(Address of principal executive offices and zip code)
(478) 822-2801
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.0001 par value
BLBD
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated Filer
☒
Non-accelerated filer
☐
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
At August 6, 2021, 27,204,435 shares of the registrant’s common stock, $0.0001 par value, were outstanding.
Guarantees, commitments and contingencies (Note 6)
Stockholders' deficit
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares outstanding at July 3, 2021 and October 3, 2020
$
—
$
—
Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,204,435 and 27,048,404 shares outstanding at July 3, 2021 and October 3, 2020, respectively
3
3
Additional paid-in capital
92,169
88,910
Accumulated deficit
(31,365)
(33,464)
Accumulated other comprehensive loss
(57,336)
(58,397)
Treasury stock, at cost, 1,782,568 shares at July 3, 2021 and October 3, 2020
(50,282)
(50,282)
Total stockholders' deficit
$
(46,811)
$
(53,230)
Total liabilities and stockholders' deficit
$
362,945
$
317,415
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Nine Months Ended
(in thousands of dollars except for share data)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Net sales
$
196,659
$
189,181
$
491,791
$
597,810
Cost of goods sold
170,500
168,099
432,671
531,259
Gross profit
$
26,159
$
21,082
$
59,120
$
66,551
Operating expenses
Selling, general and administrative expenses
18,073
17,793
50,124
58,146
Operating profit
$
8,086
$
3,289
$
8,996
$
8,405
Interest expense
(2,805)
(2,406)
(7,069)
(9,961)
Interest income
—
27
1
27
Other income, net
426
181
1,491
555
Loss on debt modification
—
—
(598)
—
Income (loss) before income taxes
$
5,707
$
1,091
$
2,821
$
(974)
Income tax (expense) benefit
(1,892)
(765)
(888)
378
Equity in net income of non-consolidated affiliate
517
960
166
840
Net income
$
4,332
$
1,286
$
2,099
$
244
Earnings per share:
Basic weighted average shares outstanding
27,172,162
27,027,731
27,116,915
26,784,404
Diluted weighted average shares outstanding
27,428,877
27,080,015
27,337,360
26,980,480
Basic earnings per share
$
0.16
$
0.05
$
0.08
$
0.01
Diluted earnings per share
$
0.16
$
0.05
$
0.08
$
0.01
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Net income
$
4,332
$
1,286
$
2,099
$
244
Other comprehensive income, net of tax:
Net change in defined benefit pension plan
354
327
1,061
980
Total other comprehensive income
$
354
$
327
$
1,061
$
980
Comprehensive income
$
4,686
$
1,613
$
3,160
$
1,224
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Cash flows from operating activities
Net income
$
2,099
$
244
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
10,145
10,728
Non-cash interest expense
2,219
3,560
Share-based compensation
1,923
4,105
Equity in net income of non-consolidated affiliate
(166)
(840)
Gain on disposal of fixed assets
(681)
(100)
Deferred taxes
350
32
Amortization of deferred actuarial pension losses
1,397
1,289
Loss on debt modification
598
—
Changes in assets and liabilities:
Accounts receivable
(2,828)
(3,157)
Inventories
(77,017)
(76,887)
Other assets
1,682
2,480
Accounts payable
55,150
(3,115)
Accrued expenses, pension and other liabilities
(9,109)
(16,644)
Total adjustments
$
(16,337)
$
(78,549)
Total cash used in operating activities
$
(14,238)
$
(78,305)
Cash flows from investing activities
Cash paid for fixed assets
$
(10,304)
$
(16,724)
Proceeds from sale of fixed assets
901
150
Total cash used in investing activities
$
(9,403)
$
(16,574)
Cash flows from financing activities
Borrowings under the revolving credit facility
$
—
$
45,000
Repayments under the senior term loan
(7,425)
(7,425)
Principal payments on finance leases
(1,147)
(854)
Cash paid for debt costs
(2,476)
(935)
Net cash received (paid) for exercises and employee taxes on vested restricted shares and stock option exercises
1,405
(3,568)
Proceeds from exercises of warrants
—
4,240
Total cash (used in) provided by financing activities
$
(9,643)
$
36,458
Change in cash and cash equivalents
(33,284)
(58,421)
Cash and cash equivalents, beginning of period
44,507
70,959
Cash and cash equivalents, end of period
$
11,223
$
12,538
Supplemental disclosures of cash flow information
Cash paid or received during the period:
Interest paid, net of interest received
$
8,855
$
6,616
Income tax paid (received), net of tax refunds
52
(1,668)
Non-cash investing and financing activities:
Changes in accounts payable for capital additions to property, plant and equipment
$
400
$
(3,613)
Cashless exercise of stock options
—
5,246
Right-of-use assets obtained in exchange for finance lease obligations
—
1,942
Right-of-use assets obtained in exchange for operating lease obligations
107
—
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Unaudited)
Three Months Ended
(in thousands of dollars, except for share data)
Common Stock
Convertible Preferred Stock
Treasury Stock
Shares
Par Value
Additional Paid-In-Capital
Shares
Amount
Accumulated Other Comprehensive Loss
Accumulated Deficit
Shares
Amount
Total Stockholders' Deficit
Balance, April 3, 2021
27,153,872
$
3
$
91,078
—
$
—
$
(57,690)
$
(35,697)
1,782,568
$
(50,282)
$
(52,588)
Stock option activity
50,563
—
794
—
—
—
—
—
—
794
Share-based compensation expense
—
—
297
—
—
—
—
—
—
297
Net income
—
—
—
—
—
—
4,332
—
—
4,332
Other comprehensive income, net of tax
—
—
—
—
—
354
—
—
—
354
Balance, July 3, 2021
27,204,435
$
3
$
92,169
—
$
—
$
(57,336)
$
(31,365)
1,782,568
$
(50,282)
$
(46,811)
Balance, April 4, 2020
27,027,272
$
3
$
87,408
—
$
—
$
(55,501)
$
(46,691)
1,782,568
$
(50,282)
$
(65,063)
Restricted stock activity
—
—
(255)
—
—
—
—
—
—
(255)
Stock option activity
21,132
—
—
—
—
—
—
—
—
—
Share-based compensation expense
—
—
1,777
—
—
—
—
—
—
1,777
Net income
—
—
—
—
—
—
1,286
—
—
1,286
Other comprehensive income, net of tax
—
—
—
—
—
327
—
—
—
327
Balance, July 4, 2020
27,048,404
$
3
$
88,930
—
$
—
$
(55,174)
$
(45,405)
1,782,568
$
(50,282)
$
(61,928)
6
Nine Months Ended
(in thousands of dollars, except for share data)
Common Stock
Convertible Preferred Stock
Treasury Stock
Shares
Par Value
Additional Paid-In-Capital
Shares
Amount
Accumulated Other Comprehensive Loss
Accumulated Deficit
Shares
Amount
Total Stockholders' Deficit
Balance, October 3, 2020
27,048,404
$
3
$
88,910
—
$
—
$
(58,397)
$
(33,464)
1,782,568
$
(50,282)
$
(53,230)
Restricted stock activity
36,404
—
(517)
—
—
—
—
—
—
(517)
Stock option activity
119,627
—
1,922
—
—
—
—
—
—
1,922
Share-based compensation expense
—
—
1,854
—
—
—
—
—
—
1,854
Net income
—
—
—
—
—
—
2,099
—
—
2,099
Other comprehensive income, net of tax
—
—
—
—
—
1,061
—
—
—
1,061
Balance, July 3, 2021
27,204,435
$
3
$
92,169
—
$
—
$
(57,336)
$
(31,365)
1,782,568
$
(50,282)
$
(46,811)
Balance, September 28, 2019
26,476,336
$
3
$
84,271
—
$
—
$
(56,154)
$
(45,649)
1,782,568
$
(50,282)
$
(67,811)
Warrant exercises
368,712
—
4,240
—
—
—
—
—
—
4,240
Restricted stock activity
94,724
—
(1,623)
—
—
—
—
—
—
(1,623)
Stock option activity
108,632
—
(1,945)
—
—
—
—
—
—
(1,945)
Share-based compensation expense
—
—
3,987
—
—
—
—
—
—
3,987
Net income
—
—
—
—
—
—
244
—
—
244
Other comprehensive income, net of tax
—
—
—
—
—
980
—
—
—
980
Balance, July 4, 2020
27,048,404
$
3
$
88,930
—
$
—
$
(55,174)
$
(45,405)
1,782,568
$
(50,282)
$
(61,928)
The accompanying notes are an integral part of these consolidated financial statements.
