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 ended
We refer to the fiscal year ended
Executive Overview
Impact of COVID-19 on Our Business
Beginning in our second fiscal quarter of 2020, the novel coronavirus known as
"COVID-19" began to spread throughout the world, resulting in a global pandemic.
The pandemic triggered a significant downturn in global commerce as early as
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 a significant portion of our fiscal year 2021
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
The full impacts from COVID-19 on the Company's financial results in fiscal year 2020 negatively affected our revenues and profits. 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 as we plan for fiscal 2021 and beyond. A prolonged economic downturn would have a material adverse impact on our sales and financial results beyond fiscal 2020. See PART I, Item 1A. "Risk Factors", of this Annual Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.
26
--------------------------------------------------------------------------------
The Company has taken actions to control spending and secure adequate liquidity,
including minor headcount rationalization and changes to the minimum required
financial covenants via execution of a third amendment to the Credit Agreement
in
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 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.
• 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 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 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.
• 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.
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 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 challenges, and the impact of overhead items such as
utilities.
27
--------------------------------------------------------------------------------
• 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, 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, and changes in the fair value of interest rate derivatives not
designated in hedge accounting relationships, 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 as
gains 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". Adjusted EBITDA and Free Cash Flow are financial metrics that are utilized by management and the board of directors to determine (a) the annual cash bonus payouts, if any, to be made to certain members of management based upon the terms of the Company's Management Incentive Plan, and (b) whether the performance criteria have been met for the vesting of certain equity awards granted annually to certain members of management based upon the terms of the Company's Omnibus Equity Incentive Plan. Additionally, consolidated EBITDA, which is an adjusted EBITDA metric defined by our Amended Credit Agreement that could differ from Adjusted EBITDA discussed above as the adjustments to the calculations are not uniform, is used to determine the Company's ongoing compliance with several financial covenant requirements, including being utilized in the denominator of the calculation of the Total Net Leverage Ratio. Accordingly, management views these non-GAAP financial metrics as key for the above purposes and as a useful way to evaluate the performance of our operations as discussed further below.
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; and 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; as adjusted for certain non-cash charges or credits that we may record on a recurring basis such as stock-compensation expense and unrealized gains or losses on certain derivative financial instruments; net gains or losses on the disposal of assets as well as certain charges such as (i) significant product design changes; (ii) transaction related costs; (iii) discrete expenses related to major cost cutting initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. While certain of the charges that are added back in the Adjusted EBITDA calculation, such as transaction related costs and operational transformation and major product redesign initiatives, represent operating expenses that may be recorded in more than one annual period, the significant project or transaction giving rise to such expenses is not considered to be indicative of the Company's normal operations. Accordingly, we believe that these, as well as the other credits and charges that comprise the amounts utilized in the determination of Adjusted EBITDA described above, should not be used in evaluating the Company's ongoing annual operating 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 ongoing operations, excluding decisions made with respect to capital investment, financing, and certain other significant initiatives or transactions as outlined in the preceding paragraph. We believe the non-GAAP measures 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.
28
--------------------------------------------------------------------------------
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 certain
other significant initiatives or transactions, (i) other companies in
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 ongoing operating results.
Our measure of Free Cash Flow is used in addition to and in conjunction with results presented in accordance with GAAP and it should not be relied upon to the exclusion of GAAP financial measures. Free Cash Flow reflects an additional way of evaluating 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 as adjusted for net cash paid for the acquisition or disposal of fixed assets and 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. Accordingly, 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 sale 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 endedOctober 3, 2020 andSeptember 28, 2019 : (in thousands) 2020 2019 Net sales$ 879,221 $ 1,018,874 Cost of goods sold 783,021 885,400 Gross profit$ 96,200 $ 133,474 Operating expenses Selling, general and administrative expenses 74,206 89,642 Operating profit$ 21,994 $ 43,832 Interest expense (12,252 ) (12,879 ) Interest income 11 9 Other income (expense), net 738 (1,331 ) Income before income taxes$ 10,491 $ 29,631 Income tax expense (1,519 ) (7,573 ) Equity in net income of non-consolidated affiliate 3,213 2,242 Net income$ 12,185 $ 24,300 Other financial data: Adjusted EBITDA$ 54,681 $ 81,829 Adjusted EBITDA Margin 6.2 % 8.0 % 29
--------------------------------------------------------------------------------
The following provides the results of operations ofBlue Bird's two reportable segments: (in thousands) 2020 2019Net Sales by Segment Bus$ 822,616 $ 952,242 Parts 56,605 66,632 Total$ 879,221 $ 1,018,874 Gross Profit by Segment Bus$ 76,059 $ 110,015 Parts 20,141 23,459 Total$ 96,200 $ 133,474
Net sales. Net sales were
Bus sales decreased
Parts sales decreased
Cost of goods sold. Total cost of goods sold was
Bus segment cost of goods sold decreased
The
Operating profit. Operating profit was
Interest expense. Interest expense was
Income taxes. We recorded income tax expense of
30
--------------------------------------------------------------------------------
The effective tax rate for the fiscal year ended 2020 differed from the statutory Federal income tax rate of 21.0%. There were minor items that lowered the effective tax rate to 14.5%, primarily the impacts of tax credits and state taxes on the Federal rate. These were offset to a lesser degree by the recording of a partial valuation allowance for state taxes and minor provision to return adjustments.
