber 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
of regulations that govern 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.
27
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• 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 fiscalquarters 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. The seasonality and annual variations of seasonality
could impact the ability to compare results between fiscal periods.
Factors Affecting Our Expenses and Other Items
Our expenses and other line items in our Consolidated Statements of Operations are principally driven by the following factors:
• 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 ofgoods 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 challenges, 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 andmarketing efforts, engineering, centralized finance, human resources,
purchasing, and information technology services, along with 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. Interest expense
also includes unrealized gains or losses from interest rate hedges, if
any, as well as expenses related to debt guarantees, if any.
• 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.
• Other expense, net. This includes periodic pension expense as well asgains or losses on foreign currency, if any. Other immaterial amounts not
associated with operating expenses may also be included here.
• 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.
Key Non-GAAP Financial Measures We Use to Evaluate Our Performance
This filing includes the following non-GAAP financial measures "Adjusted
EBITDA"; "Adjusted EBITDA Margin"; and "Free Cash Flow". 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 operating 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 operating 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. 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.
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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 total cash provided by/used in operating activities
minus cash paid for fixed assets and acquired intangible assets. We use free
cash flow, and ratios based on 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 fiscal years ended September 28, 2019
and September 29, 2018 :
(in thousands) 2019 2018
Net sales $ 1,018,874 $ 1,024,976
Cost of goods sold 885,400 902,988
Gross profit $ 133,474 $ 121,988
Operating expenses
Selling, general and administrative expenses 89,642 86,911
Operating profit $ 43,832 $ 35,077
Interest expense (12,879 ) (6,661 )
Interest income 9 70
Other expense, net (1,331 ) (1,613 )
Income before income taxes $ 29,631 $ 26,873
Income tax (expense) benefit (7,573 ) 2,620
Equity in net income of non-consolidated affiliate 2,242 1,327
Net income $ 24,300 $ 30,820
Other financial data:
Adjusted EBITDA $ 81,829 $ 70,379
Adjusted EBITDA margin 8.0 % 6.9 %
29
-------------------------------------------------------------------------------- The following provides the results of operations ofBlue Bird's two reportable segments: (in thousands) 2019 2018Net Sales by Segment Bus$ 952,242 $ 962,769 Parts 66,632 62,207 Total$ 1,018,874 $ 1,024,976
Gross Profit by Segment Bus$ 110,015 $ 100,002 Parts 23,459 21,986 Total$ 133,474 $ 121,988
Net sales. Net sales were
Bus sales decreased$10.5 million , or 1.1%, reflecting a decrease in units booked and higher sales prices. In the fiscal year ended 2019, 11,017 units were booked compared to 11,649 units booked for the fiscal year ended 2018. The average net sales price per unit for the fiscal year ended 2019 was 4.6% higher than the price per unit for the fiscal year ended 2018. The increase in unit price mainly reflects pricing taken to partially offset commodity costs, as well as product and customer mix changes.
Parts sales increased
Cost of goods sold. Total cost of goods sold was$885.4 million for the fiscal year ended 2019, a decrease of$17.6 million , or 1.9%, compared to$903.0 million for the fiscal year ended 2018. As a percentage of net sales, total cost of goods sold decreased from 88.1% to 86.9%. Bus segment cost of goods sold decreased$20.5 million , or 2.4%, for the fiscal year ended 2019 compared to the fiscal year ended 2018. The average cost of goods sold per unit for the fiscal year ended 2019 was 3.2% higher compared to the average cost of goods sold per unit for the fiscal year ended 2018 due to raw material price increases related to rising commodity costs and tariffs, which were partially offset by cost savings resulting from our operational improvement initiatives.