7
BLUE BIRD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Basis of Presentation
Nature of Business
Blue Bird Body Company, a wholly-owned subsidiary of Blue Bird Corporation, was incorporated in 1958 and has manufactured, assembled and sold school buses to a variety of municipal, federal and commercial customers since 1927. The majority of Blue Bird’s sales are made to an independent distributor network, which in turn sells buses to ultimate end users. We are headquartered in Macon, Georgia. References in these notes to financial statements to “Blue Bird,” the “Company,” “we,” “our,” or “us” relate to Blue Bird Corporation and its wholly-owned subsidiaries, unless the context specifically indicates otherwise.
COVID-19
Beginning at the end of our second quarter of fiscal year 2020 and continuing through the third quarter of fiscal year 2021, the novel coronavirus known as "COVID-19" spread throughout the world, resulting in a global pandemic. The pandemic significantly impacted our financial results for the second half of fiscal year 2020, which continued throughout the first nine months of fiscal year 2021, causing, among other matters, lower customer orders for both buses and bus parts, supply disruptions, higher rates of absenteeism among our hourly production workforce and a temporary shutdown of manufacturing in April 2020, March 2021, and May 2021. The continuing development and fluidity of the pandemic and its trailing impact 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 pandemic would likely have a material adverse impact on our financial results.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and Article 8 of Regulation S-X. The Company’s fiscal year ends on the Saturday closest to September 30 with its quarters consisting of thirteen weeks in most years. Fiscal year 2021, which ends on October 2, 2021, consists of 52 weeks while fiscal year 2020, which ended on October 3, 2020, consisted of 53 weeks. The third quarters of fiscal years 2021 and 2020 both included 13 weeks. The nine month periods in fiscal years 2021 and 2020 included 39 and 40 weeks, respectively.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for any interim period are not necessarily indicative of the results that may be expected for the entire year. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
The Condensed Consolidated Balance Sheet data as of October 3, 2020 was derived from the Company’s audited financial statements but does not include all disclosures required by GAAP. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the fiscal year ended October 3, 2020 as set forth in the Company's 2020 Form 10-K filed on December 17, 2020.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with 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; the allowance for doubtful accounts; potential impairment of long-lived assets, goodwill and intangible assets; and the accounting for self-insurance reserves, warranty reserves, pension obligations, income taxes, environmental liabilities and contingencies. Future events, including the extent and duration of COVID-19 related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The
8
Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in the Company’s evaluations. Actual results could differ from the estimates that the Company has used.
2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards
The Company’s significant accounting policies are described in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020. Our senior management has reviewed these significant accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the nine months ended July 3, 2021.
Recently Adopted Accounting Standards
ASU 2016-13 In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that credit losses on most financial instruments measured at amortized cost and certain other financial instruments be measured using an expected credit loss model. Under this model, entities are required to estimate credit losses over the entire contractual term of the financial instrument from the date of initial recognition of the instrument. As required, the Company adopted this guidance on October 4, 2020, the first day of the Company’s first quarter of fiscal year 2021. While a number of financial instruments are subject to the scope of ASU 2016-13, its provisions applied only to the Company’s accounts receivable. Given that the Company extends credit with short contractual terms on only a small percentage of its sales, the adoption of the expected credit loss model did not have any impact on the Company’s condensed consolidated financial statements.
Recently Issued Accounting Standards
ASU 2020-04 On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR (defined below), which was initially expected to occur on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.
ASU 2021-01 On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which refines the scope of Accounting Standards Codification Topic ("ASC") 848, Reference Rate Reform, and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection with reference rate reform activities under way in global financial markets.
The above amendments are effective for all entities from March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments to contract modifications on a (i) full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or (ii) prospective basis from any date within an interim period that includes or is subsequent to March 12, 2020 through the date that the interim financial statements are issued or available to be issued.
On March 5, 2021, the Intercontinental Exchange, Inc. ("ICE") Benchmark Administration ("IBA"), the administrator of the United States Dollar London Interbank Offering Rate ("LIBOR"), issued a statement, following the completion of a formal consultation process, reaffirming the preliminary announcement it made on November 30, 2020, to cease publication of (i) 1 week and 2 month LIBOR subsequent to December 31, 2021 and (ii) the overnight and 1, 3, 6 and 12 month LIBOR tenors subsequent to June 30, 2023. The IBA’s statement regarding such cessation dates primarily resulted from a majority of LIBOR panel banks communicating to the IBA that they would be unwilling to continue contributing to the relevant LIBOR settings after such dates. As a result, the IBA determined that it would be unable to publish the relevant LIBOR settings on a representative basis after such dates. The United Kingdom Financial Conduct Authority ("FCA"), which regulates the IBA, confirmed that, based on information it received from LIBOR panel banks, it does not expect that any LIBOR settings will become unrepresentative before the announced cessation dates summarized above.
Currently, the Company’s interest rate collar, which is not designated in a hedge accounting relationship, and Amended Credit Agreement (defined below) are the only contracts that reference an interest rate index (i.e., 3 month LIBOR) that is subject to the reference rate reform guidance included in the above amendments. While the termination date of the interest rate collar, September 30, 2022, occurs prior to the July 1, 2023 date on which the IBA will no longer publish 3 month LIBOR, the Amended Credit Agreement matures on September 13, 2023, approximately 2.5 months subsequent to such cessation date. However, as management does not currently forecast that the Company will have sufficient cash to fund the term loan borrowings that are expected to be outstanding under the terms of the Amended Credit Agreement upon maturity, it is expecting to refinance such borrowings prior to maturity, with such refinancing likely to occur before the July 1, 2023 LIBOR cessation date. Therefore, it is highly likely that neither the interest
9
rate collar nor Amended Credit Agreement will be modified to reflect the discontinuation of 3 month LIBOR effective July 1, 2023 and accordingly, the Company will not be required to decide whether or not to elect to adopt such amendments prior to or on December 31, 2022 (i.e., the last effective date for adopting the amendments). However, to the extent that either or both of the contracts are modified prior to December 31, 2022, the Company plans to adopt the amendments on a prospective basis by adjusting the derivative fair value and/or debt effective interest rate, as applicable, neither of which is expected to have a material impact on the consolidated financial statements.
