(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 February 2, 2023, 32,032,067 shares of the registrant’s common stock, $0.0001 par value, were outstanding.
Guarantees, commitments and contingencies (Note 6)
Stockholders' (deficit) equity
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares outstanding at December 31, 2022 and October 1, 2022
$
—
$
—
Common stock, $0.0001 par value, 100,000,000 shares authorized, 32,032,067 and 32,024,911 shares outstanding at December 31, 2022 and October 1, 2022, respectively
3
3
Additional paid-in capital
173,592
173,103
Accumulated deficit
(90,806)
(79,512)
Accumulated other comprehensive loss
(41,703)
(41,930)
Treasury stock, at cost, 1,782,568 shares at December 31, 2022 and October 1, 2022
(50,282)
(50,282)
Total stockholders' (deficit) equity
$
(9,196)
$
1,382
Total liabilities and stockholders' (deficit) equity
$
351,605
$
366,126
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
(in thousands of dollars except for share data)
December 31, 2022
January 1, 2022
Net sales
$
235,732
$
129,223
Cost of goods sold
228,275
113,026
Gross profit
$
7,457
$
16,197
Operating expenses
Selling, general and administrative expenses
16,832
18,233
Operating loss
$
(9,375)
$
(2,036)
Interest expense
(4,196)
(3,082)
Other (expense) income, net
(236)
736
Loss on debt modification
(537)
(561)
Loss before income taxes
$
(14,344)
$
(4,943)
Income tax benefit
2,981
1,762
Equity in net income (loss) of non-consolidated affiliate
69
(901)
Net loss
$
(11,294)
$
(4,082)
Loss per share:
Basic weighted average shares outstanding
32,026,311
28,118,450
Diluted weighted average shares outstanding
32,026,311
28,118,450
Basic loss per share
$
(0.35)
$
(0.15)
Diluted loss per share
$
(0.35)
$
(0.15)
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Net loss
$
(11,294)
$
(4,082)
Other comprehensive income, net of tax:
Net change in defined benefit pension plan
227
221
Total other comprehensive income
$
227
$
221
Comprehensive loss
$
(11,067)
$
(3,861)
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)
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Cash flows from operating activities
Net loss
$
(11,294)
$
(4,082)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense
3,361
3,288
Non-cash interest expense
417
1,143
Share-based compensation expense
589
1,673
Equity in net (income) loss of non-consolidated affiliate
(69)
901
Loss on disposal of fixed assets
—
9
Deferred income tax benefit
(2,986)
(1,704)
Amortization of deferred actuarial pension losses
299
291
Loss on debt modification
537
561
Changes in assets and liabilities:
Accounts receivable
3,409
3,827
Inventories
13,857
(16,747)
Other assets
(5,227)
(2,554)
Accounts payable
16,572
(11,115)
Accrued expenses, pension and other liabilities
461
(8,568)
Total adjustments
$
31,220
$
(28,995)
Total cash provided by (used in) operating activities
$
19,926
$
(33,077)
Cash flows from investing activities
Cash paid for fixed assets
$
(1,146)
$
(1,570)
Total cash used in investing activities
$
(1,146)
$
(1,570)
Cash flows from financing activities
Revolving credit facility borrowings
$
5,000
$
35,000
Revolving credit facility repayments
(20,000)
(75,000)
Term loan repayments
(4,950)
(3,713)
Principal payments on finance leases
(141)
(328)
Cash paid for debt costs
(3,211)
(2,468)
Sale of common stock
—
75,000
Repurchase of common stock in connection with stock award exercises
(57)
(1,484)
Total cash (used in) provided by financing activities
$
(23,359)
$
27,007
Change in cash, cash equivalents, and restricted cash
(4,579)
(7,640)
Cash, cash equivalents, and restricted cash at beginning of period
10,479
11,709
Cash, cash equivalents, and restricted cash at end of period
$
5,900
$
4,069
Supplemental disclosures of cash flow information
Cash paid or received during the period:
Interest paid, net of interest received
$
3,170
$
3,648
Income tax (received) paid, net of tax refunds
(90)
—
Non-cash investing and financing activities:
Changes in accounts payable for capital additions to property, plant and equipment
$
672
$
469
Accrue debt modification costs
61
—
Accrue common stock issuance costs
—
178
Right-of-use assets obtained in exchange for operating lease obligations
199
—
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) EQUITY
(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) Equity
Balance, October 1, 2022
32,024,911
$
3
$
173,103
—
$
—
$
(41,930)
$
(79,512)
1,782,568
$
(50,282)
$
1,382
Restricted stock activity
7,156
—
(57)
—
—
—
—
—
—
(57)