The
Operating profit. Operating profit was$43.8 million for the fiscal year ended 2019, an increase of$8.8 million , or 25.0%, compared to$35.1 million for the fiscal year ended 2018. Profitability was positively impacted by an increase of$11.5 million in gross profit, which was partially offset by an increase of$2.7 million in selling, general and administrative expenses due in large part to several non-recurring product development initiatives as well as higher share-based compensation expense. Interest expense. Interest expense was$12.9 million for the fiscal year ended 2019, an increase of$6.2 million , or 93.3%, compared to$6.7 million for the fiscal year ended 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. We recorded an income tax expense of
The effective tax rate for the fiscal year ended 2019 was 25.6%, which differed
from the statutory federal income tax rate of 21.0%. The difference is mainly
due to the unfavorable impact of valuation allowances, share-based and other
compensation limitations, and state taxes, which includes the application of tax
credits claimed as offsets against our payroll tax liabilities. The valuation
allowance increased mainly due to the accrual of income tax credits that are
greater than our ability to utilize before expiration. These items were
partially offset by benefits from federal and state tax credits.
The effective tax rate for the fiscal year ended 2018 was (9.7)%, which differed
from the statutory federal income tax rate of 24.5%, reflecting the benefits of
income tax credits, the domestic production activities deduction, and recording
a tax windfall from share-based
30
--------------------------------------------------------------------------------compensation awards exercised, which were offset by the application of tax credits claimed as offsets against our payroll tax liabilities, and interest and penalties on uncertain tax positions.
Adjusted EBITDA. Adjusted EBITDA was$81.8 million , or 8.0% of net sales, for the fiscal year ended 2019, an increase of$11.5 million , or 16.3%, compared to$70.4 million , or 6.9% of net sales, for the fiscal year ended 2018. The increase in adjusted EBITDA was primarily the result of increased gross profit. The following table sets forth a reconciliation of net income to adjusted EBITDA for the fiscal years presented: (in thousands) 2019 2018 Net income$ 24,300 $ 30,820
Adjustments:
Discontinued operations income - (81 ) Interest expense, net (1) 13,279 6,591 Income tax expense (benefit) 7,573 (2,620 )
Depreciation, amortization, and disposals (2) 11,102 9,214 Operational transformation initiatives
10,594 17,708
Foreign currency hedges 109 (109 )
Share-based compensation 4,273 2,628
Product redesign initiatives 10,540 6,253
Other 59 (25 )
Adjusted EBITDA $ 81,829 $ 70,379 Adjusted EBITDA margin (percentage of net sales) 8.0 % 6.9 %
(1) Includes$0.4 million for fiscal 2019, representing interest expense on operating lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations. (2) Includes$0.7 million for fiscal 2019, representing amortization on right-of-use operating lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations. 31 -------------------------------------------------------------------------------- Consolidated Results of Operations for the fiscal years endedSeptember 29, 2018 andSeptember 30, 2017 : (in thousands) 2018 2017 Net sales$ 1,024,976 $ 990,602 Cost of goods sold 902,988 863,234 Gross profit$ 121,988 $ 127,368 Operating expenses Selling, general and administrative expenses 86,911 67,836 Operating profit$ 35,077 $ 59,532 Interest expense (6,661 ) (7,251 ) Interest income 70 140 Other expense, net (1,613 ) (4,929 ) Loss on debt extinguishment - (10,142 ) Income before income taxes$ 26,873 $ 37,350 Income tax benefit (expense) 2,620 (11,856 ) Equity in net income of non-consolidated affiliate 1,327 3,307 Net income$ 30,820 $ 28,801 Other financial data: Adjusted EBITDA$ 70,379 $ 68,904 Adjusted EBITDA margin 6.9 % 7.0 % The following provides the results of operations ofBlue Bird's two reportable segments: (in thousands) 2018 2017Net Sales by Segment Bus$ 962,769 $ 930,738 Parts 62,207 59,864 Total$ 1,024,976 $ 990,602
Gross Profit by Segment Bus$ 100,002 $ 106,462 Parts 21,986 20,906 Total$ 121,988 $ 127,368
Net sales. Net sales were
Bus sales increased$32.0 million , or 3.4%, reflecting an increase in units booked and slightly higher sales prices. In the fiscal year ended 2018, 11,649 units were booked compared to 11,317 units booked in the fiscal year ended 2017. The average net sales price per unit for the fiscal year ended 2018 was 0.5% higher than the price per unit for the fiscal year ended 2017. The increase in unit price mainly reflects product and customer mix changes.