3. Supplemental Financial Information
Inventories
The following table presents the components of inventories at the dates indicated:
(in thousands of dollars)
July 3, 2021
October 3, 2020
Raw materials
$
94,173
$
43,272
Work in process
33,755
8,989
Finished goods
5,612
4,262
Total inventories
$
133,540
$
56,523
Product Warranties
The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Balance at beginning of period
$
19,181
$
21,398
$
21,374
$
22,343
Add current period accruals
2,040
1,947
4,932
6,076
Current period reductions of accrual
(2,441)
(2,517)
(7,526)
(7,591)
Balance at end of period
$
18,780
$
20,828
$
18,780
$
20,828
Extended Warranties
The following table reflects activity in deferred warranty income (current and long-term portions combined), for the sale of extended warranties of two to five years, for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Balance at beginning of period
$
20,724
$
22,948
$
22,588
$
24,045
Add current period deferred income
1,921
1,769
4,421
5,058
Current period recognition of income
(2,137)
(2,672)
(6,501)
(7,058)
Balance at end of period
$
20,508
$
22,045
$
20,508
$
22,045
The outstanding balance of deferred warranty income in the table above is considered a "contract liability," and represents a performance obligation of the Company that we satisfy over the term of the arrangement but for which we have been paid in full at the time the warranty was sold. We expect to recognize $2.2 million of the outstanding contract liability during the remainder of fiscal 2021, $7.3 million in fiscal 2022, and the remaining balance thereafter.
10
Self-Insurance
The following table reflects our total accrued self-insurance liability, comprised of workers' compensation and health insurance related claims, at the dates indicated:
(in thousands of dollars)
July 3, 2021
October 3, 2020
Current portion
$
2,675
$
2,993
Long-term portion
1,813
1,962
Total accrued self-insurance
$
4,488
$
4,955
The current and long-term portions of the accrued self-insurance liability are reflected in accrued expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Shipping and Handling Revenues
Shipping and handling revenues were $3.3 million and $3.9 million for the three months ended July 3, 2021 and July 4, 2020, respectively, and $9.2 million and $11.5 million for the nine months ended July 3, 2021 and July 4, 2020, respectively. The related cost of goods sold was $2.9 million and $3.4 million for the three months ended July 3, 2021 and July 4, 2020, respectively, and $8.0 million and $10.0 million for the nine months ended July 3, 2021 and July 4, 2020, respectively.
Pension Expense
Components of net periodic pension benefit cost were as follows for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Interest cost
$
1,057
$
1,237
$
3,171
$
3,711
Expected return on plan assets
(1,944)
(1,846)
(5,832)
(5,538)
Amortization of prior loss
466
430
1,397
1,289
Net periodic benefit cost
$
(421)
$
(179)
$
(1,264)
$
(538)
Amortization of prior loss, recognized in other comprehensive income
466
430
1,397
1,289
Total recognized in net periodic pension benefit cost and other comprehensive income
$
(887)
$
(609)
$
(2,661)
$
(1,827)
Derivative Instruments
We are charged variable rates of interest on our indebtedness outstanding under the Amended Credit Agreement (defined below) which exposes us to fluctuations in interest rates. On October 24, 2018, the Company entered into a four-year interest rate collar with a $150.0 million notional value with an effective date of November 30, 2018. The collar was entered into in order to partially mitigate our exposure to interest rate fluctuations on our variable rate debt. The collar establishes a range whereby we will pay the counterparty if the three month LIBOR rate falls below the established floor rate of 1.5%, and the counterparty will pay us if the three month LIBOR rate exceeds the ceiling rate of 3.3%. The collar settles quarterly through the termination date of September 30, 2022. No payments or receipts are exchanged on the interest rate collar contract unless interest rates rise above or fall below the contracted ceiling or floor rates. During the nine months ended July 3, 2021, the three month LIBOR rate fell below the established floor, which required $1.4 million in total cash payments to the counterparty. Additionally, $0.5 million was paid in the first quarter of fiscal year 2021 for amounts owed to the counterparty that were accrued in the fourth quarter of fiscal 2020.
Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At July 3, 2021, the fair value of the interest rate collar contract was $(2.5) million and is included in other current liabilities on the Condensed Consolidated Balance Sheets. The fair value of the interest rate collar is a Level 2 fair value measurement, based on quoted prices of similar items in active markets.
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4. Debt
On December 4, 2020, the Company executed the third amendment to the Credit Agreement, dated as of December 12, 2016; as amended by that certain first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement") and second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement'); and as further amended by the third amendment (the "Third Amended Credit Agreement" and collectively, the "Amended Credit Agreement"). The Third Amended Credit Agreement, among other things, provides for certain temporary amendments to the Credit Agreement from the third amendment effective date through and including the first date on which (a)(i) a compliance certificate is timely delivered with respect to a fiscal quarter ending on or after March 31, 2022 demonstrating compliance with certain financial performance covenants for such fiscal quarter (the “Limited Availability Period”), or (ii) the Borrower elects to terminate the Limited Availability Period; and (b) the absence of a default or event of default.
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 $15.0 million. For the duration between the fiscal quarter ending on or around December 31, 2020 and the fiscal quarter ending on or around September 30, 2021 that falls within the Limited Availability Period, a quarterly minimum consolidated EBITDA covenant applies instead of a maximum total net leverage ratio.
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 Borrower is required to prepay existing revolving loans and, if undrawn and unreimbursed letters of credit exceed $7.0 million, cash collateralize letters of credit if unrestricted cash and cash equivalents exceed $20.0 million, as determined on a semi-monthly basis. Any issuance, amendment, renewal, or extension of credit during the Limited Availability Period may not cause unrestricted cash and cash equivalents to exceed $20.0 million, or cause the aggregate outstanding Revolving Credit Facility principal to exceed $100.0 million. The Third Amended Credit Agreement also implements a cap on permissible investments, restricted payments, certain payments of indebtedness and the fair market value of all assets subject to permitted dispositions during the Limited Availability Period.
For the duration of the Limited Availability Period, there are additional monthly reporting requirements and requirements relating to subordination agreements and intercreditor arrangements for certain other indebtedness and liens subject to administrative agent approval.
The Company incurred approximately $2.5 million in lender fees and other issuance costs relating to the third amendment. Of such total, $1.1 million and $0.9 million was capitalized within other assets and long-term debt (as a contra-balance), respectively, on the Condensed Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis and utilizing the effective interest method, respectively, until maturity of the Credit Agreement. The remaining $0.5 million was recorded to loss on debt modification on the Condensed Consolidated Statements of Operations.