Share-based compensation expense
—
—
546
—
—
—
—
—
—
546
Net loss
—
—
—
—
—
—
(11,294)
—
—
(11,294)
Other comprehensive income, net of tax
—
—
—
—
—
227
—
—
—
227
Balance, December 31, 2022
32,032,067
$
3
$
173,592
—
$
—
$
(41,703)
$
(90,806)
1,782,568
$
(50,282)
$
(9,196)
Balance, October 2, 2021
27,205,269
$
3
$
96,170
—
$
—
$
(44,794)
$
(33,753)
1,782,568
$
(50,282)
$
(32,656)
Private placement
4,687,500
—
74,822
—
—
—
—
—
—
74,822
Restricted stock activity
82,505
—
(1,484)
—
—
—
—
—
—
(1,484)
Share-based compensation expense
—
—
1,642
—
—
—
—
—
—
1,642
Net loss
—
—
—
—
—
—
(4,082)
—
—
(4,082)
Other comprehensive income, net of tax
—
—
—
—
—
221
—
—
—
221
Balance, January 1, 2022
31,975,274
$
3
$
171,150
—
$
—
$
(44,573)
$
(37,835)
1,782,568
$
(50,282)
$
38,463
6
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 ("BBBC"), 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 BBBC’s sales are made to an independent dealer network, which in turn sells buses to ultimate end users. References in these notes to condensed consolidated 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. We are headquartered in Macon, Georgia.
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 (“U.S. 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. The fiscal years ending September 30, 2023 ("fiscal 2023") and ended October 1, 2022 ("fiscal 2022") consist or consisted of 52 weeks. The first quarters of fiscal 2023 and fiscal 2022 both included 13 weeks.
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 U.S. GAAP for complete financial statements.
The Condensed Consolidated Balance Sheet data as of October 1, 2022 was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes as of and for the fiscal year ended October 1, 2022 as set forth in the Company's fiscal 2022 Form 10-K filed with the Securities and Exchange Commission ("SEC") on December 12, 2022.
Impacts of COVID-19 and Subsequent Supply Chain Constraints on our Business
Towards the end of our second quarter of the fiscal year that ended October 3, 2020 ("fiscal 2020"), the novel coronavirus known as "COVID-19" spread throughout the world, resulting in a global pandemic. Countermeasures taken to address the COVID-19 pandemic included virtual and hybrid schooling in many jurisdictions throughout the United States of America ("U.S.") and Canada. The uncertainty of when and how schools would open materially affected demand for new buses and replacement/maintenance parts during the second half of fiscal 2020 and first half of the fiscal year that ended October 2, 2021 ("fiscal 2021"), significantly impacting our business and operations.
Demand for school buses strengthened substantially during the second half of fiscal 2021 as COVID-19 vaccines were administered and many jurisdictions began preparing for a return to in-person learning environments for the new school year that began in mid-August to early September 2021. However, during this same period of time, the Company, and automotive industry as a whole, began experiencing significant supply chain constraints resulting from, among others, labor shortages; the lack of maintenance on, and acquisition of, capital assets by suppliers during the extended COVID-19 global lockdowns; significant increased demand for consumer products containing certain materials required for the production of vehicles, such as microchips, as consumers spent stimulus and other funds on items for their homes; etc. These supply chain disruptions had a significant adverse impact on our operations and results during the second half of fiscal 2021 and all of fiscal 2022 due to higher purchasing costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders. Towards the end of fiscal 2022 and continuing throughout the first quarter of fiscal 2023, there were slight improvements in the supply chain's ability to deliver the parts and components necessary to support our production operations, resulting in increased (i) manufacturing efficiencies and (ii) production of buses to fulfill sales orders during the first quarter of fiscal 2023. However, the higher costs charged by suppliers to procure inventory continued into the first quarter of fiscal 2023 and had a significant adverse impact on our operations and results as such costs outpaced the increases in sales prices that we
7
charged for the buses that were sold during the quarter, all of which were included in the backlog of fixed price sales orders originating in fiscal 2021 and 2022 that carried forward into fiscal 2023.