Parts sales increased
Cost of goods sold. Total cost of goods sold was$903.0 million for the fiscal year ended 2018, an increase of$39.8 million , or 4.6%, compared to$863.2 million for the fiscal year ended 2017. As a percentage of net sales, total cost of goods sold increased from 87.1% to 88.1%. Bus segment cost of goods sold increased$38.5 million , or 4.7%, for the fiscal year ended 2018 compared to the fiscal year ended 2017. The average cost of goods sold per unit was 1.7% higher compared to the average cost of goods sold per unit for the fiscal year ended 2017 due to raw material price increases related to rising commodity costs, which were partially offset by favorable changes in product and customer mix as well as cost savings resulting from our operational improvement initiatives. 32 --------------------------------------------------------------------------------
The
Operating profit. Operating profit was$35.1 million for the fiscal year ended 2018, a decrease of$24.5 million , or 41.1%, compared to$59.5 million for the fiscal year ended 2017. Profitability was negatively impacted by a decrease of$5.4 million in gross profit and an increase of$19.1 million in selling, general and administrative expenses due in large part to several non-recurring operational and product development initiatives. Interest expense. Interest expense was$6.7 million for the fiscal year ended 2018, a decrease of$0.6 million , or 8.1%, compared to$7.3 million for the fiscal year ended 2017. The decrease was primarily attributed to lower average borrowing levels as well as a lower weighted-average annual effective interest rate. Other expense, net. Other expense, net was$1.6 million for the fiscal year ended 2018, a decrease of$3.3 million , or 67.3%, compared to$4.9 million for the fiscal year ended 2017. The decrease was primarily attributed to changes in pension expense related to a change in the amortization of net loss from fiscal 2017 to fiscal 2018. Pension expense was retroactively reclassified from selling, general and administrative expenses to other expense, net as we adopted ASU 2017-07 in fiscal 2019. Refer to Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards, for more information on adoption of the accounting pronouncement. Income taxes. We recorded an income tax benefit of$2.6 million for the fiscal year ended 2018, compared to income tax expense of$11.9 million for the fiscal year ended 2017.
The effective tax rate for the fiscal year ended 2018 was (9.7)%, which significantly differed from the federal statutory tax rate of 24.5%. The difference is explained below.
We recorded several one-time tax items in the fiscal year ended 2018, including:
• Release of a
• A total of
reported on our prior year return; and
• Tax expense adjustments of
Act, which was enacted during our first fiscal quarter of 2018 (enacted on
Along with re-measuring our deferred tax balances to the new tax rate, the$2.1 million net tax reform adjustment amount cited above includes$1.1 million in expense related to our tax liability for uncertain tax positions with the associated accrued interest and$0.1 million associated with the deemed repatriation tax. We also recorded normal tax rate benefit items, such as the domestic production activities deduction, federal and state tax credits, and share-based award related deductions in excess of recorded expense.