In conjunction with executing the third amendment, previously capitalized lender fees and other issuance costs incurred in prior periods totaling $0.1 million were expensed to loss on debt modification on the Condensed Consolidated Statements of Operations.
Term debt consisted of the following at the dates indicated:
(in thousands of dollars)
July 3, 2021
October 3, 2020
2023 term loan, net of deferred financing costs of $2,307 and $2,246, respectively
$
166,618
$
174,104
Less: current portion of long-term debt
13,613
9,900
Long-term debt, net of current portion
$
153,005
$
164,204
Term loans are recognized on the Condensed Consolidated Balance Sheets at the unpaid principal balance, and are not subject to fair value measurement; however, given the variable rates on the loans, the Company estimates that the unpaid principal balance approximates fair value. If measured at fair value in the financial statements, the term loans would be classified as Level 2 in the fair value hierarchy. At July 3, 2021 and October 3, 2020, $168.9 million and $176.4 million, respectively, were outstanding on the term loans.
At July 3, 2021 and October 3, 2020, the stated interest rates on the term loans were 4.0% and 3.5%, respectively. At July 3, 2021 and October 3, 2020, the weighted-average annual effective interest rates for the term loans were 6.0% and 4.1%, respectively, which includes amortization of the deferred financing costs and interest relating to the interest rate collar, as applicable.
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At July 3, 2021, $6.9 million of Letters of Credit were outstanding, which reduces the availability on the revolving line of credit. No borrowings were outstanding on the Revolving Credit Facility; therefore, the Company would have been able to borrow $93.1 million on the revolving line of credit.
Interest expense on all indebtedness was $2.8 million and $2.4 million for the three months ended July 3, 2021 and July 4, 2020, respectively, and $7.1 million and $10.0 million for the nine months ended July 3, 2021 and July 4, 2020, respectively.
The schedule of remaining principal payments through maturity for total debt is as follows:
(in thousands of dollars)
Fiscal Year
Principal Payments
2021
$
2,475
2022
14,850
2023
151,600
Total remaining principal payments
$
168,925
5. Income Taxes
Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items that are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the forecast pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily in the United States. In periods where our operating income approximates or is equal to break-even, the effective tax rates for quarter-to-date and full-year periods may not be meaningful due to discrete period items.
On December 27, 2020, the President of the United States signed the Consolidated Appropriations Act (the "Act") into law. While the Act has broad income tax implications for many companies stemming from COVID-19 relief and various tax extenders, it did not have a material impact on our reported income tax accounts.
The guidance for accounting for uncertainty in income taxes requires that a determination be made regarding whether a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination, which is the threshold required for recognition of the tax position in the financial statements. As of October 2, 2020, there were no amounts recorded in the consolidated financial statements for gross unrecognized tax benefits. During the three months ended July 3, 2021, management obtained additional information that resulted in a conclusion that certain tax positions previously recognized in specific prior year financial statements may be subject to adjustment in conjunction with an examination. Accordingly, such determination resulted in the derecognition of these tax positions during the third quarter of fiscal year 2021, resulting in gross unrecognized tax benefits of $0.5 million as of July 3, 2021. These tax positions would impact the Company's effective tax rate in future periods if subsequently recognized. The Company recognizes accrued interest and penalties related to unrecognized tax positions in income tax expense, with such accrual totaling $0.3 million as of July 3, 2021. The Company's liability arising from uncertain tax positions ("UTPs"), including accrued interest and penalties, is recorded in other liabilities in the Condensed Consolidated Balance Sheets.
Three Months
The effective tax rate for the three months ended July 3, 2021 was 33.2%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments. The effective tax rate was also impacted by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties, that was partially offset by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments.
The effective tax rate for the three months ended July 4, 2020 was 70.1%, which differed from the statutory federal tax rate of 21%. The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.
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Nine Months
The effective tax rate for the nine months ended July 3, 2021 was 31.5%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments. The effective tax rate was also impacted by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments that were partially offset by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties.
The effective tax rate for the nine months ended July 4, 2020 was 38.8%, which differed from the statutory federal tax rate of 21%. The difference is mainly due to a net discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.
6. Guarantees, Commitments and Contingencies
Litigation
At July 3, 2021, the Company had a number of product liability and other cases pending. Management believes that, considering the Company’s insurance coverage and its intention to vigorously defend its positions, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements.
Environmental
The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company is currently not involved in any material environmental proceedings and therefore, management believes that the resolution of pending environmental matters will not have a material adverse effect on the Company’s financial statements.
Guarantees
In the ordinary course of business, we may provide guarantees for certain transactions entered into by our dealers. At July 3, 2021, we had a $3.0 million guarantee outstanding that relates to a guarantee of dealer indebtedness for a term loan with remaining maturity up to 1.5 years. The $3.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote. At July 3, 2021, $0.2 million was included in other current liabilities on our Condensed Consolidated Balance Sheets for the estimated fair value of the guarantee.
7. Segment Information
We manage our business in two operating segments: (i) the Bus segment, which includes the manufacturing and assembly of buses to be sold to a variety of customers across the United States, Canada and in international markets; and (ii) the Parts segment, which consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. The tables below present segment net sales and gross profit for the periods presented:
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Net sales
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Bus (1)
$
181,735
$
180,592
$
449,876
$
554,061
Parts (1)
14,924
8,589
41,915
43,749
Segment net sales
$
196,659
$
189,181
$
491,791
$
597,810
(1) Parts segment revenue includes $0.9 million and $0.8 million for the three months ended July 3, 2021 and July 4, 2020, respectively, and $2.9 million and $3.2 million for the nine months ended July 3, 2021 and July 4, 2020, respectively, related to inter-segment sales of parts that were eliminated by the Bus segment upon consolidation.
Gross profit
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Bus
$
20,471
$
18,079
$
43,265
$
50,884
Parts
5,688
3,003
15,855
15,667
Segment gross profit
$
26,159
$
21,082
$
59,120
$
66,551
The following table is a reconciliation of segment gross profit to consolidated income (loss) before income taxes for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Segment gross profit
$
26,159
$
21,082
$
59,120
$
66,551
Adjustments:
Selling, general and administrative expenses
(18,073)
(17,793)
(50,124)
(58,146)
Interest expense
(2,805)
(2,406)
(7,069)
(9,961)
Interest income
—
27
1
27
Other income, net
426
181
1,491
555
Loss on debt modification
—
—
(598)
—
Income (loss) before income taxes
$
5,707
$
1,091
$
2,821
$
(974)
Sales are attributable to geographic areas based on customer location and were as follows for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
United States
$
179,850
$
175,433
$
436,286
$
544,176
Canada
15,072
13,429
49,257
49,331
Rest of world
1,737
319
6,248
4,303
Total net sales
$
196,659
$
189,181
$
491,791
$
597,810
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8. Revenue
The following table disaggregates revenue by product category for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
July 3, 2021
July 4, 2020
Diesel buses
$
76,753
$
88,299
$
212,578
$
278,698
Alternative power buses (1)
95,877
80,975
214,133
245,766
Other (2)
9,495
11,583
24,240
30,931
Parts
14,534
8,324
40,840
42,415
Net sales
$
196,659
$
189,181
$
491,791
$
597,810
(1) Includes buses sold with any power source other than diesel (e.g., gasoline, propane, compressed natural gas "CNG", electric).