The effective tax rate for the fiscal year ended 2019 was 25.6%, which differed from the statutory federal income tax rate of 21%. The difference was mainly due to the unfavorable impact of valuation allowances, share-based and other compensation limitations, and state taxes, which included 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 were greater than our ability to utilize before expiration. These items were partially offset by benefits from federal and state tax credits.
Adjusted EBITDA. Adjusted EBITDA was
The following table sets forth a reconciliation of net income to Adjusted EBITDA for the fiscal years presented: (in thousands) 2020 2019 Net income$ 12,185 $ 24,300 Adjustments: Interest expense, net (1) 12,616 13,279 Income tax expense 1,519 7,573 Depreciation, amortization, and disposals (2) 15,096 11,102 Operational transformation initiatives 3,404 10,594 Foreign currency hedges - 109 Share-based compensation 4,141 4,273 Product redesign initiatives 4,068 10,540 Restructuring charges 646 - Costs directly attributed to the COVID-19 pandemic (3) 1,000 - Other 6 59 Adjusted EBITDA$ 54,681 $ 81,829 Adjusted EBITDA Margin (percentage of net sales) 6.2 % 8.0 % (1) Includes$0.4 million and$0.4 million for fiscal 2020 and 2019, respectively, 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 and$0.7 million for fiscal 2020 and 2019, respectively, representing amortization on right-of-use operating lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations. (3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees in response to the COVID-19 pandemic. 31
--------------------------------------------------------------------------------
Consolidated Results of Operations for the fiscal years endedSeptember 28, 2019 andSeptember 29, 2018 : (in thousands) 2019 2018 Net sales$ 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 % 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
Parts sales increased
Cost of goods sold. Total cost of goods sold was
Bus segment cost of goods sold decreased
32
--------------------------------------------------------------------------------
The
Operating profit. Operating profit was
Interest expense. Interest expense was
Income taxes. We recorded income tax expense of
The effective tax rate for the fiscal year ended 2019 was 25.6%, which differed from the federal statutory tax rate of 21.0%. The difference was mainly due to the unfavorable impact of valuation allowances, share-based and other compensation limitations, and state taxes, which included 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 were 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%, mainly due to one-time events like the decrease in our uncertain tax positions and a re-measurement of our deferred tax assets and liabilities as a result of the Tax Act. The rate was also favorably impacted by 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 book expense.
Adjusted EBITDA. Adjusted EBITDA was
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
33
--------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash generated from operations,
available cash, and borrowings under the credit facility. At
Credit Agreement
On
The credit facility provided for under the Credit Agreement consists of a term
loan facility in an aggregate initial principal amount of
The obligations under the Credit Agreement and the related loan documents
(including without limitation, the borrowings under the Credit Facilities
(including the Incremental Term Loan discussed below) 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
Up to
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, 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.
First Amended Credit Agreement
On
After giving effect to the First Amended Credit Agreement, the initial
34
--------------------------------------------------------------------------------
After giving effect to the First Amended Credit Agreement, the interest payable
with respect to the Term Loan Facility was (i) from the first amendment
effective date until the first quarter ended on or about
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 First 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:
•
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 First Amended Credit Agreement, including, among other things, events of default resulting from (i) failure to pay obligations when due under the First 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 First 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 First Amended Credit Agreement.
The First 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
Second Amended Credit Agreement
On
On
35
--------------------------------------------------------------------------------
Amendments to the financial performance covenants provide that during the
Limited Availability Period, a higher maximum Total Net Leverage Ratio is
permitted, and requires the Company to maintain liquidity (in the form of
undrawn availability under the Revolving Credit Facility and unrestricted cash
and cash equivalents) of at least
The pricing grid in the First Amended Credit Agreement, which is based on the ratio of the Company's consolidated net debt to consolidated EBITDA, remains unchanged. However, during the Limited Availability Period, an additional margin of 0.50% applies.
During the Limited Availability Period, the Amended Credit Agreement requires
that the Borrower prepay existing revolving loans and, if undrawn and
unreimbursed letters of credit exceed
For the duration of the Limited Availability Period, the Amended Credit Agreement sets forth additional monthly reporting requirements, and requires subordination agreements and intercreditor arrangements for certain other indebtedness and liens subject to administrative agent approval.