In fiscal 2018, we finalized our tax reform estimates under
The effective tax rate for the fiscal year ended 2017 was 31.7%, which differed from the statutory federal income tax rate of 35%, reflecting the benefits of income tax credits, the domestic production activities deduction, and recording a tax windfall from share-based compensation awards exercised, which were offset by the application of tax credits claimed as offsets against our payroll tax liabilities, and interest and penalties on uncertain tax positions. Adjusted EBITDA. Adjusted EBITDA was$70.4 million , or 6.9% of net sales, for the fiscal year ended 2018, an increase of$1.5 million , or 2.1%, compared to$68.9 million , or 7.0% of net sales, for the fiscal year ended 2017. The increase in adjusted EBITDA was primarily the result of a decrease in selling, general and administrative expenses when adjusted for specific non-recurring operational and product development initiatives, which was partially offset by decreased gross profit. 33
-------------------------------------------------------------------------------- The following table sets forth a reconciliation of net income to adjusted EBITDA for the fiscal years presented: (in thousands) 2018 2017 Net income$ 30,820 $ 28,801
Adjustments:
Discontinued operations income (81 ) (65 ) Interest expense, net 6,591 7,111 Income tax (benefit) expense (2,620 ) 11,856 Depreciation, amortization, and disposals 9,214 8,205 Loss on debt extinguishment - 10,142 Operational transformation initiatives 17,708 - Share-based compensation 2,628 1,270 Product redesign initiatives 6,253 1,758 Other (25 ) (174 ) Adjusted EBITDA$ 70,379 $ 68,904
Adjusted EBITDA margin (percentage of net sales) 6.9 % 7.0 %
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash generated from operations, available cash, and borrowings under the credit facility. AtSeptember 28, 2019 , the Company had$71.0 million of available cash and cash equivalents (net of outstanding checks) and$93.1 million of additional borrowings available under the revolving line of credit portion of its senior secured credit facilities. The Company's revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.
Credit Agreement
OnDecember 12, 2016 (the "Closing Date"),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, andRegions Bank , as Co-Syndication Agent, together with other lenders (the "Credit Agreement"). The credit facility provided for under the Credit Agreement consists of a term loan facility in an aggregate initial principal amount of$160.0 million (the "Term Loan Facility") and a revolving credit facility with aggregate commitments of$75.0 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 onDecember 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, 34 -------------------------------------------------------------------------------- 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, generally based upon our levels of excess free cash flow and Unrestricted Cash (as defined in the Credit Agreement) and maintenance of specified Total Net Leverage Ratios.
Amended Credit Agreement
OnSeptember 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 up to$50.0 million , which transaction closed inOctober 2018 . After giving effect to the Amended Credit Agreement, the initial$160.0 million Term Loan Facility, with a balance of$146.2 million atSeptember 29, 2018 , increased$50.0 million , and the initial$75.0 million Revolving Credit Facility increased$25.0 million . The amended Credit Facilities each mature onSeptember 13, 2023 , the fifth anniversary of the effective date of the Amended Credit Agreement. After giving effect to the Amended Credit Agreement, the interest payable with respect to the Term Loan Facility is (i) from the first amendment effective date until the first quarter ended on or aboutSeptember 30, 2018 , LIBOR plus 2.25% and (ii) commencing with the fiscal quarter ended on or aboutSeptember 30, 2018 and thereafter, dependent on the Total Net Leverage Ratio of the Company, an election of either base rate or LIBOR pursuant to the table below. The Company's 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 Annual Report on Form 10-K, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending. Level Total Net Leverage Ratio ABR Loans
Eurodollar Loans
I Less than 2.00x 0.75% 1.75%
Greater than or equal to 2.00x and
II less than 2.50x 1.00% 2.00%
Greater than or equal to 2.50x and
III less than 3.00x 1.25% 2.25%
Greater than or equal to 3.00x and
IV less than 3.25x 1.50% 2.50%
Greater than or equal to 3.25x and
V less than 3.50x 1.75% 2.75%
VI Greater than 3.50x 2.00% 3.00%
Under the Amended Credit Agreement, the principal of the Term Facility must be
paid in quarterly installments on 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;
•
fiscal quarter in 2021 through the last day of the Company's third fiscal
quarter in 2022;
•
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, among other things, events of default resulting from (i) failure to pay obligations when due under the Amended Credit Agreement, (ii) insolvency of the Company or its material subsidiaries, (iii) defaults under other material debt, (iv) judgments against the Company or its subsidiaries, (v) failure to comply with certain financial maintenance covenants (as set forth in the Amended Credit Agreement), or (vi) a change of control of the Company, in each case subject to limitations and exceptions as set forth in the Amended Credit Agreement.