(2) Includes shipping and handling revenue, extended warranty income, surcharges and chassis and bus shell sales.
9. Earnings Per Share
The following table presents the earnings per share computation for the periods presented:
Weighted-average shares and dilutive potential common shares (1)
27,428,877
27,080,015
27,337,360
26,980,480
Earnings per share:
Basic earnings per share
$
0.16
$
0.05
$
0.08
$
0.01
Diluted earnings per share
$
0.16
$
0.05
$
0.08
$
0.01
(1) Potentially dilutive securities representing 0.0 million and 0.4 million shares of common stock were excluded from the computation of diluted earnings per share for the three months ending July 3, 2021 and July 4, 2020, respectively, and potentially dilutive securities representing 0.1 million and 0.3 million shares of common stock were excluded from the computation of diluted earnings per share for the nine months ending July 3, 2021 and July 4, 2020, respectively, as their effect would have been antidilutive.
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10. Accumulated Other Comprehensive Loss
The following table provides information on changes in accumulated other comprehensive loss ("AOCL") for the periods presented:
Three Months Ended
Nine Months Ended
(in thousands of dollars)
Defined Benefit Pension Plan
Total AOCL
Defined Benefit Pension Plan
Total AOCL
July 3, 2021
Beginning Balance
$
(57,690)
$
(57,690)
$
(58,397)
$
(58,397)
Amounts reclassified and included in earnings
466
466
1,397
1,397
Total before taxes
466
466
1,397
1,397
Income taxes
(112)
(112)
(336)
(336)
Ending Balance July 3, 2021
$
(57,336)
$
(57,336)
$
(57,336)
$
(57,336)
July 4, 2020
Beginning Balance
$
(55,501)
$
(55,501)
$
(56,154)
$
(56,154)
Amounts reclassified and included in earnings
430
430
1,289
1,289
Total before taxes
430
430
1,289
1,289
Income taxes
(103)
(103)
(309)
(309)
Ending Balance July 4, 2020
$
(55,174)
$
(55,174)
$
(55,174)
$
(55,174)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations of Blue Bird Corporation ("Blue Bird" or the "Company") should be read in conjunction with the Company’s unaudited financial statements for the three and nine months ended July 3, 2021 and July 4, 2020 and related notes appearing in Part I, Item 1 of this Quarterly Report of Form 10-Q ("Report"). Our actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.
We refer to the fiscal year ending October 2, 2021 as "fiscal 2021" and fiscal year ended October 3, 2020 as “fiscal 2020." We refer to the quarter ended July 3, 2021 as the “third quarter of fiscal 2021” and we refer to the quarter ended July 4, 2020 as the “third quarter of fiscal 2020.”
Fiscal year 2021 consists of 52 weeks while fiscal year 2020 consisted of 53 weeks. The third quarters of fiscal 2021 and 2020 both included 13 weeks. The nine month periods in fiscal 2021 and 2020 included 39 and 40 weeks, respectively.
Special Note Regarding Forward-Looking Statements
This Report contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:
•the future financial performance of the Company;
•negative changes in the market for Blue Bird products;
•expansion plans and opportunities;
•challenges or unexpected costs related to manufacturing;
•future impacts from the novel coronavirus pandemic known as "COVID-19," and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which could include, among other effects:
◦disruption in global financial and credit markets;
◦supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic;
◦negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations;
◦negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions;
◦financial difficulties of our customers impacted by the pandemic;
◦reductions in market demand for our products due to the pandemic; and
◦potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic.
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These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.
Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. The following information should be read in conjunction with the financial statements included in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Report. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.
Executive Overview
Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications, Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs. In addition, Blue Bird is the market leader in alternatives to diesel-powered 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 of United States and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and Type D school buses. Blue Bird also sells directly to major fleet operators, the United States Government, state governments, and authorized dealers in a number of foreign countries.
COVID-19 Impact
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 February 2020 and the challenging market conditions continued throughout the second half of fiscal 2020 and into the first three quarters of fiscal 2021, and may continue for an extended period of time. In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, address the reduced demand from our customers and be responsive and efficient with supply chain constraints, management took decisive actions including closing our manufacturing facilities for two weeks in April 2020 and implementing stringent safety protocols, including administering COVID-19 testing for all manufacturing and office employees and requesting office employees to work from home. Management also decided to cease production for a full week in each of March and May 2021 due to supply chain disruptions that resulted in a shortage of critical components. Additionally, management closely monitors the expected receipt of critical components on a daily basis and has had to cease part or all of production for shorter periods of time as a result of supply shortages.
These temporary closures of our manufacturing facility did not materially impact our operations during the first and second quarters of fiscal 2021 as we did not need to operate at full capacity to fill sales orders. However, such supply chain disruptions did significantly impact our operations and results during the third quarter of fiscal 2021 as a result of higher freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fill sales orders. Specifically, management estimates that the sale of over 500 units was deferred from the third quarter of fiscal 2021 into subsequent
19
quarters as a result of the shortage of critical components that prevented the Company from initiating or completing, as applicable, the production process for certain units that were otherwise scheduled to be delivered to customers during the quarter. Including these units, the Company's backlog exceeded 3,900 units as of July 3, 2021 as demand for our products remains strong, with no sales orders canceled as a result of delays in our production process. The Company has also experienced increased purchase costs for certain of its raw materials during the pandemic that have negatively impacted the gross profit it recognized on sales during the nine months ended July 3, 2021. However, in July 2021, the Company announced two sales price increases that will apply to new sales orders and are intended to mitigate the impact of rising purchase costs on our operations and results. In general, management believes that such supply chain disruptions will continue in future periods and will materially impact our results if we are unable to i) produce during quarters having higher sales volumes and/or ii) pass along rising costs to our customers. Additionally, although we have not experienced any pervasive COVID-19 illnesses to-date, if we were to experience some form of outbreak within our facilities, we would take all appropriate measures to protect the health and safety of our employees, which could include another temporary halt in production.
The pandemic has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected our business. We currently believe that it will continue to adversely impact our business for the remainder of our fiscal 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 economy, both within the United States and globally. Accordingly, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.
The continuing impacts from COVID-19 on the Company's operations in the first three quarters of fiscal 2021 negatively affected our revenue and profit. We continue to monitor and assess the level of future customer demand, the ability of school boards to make decisions regarding reinstating normal in-person learning in the foreseeable future, 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 the remainder of fiscal 2021 and beyond. A prolonged economic downturn could have a material adverse impact on our sales and financial results beyond fiscal 2021. See PART I, Item 1.A. "Risk Factors," of our 2020 Form 10-K, filed with the SEC on December 17, 2020, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.