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 future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. During fiscal 2020, the novel coronavirus known as "COVID-19" spread throughout the world, resulting in a global pandemic. The pandemic materially impacted our 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 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. See PART I, Item 1A. "Risk Factors", of this Annual Report for a discussion of the 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 liquidity which could lead to issues complying with our Credit Facility covenants. Our primary financial covenants are (i) for fiscal 2021, minimum consolidated EBITDA, an adjusted EBITDA metric that could differ from Adjusted EBITDA appearing in the Company's periodic filings on Form 10-K or Form 10-Q as the adjustments to the calculations are not uniform, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending; b) for fiscal 2021 and the first two quarters of fiscal 2022, minimum liquidity at the end of each month, and (iii) beginning in fiscal 2022 and thereafter, Total Net Leverage Ratio, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA. We may need to seek additional 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 than included in our historical financial statements.
On
36
--------------------------------------------------------------------------------
Seasonality
Historically, our business has been highly seasonal with school districts buying
their new schools buses so that they will be available for use on the first day
of the school year, typically in mid-August to early September. This has
resulted in our third and fourth fiscal quarters becoming our two busiest
quarters, the latter ending on the Saturday closest to
Cash Flows
The following table sets forth general information derived from our statement of cash flows for the fiscal years presented: (in thousands)
2020 2019 2018
Cash and cash equivalents, beginning of year
(26,452 ) 10,699 (2,356 )
Cash and cash equivalents, end of year
Total cash provided by operating activities
Cash flows provided by operating activities totaled
• A year over year reduction of
• The effect of net changes in operating assets and liabilities negatively
impacted 2020 operating cash flow by $35.0 million compared to 2019. The
primary drivers in this category were the unfavorable changes in accounts
payable and accrued expenses of $75.7 million as well as accounts
receivable of $10.6 million , which were partially offset by improvements
in inventory level changes of $43.8 million and other assets of $9.7
million .
• The impact of non-cash items (net source of cash) were
in fiscal 2019 compared to fiscal 2020. Non-cash items impact net income,
but do not have direct cash outflows associated with them. The significant
differences were the impact of higher amounts of deferred taxes of $6.6
million , share-based compensation of $0.1 million , and pension
amortization expense of $1.0 million in fiscal 2019 compared to fiscal
2020. These were partially offset by an increase in depreciation and
amortization expense in fiscal 2020 of $4.0 million .
Cash flows provided by operating activities totaled
• Changes in pension and accrued expenses provided$24.0 million in incremental cash compared to the prior year. In fiscal 2019, the pension liability increased by$24.5 million (source of cash) compared to fiscal 2018. In fiscal 2018, the pension liability decreased by$11.3 million (use of cash). The release of$7.6 million in fiscal 2018 for uncertain tax positions lowered the accrued expense balance (use of cash). • Non-cash items (source of cash) were$5.4 million higher compared to the fiscal year ended 2018. Non-cash items impact net income, but do not have 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:
37
--------------------------------------------------------------------------------
• 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 $2.8 million increase (use of cash) from fiscal 2017 to fiscal 2018. The
combined changes resulted in $7.4 million decrease in fiscal 2019 from the
prior year. The primary driver of the change was a $3.8 million federal
income tax receivable recorded in fiscal 2019 that was not recorded in
fiscal 2018.
• Net income was lower by $6.5 million in fiscal 2019 compared to the prior
year.
Total cash used in investing activities
Cash flows used in investing activities totaled
Cash flows used in investing activities totaled
Total cash used in financing activities
Cash used in financing activities totaled
Cash used in financing activities totaled
In fiscal 2019, the Company received
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)
2020 2019 2018
Total cash provided by operating activities $ 3,459 $ 55,706 $ 48,353
Cash paid for fixed assets and acquired
intangible assets (18,968 ) (35,514 ) (32,118 )
Free cash flow $ (15,509 ) $ 20,192 $ 16,235 Free cash flow for the fiscal year ended 2020 was
38
--------------------------------------------------------------------------------
Free cash flow for the fiscal year ended 2019 was
Off-Balance Sheet arrangements
We had outstanding letters of credit totaling
We had a
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in
Use of Estimates and Assumptions
The preparation of financial statements in accordance with
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.
39
--------------------------------------------------------------------------------
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 are 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. At
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.
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.
40
--------------------------------------------------------------------------------
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 the
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. We are required to consider current market conditions, including
changes in interest rates, in making these assumptions. Effective
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, at
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.
41
--------------------------------------------------------------------------------
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.
© Edgar Online, source