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:
Maximum Total
Period Net
Leverage Ratio
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
35
--------------------------------------------------------------------------------Short-Term and Long-Term Liquidity Requirements
Our ability to make principal and interest payments on borrowings under the Amended Credit Agreement 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 operating requirements for at least the next 12 months.
Seasonality
Our business is highly seasonal. Most school districts seek to buy their new school 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 are our third and fourth fiscal quarters, the latter ending on the Saturday closest toSeptember 30 . Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these 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 typically a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter. We typically conduct planned shutdowns during our first fiscal quarter.
Cash Flows
The following table sets forth general information derived from our statement of cash flows for the fiscal years presented: (in thousands) 2019 2018
2017
Cash and cash equivalents, beginning of year
$ 52,309 Total cash provided by operating activities 55,706 48,353
47,641
Total cash used in investing activities (35,467 ) (32,104 ) (9,204 ) Total cash used in financing activities (9,540 ) (18,605 ) (28,130 ) Change in cash and cash equivalents 10,699 (2,356 ) 10,307 Cash and cash equivalents, end of year$ 70,959 $ 60,260 $ 62,616 Depreciation and amortization expense 10,383 9,042
8,180
Cash paid for fixed assets and acquired intangible assets$ 35,514 $ 32,118 $ 9,252
Total cash provided by operating activities
Cash flows provided by operating activities totaled$55.7 million for the fiscal year ended 2019, as compared with$48.4 million of cash flows provided by operating activities for the fiscal year ended 2018. The primary drivers of the$7.4 million increase were the following:
• Changes in pension and accrued expenses provided
incremental cash compared to the prior year. In fiscal 2019, the pension
liability increased by
2018. In fiscal 2018, the pension liability decreased by
(use of cash) compared to fiscal 2017. The release of $7.6 million in
fiscal 2018 for uncertain tax positions lowered the accrued expense
balance (use of cash) compared to fiscal 2017.
• Non-cash items (source of cash) were $5.4 million higher in fiscal 2019
compared to the prior year. Non-cash items impact net income, but do nothave direct cash outflows associated with them. The significant drivers in
fiscal 2019 were non-cash interest expense from our interest rate collar,
an increase in share-based compensation expense, and an increase in
depreciation expense which totaled $6.0 million .
The above increases were partially offset by the following that decreased
operating cash flows compared to the prior year:
• Working capital, consisting of accounts receivable, inventory, and
accounts payable changes, negatively impacted fiscal 2019 versus the prior
year by $8.6 million , as we had a larger inventory balance in fiscal 2019(use of cash), which was partially offset by a higher accounts payable
balance and lower accounts receivable balance (both sources of cash).
• The cash flow difference due to changes in other assets was a $4.7 million
decrease (source of cash) from fiscal 2018 to fiscal 2019, but a
million increase (use of cash) from fiscal 2017 to fiscal 2018. The
combined changes are a
year. The primary driver of the change is a
tax receivable recorded in fiscal 2019 that was not recorded in fiscal
2018.
• Net income was lower by
year.
36
-------------------------------------------------------------------------------- Cash flows provided by operating activities totaled$48.4 million for the fiscal year ended 2018, as compared with$47.6 million of cash flows provided by operating activities for the fiscal year ended 2017. The$0.7 million increase was primarily attributed to a$2.0 million increase in net income, an improvement in the cash flow impacts of changes to working capital and other assets of$19.0 million , and$2.2 million in additional non-cash components to net income in the year. The sources of operating cash were largely offset by a$15.3 million negative difference in the cash flow impacts of accrued expenses between the years which includes the release of our uncertain tax position, as well as a decrease of$2.8 million in dividends received from ourMicro Bird joint venture.