The Company has also taken actions to control spending and secure adequate liquidity, including headcount rationalization and changes to the minimum required financial covenants via execution of a third amendment to our Credit Agreement in December 2020. Further detail and discussion of this amendment can be found in the "Liquidity and Capital Resources" section of this Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Report. Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential longer-term impacts on our business from the pandemic. Our actions may include reducing hiring activities, limiting discretionary spending, limiting spending on capital investment projects or other steps necessary to preserve adequate liquidity. We will continue to actively monitor the situation and may need to take further actions required by federal, state or local authorities, or enact measures we determine are in the best interests of our employees, customers, suppliers and shareholders. For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Report.
Critical Accounting Policies and Estimates, Recent Accounting Pronouncements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference. Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended July 3, 2021.
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Recent Accounting Pronouncements
See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements.
Factors Affecting Our Revenues
Our revenues are driven primarily by the following factors:
•Property tax revenues. Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate.
•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, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period.
•Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district.
•Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.
•Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year.
•Seasonality. 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, when coupled with its impact on supply chains, 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 on our unaudited Condensed 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 problems, and the impact of overhead items such as utilities.
•Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing, information technology services, along with other administrative matters and functions. In most instances, other than direct costs associated with sales
21
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 income, net. This primarily includes periodic pension expense as well as other amounts not associated with our operating results.
•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 Report 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, when applicable. 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.
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Adjusted EBITDA and Adjusted EBITDA Margin should not be considered as alternatives to net income or loss 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 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 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 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, Free Cash Flow will 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 Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit.
23
Consolidated Results of Operations for the Three Months Ended July 3, 2021 and July 4, 2020:
Three Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Net sales
$
196,659
$
189,181
Cost of goods sold
170,500
168,099
Gross profit
$
26,159
$
21,082
Operating expenses
Selling, general and administrative expenses
18,073
17,793
Operating profit
$
8,086
$
3,289
Interest expense
(2,805)
(2,406)
Interest income
—
27
Other income, net
426
181
Income before income taxes
$
5,707
$
1,091
Income tax expense
(1,892)
(765)
Equity in net income of non-consolidated affiliate
517
960
Net income
$
4,332
$
1,286
Other financial data:
Adjusted EBITDA
$
13,161
$
12,481
Adjusted EBITDA margin
6.7
%
6.6
%
The following provides the results of operations of Blue Bird’s two reportable segments:
(in thousands of dollars)
Three Months Ended
Net Sales by Segment
July 3, 2021
July 4, 2020
Bus
$
181,735
$
180,592
Parts
14,924
8,589
Total
$
196,659
$
189,181
Gross Profit by Segment
Bus
$
20,471
$
18,079
Parts
5,688
3,003
Total
$
26,159
$
21,082
Net sales. Net sales were $196.7 million for the third quarter of fiscal 2021, an increase of $7.5 million, or 4.0%, compared to $189.2 million for the third quarter of fiscal 2020. The increase in net sales is primarily attributed to increased volumes in both bus and parts sales.
Bus sales increased $1.1 million, or 0.6%, reflecting an increase in units booked, which was partially offset by lower sales prices per unit. In the third quarter of fiscal 2021, 2,024 units were booked compared to 1,948 units booked for the same period in fiscal 2020. The increase is mainly attributed to more schools offering, or expecting to offer, in-person learning in 2021 compared to 2020, when most schools were conducting learning remotely due to the COVID-19 pandemic. The 3.1% decrease in unit price for the third quarter of fiscal 2021 compared to the same period in fiscal 2020 mainly reflects product and customer mix changes.
Parts sales increased $6.3 million, or 73.8%, for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. This increase is primarily attributed to more schools offering in-person learning in 2021 compared to 2020, which increased school bus units in operation and thus increased bus repair and maintenance activities.
Cost of goods sold. Total cost of goods sold was $170.5 million for the third quarter of fiscal 2021, an increase of $2.4 million, or 1.4%, compared to $168.1 million for the third quarter of fiscal 2020. As a percentage of net sales, total cost of goods sold improved from 88.9% to 86.7%.
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Bus segment cost of goods sold decreased $1.2 million, or 0.8%, for the third quarter of fiscal 2021 compared to the same period in fiscal 2020. The average cost of goods sold per unit for the third quarter of fiscal 2021 was 4.5% lower compared to the third quarter of fiscal 2020 due to decreases in manufacturing costs from several COVID-19 related factors including improved absenteeism among our hourly workforce and manufacturing efficiencies. The decreases in manufacturing costs per unit were partially offset by an increase in the volume of units produced and sold, driven by increased in-person learning in 2021 compared to 2020.
The $3.7 million, or 65.3%, increase in parts segment cost of goods sold for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 largely aligned with the increase in sales volume noted above, with slight variation due to product and channel mix.
Operating profit. Operating profit was $8.1 million for the third quarter of fiscal 2021, an increase of $4.8 million, compared to operating profit of $3.3 million for the third quarter of fiscal 2020. Profitability was positively impacted by an increase of $5.1 million in gross profit as outlined in the revenue and cost of goods sold discussion. This was partially offset by an increase of $0.3 million in selling, general and administrative expenses.
Interest expense. Interest expense was $2.8 million for the third quarter of fiscal 2021, an increase of $0.4 million, or 16.6%, compared to $2.4 million for the third quarter of fiscal 2020. The increase was primarily attributable an increase in the stated term loan interest rate from 2.8% at July 4, 2020 to 4% at July 3, 2021.
Income taxes. We recorded income tax expense of $1.9 million for the third quarter of fiscal 2021, compared to income tax expense of $0.8 million for the same period in fiscal 2020.
The effective tax rate for the three month period ended July 3, 2021 was 33.2%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments. The effective tax rate was also impacted by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties, that was partially offset by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments.
The effective tax rate for the three month period ended July 4, 2020 was 70.1%, which differed from the statutory federal tax rate of 21%. The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.
Adjusted EBITDA. Adjusted EBITDA was $13.2 million, or 6.7% of net sales, for the third quarter of fiscal 2021, an increase of $0.7 million, or 5.4%, compared to $12.5 million, or 6.6% of net sales, for the third quarter of fiscal 2020. The increase in Adjusted EBITDA primarily results from an increase of $5.1 million in gross profit, as outlined in the revenue and cost of goods sold discussion. This was largely offset by lower adjustments for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, particularly in depreciation, amortization, and disposals, and share-based compensation.
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The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:
Three Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Net income
$
4,332
$
1,286
Adjustments:
Interest expense, net (1)
2,887
2,466
Income tax expense
1,892
765
Depreciation, amortization, and disposals (2)
2,851
3,861
Operational transformation initiatives
14
339
Share-based compensation
328
1,808
Product redesign initiatives
641
1,071
Restructuring charges
—
364
Costs directly attributed to the COVID-19 pandemic (3)
216
521
Adjusted EBITDA
$
13,161
$
12,481
Adjusted EBITDA margin (percentage of net sales)
6.7
%
6.6
%
(1) Includes $0.1 million for both fiscal periods, representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.2 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(3) Primarily represents costs incurred for third party cleaning services and personal protective equipment for our employees.