Additionally, Russian military forces launched a large-scale invasion of Ukraine on February 24, 2022, which further exacerbated global supply chain disruptions.While the Company has no assets or customers in either of these countries, this military conflict significantly impacted our financial results during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023, primarily in an indirect manner since the Company does not sell to customers located in, or source goods directly from, either country. Specifically, it has contributed to increased a) costs charged by suppliers for the purchase of inventory that is at least partially dependent on resources originating from either of the countries and b) freight costs, both of which negatively impacted the gross profit recognized on sales during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023.
The continuing development and fluidity of the pandemic and subsequent supply chain constraints and their trailing impacts preclude any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. At the date of the financial statements, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, and during the reporting period, these estimates and assumptions affect the reported amounts of revenues and expenses. For example, significant management judgments are required in determining excess, obsolete, or unsalable inventory; 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 any COVID-19 outbreaks and continued supply chain constraints and their related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in the Company’s evaluations. Actual results could differ from the estimates that the Company has used.
2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards
The Company’s significant accounting policies are described in the Company’s fiscal 2022 Form 10-K, filed with the SEC on December 12, 2022. 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 three months ended December 31, 2022.
Recently Issued Accounting Standards
ASU 2020-04 On March 12, 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.
ASU 2022-06 On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which defers the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC 848.
The above amendments are effective for all entities from March 12, 2020 through December 31, 2024. 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
8
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.
With the maturity of the interest rate collar on September 30, 2022 and execution of the Fifth Amended Credit Agreement (defined below) on September 2, 2022, which, among other things, changed one of the market interest rate indices that the Company can elect to accrue interest on outstanding borrowings from LIBOR to the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York (“SOFR”) and became effective at the end of the applicable interest period for any LIBOR borrowings outstanding on the fifth amendment effective date, the Company no longer has any contracts that reference LIBOR as of December 31, 2022 and has no plans to enter such contracts prior to the discontinuation of LIBOR. The change in interest rate indices from LIBOR to SOFR had virtually no impact on the first quarter of fiscal 2023 as the LIBOR interest rate on outstanding borrowings on the fifth amendment effective date remained in place through approximately the end of December 2022. Accordingly, interest was accrued utilizing SOFR for only a short period of time and the Company adjusted the effective interest rate on outstanding borrowings on a prospective basis, which did not have a material impact on the condensed consolidated financial statements.
3. Supplemental Financial Information
Inventories
The following table presents the components of inventories at the dates indicated:
(in thousands of dollars)
December 31, 2022
October 1, 2022
Raw materials
$
89,099
$
106,070
Work in process
36,961
35,398
Finished goods
3,060
1,509
Total inventories
$
129,120
$
142,977
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Condensed Consolidated Balance Sheets that sum to the total of such amounts reported on the Condensed Consolidated Statements of Cash Flows:
(in thousands of dollars)
December 31, 2022
January 1, 2022
Cash and cash equivalents
$
5,664
$
4,069
Restricted cash
236
—
Total cash, cash equivalents, and restricted cash reported on the Condensed Consolidated Statements of Cash Flows
$
5,900
$
4,069
Amounts included in restricted cash represent those required by a contractual agreement with a financial institution to serve as collateral against outstanding balances pertaining to the Company's corporate credit card program.
9
Product Warranties
The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Balance at beginning of period
$
15,970
$
18,550
Add current period accruals
2,033
1,236
Current period reductions of accrual
(2,423)
(2,534)
Balance at end of period
$
15,580
$
17,252
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
(in thousands of dollars)
December 31, 2022
January 1, 2022
Balance at beginning of period
$
18,795
$
20,144
Add current period deferred income
2,336
939
Current period recognition of income
(1,841)
(1,995)
Balance at end of period
$
19,290
$
19,088
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 $5.6 million of the outstanding contract liability during the remainder of fiscal 2023, $5.7 million in fiscal 2024, and the remaining balance thereafter.
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)
December 31, 2022
October 1, 2022
Current portion
$
3,813
$
3,996
Long-term portion
1,893
1,794
Total accrued self-insurance
$
5,706
$
5,790
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 $4.3 million and $3.4 million for the quarters ended December 31, 2022 and January 1, 2022, respectively. The related cost of goods sold was $3.8 million and $3.1 million for the quarters ended December 31, 2022 and January 1, 2022, respectively.