Total cash used in investing activities
Cash flows used in investing activities totaled$35.5 million for the fiscal year ended 2019, as compared with$32.1 million of cash flows used in investing activities for the fiscal year ended 2018. The$3.4 million increase in cash used was primarily due to increased spending on manufacturing assets associated with our new paint facility. Cash flows used in investing activities totaled$32.1 million for the fiscal year ended 2018, as compared with$9.2 million of cash flows used in investing activities for the fiscal year ended 2017. The$22.9 million increase in cash used was primarily due to increased spending on manufacturing assets associated with our paint facility.
Total cash used in financing activities
Cash used in financing activities totaled$9.5 million for the fiscal year ended 2019, as compared with$18.6 million in cash used in financing activities for the fiscal year ended 2018. The$9.1 million decrease in cash used was mainly attributed to no share repurchase programs in fiscal 2019 compared to fiscal 2018 (a$26.6 million decrease), no cash dividends paid on preferred stock in fiscal 2019 compared to fiscal 2018 (a$1.9 million decrease), no cash paid for debt issuance costs in fiscal 2019 compared to fiscal 2018 (a$2.0 million decrease), and a decrease of$1.6 million in cash paid for vested restricted shares and stock option exercises. The decreases in use were partially offset by a$20.6 million decrease in proceeds received from warrant exercises and a$2.1 million increase in debt principal payments. In fiscal 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). Cash used in financing activities totaled$18.6 million for the fiscal year ended 2018, as compared with$28.1 million in cash used in financing activities for the fiscal year ended 2017. The$9.5 million decrease in cash used was mainly attributed to a decrease of$7.7 million in cash spent on share repurchases under share repurchase programs, a$2.4 million decrease in cash dividends paid on preferred stock, and a$159.7 million decrease in debt principal payments. The decreases in cash used were partially offset by an increase of$1.7 million paid for debt issuance costs and a$1.2 million increase in cash taxes paid for employee taxes on vested restricted shares and stock option exercises.
Free cash flow
Management believes the non-GAAP measurement of free cash flow, defined as net cash provided by continuing operations 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 Measures We Use to Evaluate Our Performance". The following table sets forth the calculation of free cash flow for the fiscal years presented: (in thousands) 2019 2018
2017
Total cash provided by operating activities
$ 47,641 Cash paid for fixed assets and acquired intangible assets (35,514 ) (32,118 ) (9,252 ) Free cash flow$ 20,192 $ 16,235 $ 38,389 Free cash flow for the fiscal year ended 2019 was$4.0 million higher than free cash flow for the fiscal year ended 2018, primarily due to an increase of$3.4 million in cash paid for manufacturing assets, which was partially offset by a$7.4 million increase from cash provided by operating activities as discussed above. 37
-------------------------------------------------------------------------------- Free cash flow for the fiscal year ended 2018 was$22.2 million lower than free cash flow for the fiscal year ended 2017, primarily due to an increase of$22.9 million in cash paid for manufacturing assets, which was partially offset by a$0.7 million increase from cash provided by operating activities as discussed above.
Commitments and Contractual Obligations
In the normal course of business, we enter into various contractual obligations that impact, or could impact, our liquidity. The table below outlines our projected cash payments for material obligations atSeptember 28, 2019 . Also refer to Note 10, Guarantees, Commitments and Contingencies, to the accompanying consolidated financial statements for further information on our commitments and contractual obligations. Payments Due by Period Less than 1 More than 5 (in thousands) Total year 1 to 3 years 3 to 5 years years Debt obligations (1)$ 186,250 $ 9,900 $ 24,750 $ 151,600 $ - Interest expense on long-term debt obligations (2) 29,278 8,209 14,710 6,359 - Accrued warranty costs (3) 22,343 9,161 9,119 4,063 - Operating lease obligations (4) 10,390 1,562 2,792 2,871 3,165 Future pension plan contributions (5) 21,411 3,694 3,984 6,109 7,624 Finance lease obligations (6) 5,241 899 1,798 1,796 748 Purchase commitments (7) 97,887 97,887 - - - Total commitments and contractual obligations$ 372,800 $ 131,312 $ 57,153 $ 172,798 $ 11,537 (1) Reflects principal payments under the amended credit agreement. Refer to Note 8, Debt, for further information. (2) Reflects estimated interest expense using the stated interest rate at the end of the period. (3) Reflects accrued anticipated warranty costs based on the historical average per unit warranty cost of the relevant bus model type. (4) Represents the future minimum lease payments under non-cancelable operating leases with original terms exceeding one year. (5) Represents expected future minimumIRS contributions required to fundBlue Bird's pension plan, based on current actuarial assumptions. (6) Represents the future minimum lease payments under non-cancelable finance leases, including interest. (7) Reflects non-cancelable purchase commitments for manufacturing inventory and capital assets.