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Consolidated Results of Operations for the Nine Months Ended July 3, 2021 and July 4, 2020:
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Net sales
$
491,791
$
597,810
Cost of goods sold
432,671
531,259
Gross profit
$
59,120
$
66,551
Operating expenses
Selling, general and administrative expenses
50,124
58,146
Operating profit
$
8,996
$
8,405
Interest expense
(7,069)
(9,961)
Interest income
1
27
Other income, net
1,491
555
Loss on debt extinguishment
(598)
—
Income (loss) before income taxes
$
2,821
$
(974)
Income tax (expense) benefit
(888)
378
Equity in net income of non-consolidated affiliate
166
840
Net income
$
2,099
$
244
Other financial data:
Adjusted EBITDA
$
26,484
$
32,778
Adjusted EBITDA margin
5.4
%
5.5
%
The following provides the results of operations of Blue Bird’s two reportable segments:
(in thousands of dollars)
Nine Months Ended
Net Sales by Segment
July 3, 2021
July 4, 2020
Bus
$
449,876
$
554,061
Parts
41,915
43,749
Total
$
491,791
$
597,810
Gross Profit by Segment
Bus
$
43,265
$
50,884
Parts
15,855
15,667
Total
$
59,120
$
66,551
Net sales. Net sales were $491.8 million for the nine months ended July 3, 2021, a decrease of $106.0 million, or 17.7%, compared to $597.8 million for the nine months ended July 4, 2020. The decrease in net sales is attributed to the COVID-19 pandemic which caused an increase in remote learning arrangements during the majority of the 2020/2021 school year, which significantly impacted our operations as a result of the reduced demand for new school buses and parts.
Bus sales decreased $104.2 million, or 18.8%, primarily due to a decrease in units booked and partially offset by higher sales prices per unit. In the nine months ended July 3, 2021, 4,768 units were booked compared to 6,002 units booked for the same period in fiscal 2020. The decrease is mainly attributed to lower orders due to the uncertainties caused by the COVID-19 pandemic and production limitations caused by supply chain shortages. The average net sales price per unit for the nine months ended July 3, 2021 was 2.2% higher than the price per unit for the nine months ended July 4, 2020. The increase in unit price mainly reflects pricing actions taken by management to partially offset increases in commodity costs, as well as product and customer mix changes.
Parts sales decreased $1.8 million, or 4.2%, for the nine months ended July 3, 2021 compared to the nine months ended July 4, 2020, as we had lower sales volume, mainly from lower school bus units in operation which reduced bus repair and maintenance activities. The lower units in operation results from school schedule changes and increased remote learning arrangements caused by the COVID-19 pandemic.
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Cost of goods sold. Total cost of goods sold was $432.7 million for the nine months ended July 3, 2021, a decrease of $98.6 million, or 18.6%, compared to $531.3 million for the nine months ended July 4, 2020. As a percentage of net sales, total cost of goods sold improved from 88.9% to 88.0%.
Bus segment cost of goods sold decreased $96.6 million, or 19.2%, for the nine months ended July 3, 2021 compared to the nine months ended July 4, 2020, which aligned with the decrease in sales volume noted above. The average cost of goods sold per unit for the nine months ended July 3, 2021 was 1.7% higher compared to the nine months ended July 4, 2020 due to increases in manufacturing costs from several COVID-19 related factors including absenteeism among our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.
The $2.0 million, or 7.2%, decrease in parts segment cost of goods sold for the nine months ended July 3, 2021 compared to the nine months ended July 4, 2020 largely aligned with the decrease in sales volume noted above, with slight variation due to product and channel mix.
Operating profit. Operating profit was $9.0 million for the nine months ended July 3, 2021, an increase of $0.6 million compared to an operating profit of $8.4 million for the nine months ended July 4, 2020. Profitability was negatively impacted by a decrease of $7.4 million in gross profit as outlined in the revenue and cost of goods sold discussion. This was offset by a decrease of $8.0 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.
Interest expense. Interest expense was $7.1 million for the nine months ended July 3, 2021, a decrease of $2.9 million, or 29.0%, compared to $10.0 million for the nine months ended July 4, 2020. The decrease was primarily attributable to a $3.0 million net increase in the fair value of the interest rate collar (a liability balance) recorded in interest expense in the nine months ended July 4, 2020 with the corresponding activity recorded in the nine months ended July 3, 2021 netting to an immaterial amount.
Loss on debt modification. Loss on debt modification was $(0.6) million for the nine months ended July 3, 2021. The amount is related to the execution of the third amendment to the Credit Agreement on December 4, 2020 for which we paid $2.5 million in lender fees and other issuance costs. Of the fees and issuance costs, only $2.0 million could be capitalized with the remainder, $0.5 million, expensed in the period incurred. In addition, $0.1 million in previously capitalized lender fees and other issuance costs capitalized in prior periods were expensed during the first quarter of fiscal 2021 in conjunction with executing the third amendment.
Income taxes. Income tax expense was $0.9 million for the nine months ended July 3, 2021, compared to income tax benefit of $0.4 million for the same period in fiscal 2020. The increase is primarily due to reporting pre-tax income of $2.8 million for the nine months ended July 3, 2021, compared to pre-tax loss of $(1.0) million for the same period in fiscal 2020.
The effective tax rate for the nine months ended July 3, 2021 was 31.5%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments. The effective tax rate was also impacted by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments that were partially offset by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties.
The effective tax rate for the nine months ended July 4, 2020 was 38.8%, which differed from the statutory federal tax rate of 21%. The difference is mainly due to discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.
Adjusted EBITDA. Adjusted EBITDA was $26.5 million, or 5.4% of net sales, for the nine months ended July 3, 2021, a decrease of $6.3 million, or 19.2%, compared to $32.8 million, or 5.5% of net sales, for the nine months ended July 4, 2020. The decrease in Adjusted EBITDA is primarily the result of a decrease of $7.4 million in gross profit, mainly from lower sales volumes due the COVID-19 pandemic and higher manufacturing costs, as well as reductions in certain adjustment balances such as operational transformation initiatives and share-based compensation expense. These decreases were partially offset by lower adjusted selling, general and administrative expenses due to actions taken to control spending during the pandemic.
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The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Net income
$
2,099
$
244
Adjustments:
Interest expense, net (1)
7,321
10,213
Income tax expense (benefit)
888
(378)
Depreciation, amortization, and disposals (2)
10,118
11,215
Operational transformation initiatives
222
3,218
Loss on debt modification
598
—
Share-based compensation
1,923
4,105
Product redesign initiatives
1,908
3,163
Restructuring charges
494
364
Costs directly attributed to the COVID-19 pandemic (3)
913
628
Other
—
6
Adjusted EBITDA
$
26,484
$
32,778
Adjusted EBITDA margin (percentage of net sales)
5.4
%
5.5
%
(1) Includes $0.3 million for both fiscal periods representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.6 million and $0.5 million for the nine months ended July 3, 2021 and July 4, 2020, respectively, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.
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Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash generated from its operations, available cash and cash equivalents and borrowings under its credit facility. At July 3, 2021, the Company had $11.2 million of available cash (net of outstanding checks) and $93.1 million of additional borrowings available under the revolving line of credit portion of its credit facility. The Company’s revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.
Third Amendment to the Credit Agreement
On December 4, 2020, the Company executed the third amendment to the Credit Agreement, dated as of December 12, 2016; as amended by that certain first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement") and second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement'); and as further amended by the third amendment (the "Third Amended Credit Agreement" and collectively, the "Amended Credit Agreement"). The Third Amended Credit Agreement, among other things, provides for certain temporary amendments to the Credit Agreement from the third amendment effective date through and including the first date on which (a)(i) a compliance certificate is timely delivered with respect to a fiscal quarter ending on or after March 31, 2022 demonstrating compliance with certain financial performance covenants for such fiscal quarter (the “Limited Availability Period”), or (ii) the Borrower elects to terminate the Limited Availability Period; and (b) the absence of a default or event of default.
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 $15.0 million. For the duration between the fiscal quarter ending on or around December 31, 2020 and the fiscal quarter ending on or around September 30, 2021 that falls within the Limited Availability Period, a quarterly minimum consolidated EBITDA covenant applies instead of a maximum total net leverage ratio.
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 Borrower is required to prepay existing revolving loans and, if undrawn and unreimbursed letters of credit exceed $7.0 million, cash collateralize letters of credit if unrestricted cash and cash equivalents exceed $20.0 million, as determined on a semi-monthly basis. Any issuance, amendment, renewal, or extension of credit during the Limited Availability Period may not cause unrestricted cash and cash equivalents to exceed $20.0 million, or cause the aggregate outstanding Revolving Credit Facility principal to exceed $100.0 million. The Third Amended Credit Agreement also implements a cap on permissible investments, restricted payments, certain payments of indebtedness and the fair market value of all assets subject to permitted dispositions during the Limited Availability Period.
For the duration of the Limited Availability Period, there are additional monthly reporting requirements and requirements relating to subordination agreements and intercreditor arrangements for certain other indebtedness and liens subject to administrative agent approval.
Detailed descriptions of the Credit Agreement, First Amended Credit Agreement and Second Amended Credit Agreement are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2020, filed with the SEC on December 17, 2020.
At July 3, 2021, the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.
Short-Term and Long-Term Liquidity Requirements
Our ability to make principal and interest payments on borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.
The continuing adverse impacts from the COVID-19 pandemic materially impacted our results in the first three quarters of fiscal 2021, causing lower customer orders for both buses and parts, supply disruptions, and higher rates of absenteeism among our hourly production workforce. The continuing development and fluidity of the pandemic precludes any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, 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 1.A. "Risk Factors," of our 2020 Form 10-K, filed with the SEC on December 17, 2020, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.
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The pandemic could cause a severe contraction in our profits and/or liquidity which could lead to issues complying with our Amended Credit Agreement 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; ii) for fiscal year 2021 and the first two quarters of fiscal year 2022, minimum liquidity at the end of each month, and (iii) beginning in fiscal year 2022 and thereafter, total net leverage ratio, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA. If we are not able to comply with such covenants, we may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure. We cannot assure our investors that we would be successful in amending or refinancing the existing debt. An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses not included in our historical financial statements.
Seasonality
Historically, our business has been highly seasonal with school districts buying 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. This has resulted in our third and fourth fiscal quarters being our two busiest quarters, the latter ending on the Saturday closest to September 30. Our quarterly results of operations, cash flows, and liquidity have been, and are likely to continue to be, impacted by the seasonal patterns. Working capital has historically been a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter, with planned shutdowns during our first fiscal quarter. With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, when coupled with its impact on supply chains, seasonality and working capital trends have become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of working capital and liquidity results between fiscal periods.
Cash Flows
The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows:
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Cash and cash equivalents at beginning of period
$
44,507
$
70,959
Total cash used in operating activities
(14,238)
(78,305)
Total cash used in investing activities
(9,403)
(16,574)
Total cash (used in) provided by financing activities
(9,643)
36,458
Change in cash and cash equivalents
$
(33,284)
$
(58,421)
Cash and cash equivalents at end of period
$
11,223
$
12,538
Total cash used in operating activities
Cash flows used in operating activities totaled $14.2 million for the nine months ended July 3, 2021, as compared to $78.3 million for the nine months ended July 4, 2020. The $64.1 million decrease in cash used was primarily attributed to a positive $66.0 million difference (source of cash) from the impacts of changes in working capital and accrued expenses between fiscal periods.
Total cash used in investing activities
Cash flows used in investing activities totaled $9.4 million for the nine months ended July 3, 2021, as compared to $16.6 million for the nine months ended July 4, 2020. The $7.2 million decrease was due to a reduction of spending on manufacturing assets and a delay of certain projects due to the COVID-19 pandemic.
Total cash (used in) provided by financing activities
Cash flows used in financing activities totaled $9.6 million for the nine months ended July 3, 2021, as compared to $36.5 million of cash flows provided by financing activities for the nine months ended July 4, 2020. The $46.1 million decrease between fiscal periods was primarily attributed to a $45.0 million decrease in cash borrowings under the revolving credit facility and a $1.5 million increase in cash paid for debt costs.
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Free cash flow
Management believes the non-GAAP measurement of free cash flow, defined as net cash used in operating activities plus cash paid for fixed assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business. See “Key Non-GAAP Measures We Use to Evaluate Our Performance.” The following table sets forth the calculation of free cash flow for the periods presented:
Nine Months Ended
(in thousands of dollars)
July 3, 2021
July 4, 2020
Net cash used in operating activities
$
(14,238)
$
(78,305)
Cash paid for fixed assets
(10,304)
(16,724)
Free cash flow
$
(24,542)
$
(95,029)
Free cash flow for the nine months ended July 3, 2021 was $70.5 million higher than the nine months ended July 4, 2020, due to a $64.1 million decrease in cash used in operating activities and a decrease of $6.4 million in cash paid for fixed assets.
Off-Balance Sheet Arrangements
We had outstanding letters of credit totaling $6.9 million at July 3, 2021, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.
We had a $3.0 million guarantee outstanding at July 3, 2021 which relates to a guarantee of indebtedness for a term loan issued by a Company dealer with a remaining maturity up to 1.5 years. The $3.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have not been any material changes to our interest rate risks, commodity risks or currency risks previously disclosed in Part II, Item 7A of the Company’s 2020 Form 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based on their evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 3, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended July 3, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Items required under Part II not specifically shown below are not applicable.
Item 1. Legal Proceedings.
Blue Bird is engaged in legal proceedings in the ordinary course of its business. Although no assurances can be given about the final outcome of pending legal proceedings, at the present time management does not believe that the resolution or outcome of any of Blue Bird’s pending legal proceedings will have a material adverse effect on its financial condition, liquidity or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this Report, you should carefully consider the risk factors discussed in Part I, Item 1A of the Company's 2020 Form 10-K. Such risk factors are expressly incorporated herein by reference, and could materially adversely affect our business, financial condition, cash flows or future results. The risks described in the 2020 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or operating results.
Item 6. Exhibits.
The following Exhibits are filed with this Report:
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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* Filed herewith.
^ In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