Off-Balance Sheet arrangements
We had outstanding letters of credit totaling
At
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.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. 38 --------------------------------------------------------------------------------
Use of Estimates and Assumptions
The preparation of financial statements in accordance with accounting principles generally accepted inthe 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 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 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.
Revenue Recognition
The Company records revenue, net 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 control of a promised good or service to 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 all of the remaining benefits from, that good 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 all of the remaining benefits of the product when the product is delivered or when the product has been completed, is ready for delivery, has been paid for, its title has transferred and it is awaiting pickup by 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 related 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 may 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 recognized 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. The Company includes shipping and handling revenues, which represents costs billed to customers, in net sales on the Consolidated Statements of Operations. The related costs incurred by the Company are included in cost of goods sold on the Consolidated Statements of Operations.
The Company is self-insured for the majority of its workers' compensation and medical claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience. AtSeptember 28, 2019 andSeptember 29, 2018 , reserves totaled approximately$4.7 million and$5.2 million , respectively. 39
--------------------------------------------------------------------------------
Inventories
The Company values inventories at the lower of cost or net realizable value. The
Company uses a standard costing methodology, which approximates cost on a
first-in, first-out ("FIFO") basis. The Company reviews the standard costs of
raw materials, work-in-process and finished goods inventory on a periodic basis
to ensure that its inventories approximate current actual costs. Manufacturing
cost includes raw materials, direct labor and manufacturing overhead. Obsolete
inventory amounts are based on historical usage and assumptions about future
demand.
Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the assets acquired less liabilities assumed in connection with such acquisition. In accordance with the provisions of ASC 350, Intangibles-Goodwill and Other ("ASC 350"), goodwill and intangible assets with indefinite useful lives acquired in an acquisition are not amortized, but instead are tested for impairment at least annually or more frequently should an event occur or circumstances indicate that the carrying amount may be impaired. Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition of a reporting unit or a portion thereof. Although management believes the assumptions used in the determination of the value of the enterprise are reasonable, no assurance can be given that these assumptions will be achieved. As a result, impairment charges may occur when goodwill is tested for impairment in the future. We have two reporting units for which we test goodwill for impairment: Bus and Parts. In the evaluation of goodwill for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If under the quantitative assessment the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, we would record an impairment loss equal to the excess of the carrying value of the reporting unit's goodwill over its implied fair value should such a circumstance arise. Fair value of the reporting units is estimated primarily using the income approach, which incorporates the use of discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate and working capital changes. The cash flow forecasts are based on approved strategic operating plans.
During the fourth quarter of each fiscal year presented, we performed our annual impairment assessment of goodwill which did not indicate that an impairment existed.
In the evaluation of indefinite lived assets for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary, or to perform a quantitative assessment by comparing the fair value of an asset to its carrying amount. The Company's intangible asset with an indefinite useful life is theBlue Bird trade-name. Under the qualitative assessment, an entity is not required to calculate the fair value of the asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If a qualitative assessment is not performed or if a quantitative assessment is otherwise required, then the entity compares the fair value of an asset to its carrying amount and the amount of the impairment loss, if any, is the difference between fair value and carrying value. The fair value of our trade name is derived by using the relief from royalty method, which discounts the estimated cash savings we realized by owning the name instead of otherwise having to license or lease it.
During the fourth quarter of each fiscal year presented, we performed our annual impairment assessment of our trade name which did not indicate that an impairment existed.
Our intangible assets with definite useful lives include customer relationships and engineering designs, which are amortized over their estimated useful lives of 2, 7, or 20 years using the straight-line method. These assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. No impairments have been recorded.
Pensions
We have pension benefit costs and obligations, which are developed from
actuarial valuations. Actuarial assumptions attempt to anticipate future events
and are used in calculating the expense and liability relating to our plan.
These factors include assumptions we make about interest rates and expected
investment return on plan assets. In addition, our actuarial consultants also
use subjective factors such as mortality rates to develop our valuations. We
review and update these assumptions on an annual basis at the beginning of each
fiscal year.
40
-------------------------------------------------------------------------------- We are required to consider current market conditions, including changes in interest rates, in making these assumptions. EffectiveJanuary 1, 2006 , the benefit plan was frozen to all participants. No accrual of future benefits is earned or calculated beyond this date. Accordingly, our obligation estimate is based on benefits earned at that time discounted using an estimate of the single equivalent discount rate determined by matching the plan's future expected cash flows to spot rates from a yield curve comprised of high quality corporate bond rates of various durations. The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the pension benefit obligation. In estimating that rate, appropriate consideration is given to the returns being earned by the plan assets in the fund and rates of return expected to be available for reinvestment and a building block method and we consider asset allocations, input from an external pension investment adviser, and risks and other factors adjusted for our specific investment strategy. The focus is on long-term trends and provides for the consideration of recent plan performance. The actuarial assumptions that we use may differ materially from actual results due to changing market and economic conditions as well as longer or shorter life spans of participants. These differences may result in a significant impact to the measurement of our pension benefit obligations, and to the amount of pension benefits expense we may record. For example, atSeptember 28, 2019 , a one-half percent increase in the discount rate would reduce the projected benefit obligation of our pension plans by approximately$9.6 million , while a one-half percent decrease in the discount rate would increase the projected benefit obligation of our pension plans by approximately$10.9 million .
Product Warranty Costs
The Company's products are generally warranted against defects in material and workmanship for a period of one to five years. A provision for estimated warranty costs is recorded at the time a unit is sold. The methodology to determine the warranty reserve calculates the average expected warranty claims using warranty claims by body type, by month, over the life of the bus, which is then multiplied by remaining months under warranty, by warranty type. Management believes the methodology provides an accurate reserve estimate. Actual claims incurred could differ from the original estimates, requiring future adjustments. The Company also sells extended warranties related to its products. Revenue related to these contracts is recognized on a straight-line basis over the contract period and costs thereunder are expensed as incurred. All warranty expenses are recorded in cost of goods sold on the Consolidated Statements of Operations. The current methodology to determine short-term extended warranty income reserve is based on twelve months of the remaining warranty value for each effective extended warranty at the balance sheet date.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes
("ASC 740"), which requires an asset and liability approach to financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes represent the expected future tax consequences of temporary differences
between the financial statement and tax basis of assets and liabilities. The
Company evaluates its ability, based on the weight of evidence available, to
realize future tax benefits from deferred tax assets and establishes a valuation
allowance to reduce a deferred tax asset to a level which, more likely than not,
will be realized in future years.
The Company recognizes uncertain tax positions based on a cumulative probability
assessment if it is more likely than not that the tax position will be sustained
upon examination by an appropriate tax authority with full knowledge of all
information. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Amounts recorded for
uncertain tax positions are periodically assessed, including the evaluation of
new facts and circumstances, to ensure sustainability of the positions. The
Company records interest and penalties related to unrecognized tax benefits in
income tax expense.
Recent Accounting Pronouncements
A discussion of recently issued accounting standards applicable to the Company is described in Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards, in the Notes to Consolidated Financial Statements contained elsewhere in this Report, and we incorporate such discussion by reference herein.
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