10
Pension Expense
Components of net periodic pension benefit expense (income) were as follows for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Interest cost
$
1,509
$
1,092
Expected return on plan assets
(1,630)
(2,122)
Amortization of prior loss
299
291
Net periodic benefit expense (income)
$
178
$
(739)
Amortization of prior loss, recognized in other comprehensive income
(299)
(291)
Total recognized in net periodic pension benefit expense (income) and other comprehensive income
$
(121)
$
(1,030)
4. Debt
On November 21, 2022, BBBC (as "Borrower") executed a sixth amendment to the Credit Agreement, dated as of December 12, 2016 ("Credit Agreement"); as amended by the first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement"), the second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement"), the third amendment to the Credit Agreement, dated as of December 4, 2020 (the "Third Amended Credit Agreement"); the fourth amendment to the Credit Agreement, dated as of November 24, 2021 (the "Fourth Amended Credit Agreement:); the fifth amendment and limited waiver to the Credit Agreement, dated as of September 2, 2022 (the "Fifth Amended Credit Agreement"); and as further amended by the sixth amendment (the "Sixth Amended Credit Agreement" and collectively, the "Amended Credit Agreement"). The Sixth Amended Credit Agreement, among other things, extends the maturity date for both the term loan and revolving credit facilities from September 13, 2023 to December 31, 2024. The total revolving credit facility commitment is reduced to an aggregate principal amount of $90.0 million, of which $80.0 million is available for Borrower to draw, with the remaining $10.0 million subject to written approval from the lenders, which, once obtained, will be irrevocable. There was no change in the term loan facility commitment; however, the Sixth Amended Credit Agreement requires principal repayments approximating $5.0 million on a quarterly basis through September 30, 2024, with the remaining balance due upon maturity.There were $151.6 million of term loan borrowings outstanding on the sixth amendment effective date.
The Sixth Amended Credit Agreement also provides for temporary amendments to certain financial performance covenants during the period from the third amendment effective date, December 4, 2020, through and including April 1, 2023 (the “Amended Limited Availability Period:), which will terminate on the date on which the Company’s Total Net Leverage Ratio ("TNLR"), defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, for the two fiscal quarters most recently ended is each less than 4.00x and no default or event of default has occurred and is continuing. However, the Amended Limited Availability Period can re-occur upon a default or event of default or if the TNLR for the immediately preceding fiscal quarter is equal to or greater than 4.00x.
The minimum consolidated EBITDA that the Company is required to maintain during the Amended Limited Availability Period is updated as set forth in the table below (in millions):
Period
Minimum Consolidated EBITDA
Fiscal quarter ending July 1, 2023
$50.0
Fiscal quarter ending September 30, 2023
$60.0
For purposes of complying with the above minimum consolidated EBITDA covenant, the Company’s consolidated EBITDA for the (i) two fiscal quarter period ending July 1, 2023 is multiplied by 2 and (ii) three fiscal quarter period ending September 30, 2023 is multiplied by 4/3.
The minimum liquidity (in the form of undrawn availability under the revolving credit facility and unrestricted cash and cash equivalents) that the Company is required to maintain at the end of each fiscal month during the Amended Limited Availability Period is amended as set forth in the table below (in millions):
Period
Minimum Liquidity
Sixth amendment effective date through December 30, 2023
$30.0
11
Additionally, the financial performance covenant requiring that school bus units manufactured by the Company (“Units”) not fall below certain pre-set thresholds on a three month trailing basis (“Units Covenant”) is amended for Units to be calculated at the end of each applicable fiscal month on a cumulative basis, with the minimum cumulative threshold that the Company is required to maintain during the Amended Limited Availability Period amended as set forth in the table below. The Units Covenant is triggered only if the Company’s liquidity for the most-recently ended fiscal month is less than $50.0 million during the Amended Limited Availability Period:
Period
Minimum Units Manufactured
Period from October 2, 2022 and ending October 29, 2022
450
Period from October 2, 2022 and ending November 26, 2022
900
Period from October 2, 2022 and ending December 31, 2022
1,400
Period from October 2, 2022 and ending January 28, 2023
1,900
Period from October 2, 2022 and ending February 25, 2023
2,400
Period from October 2, 2022 and ending April 1, 2023
3,000
The Company is not required to comply with a maximum TNLR financial maintenance covenant for any fiscal quarters from the sixth amendment effective date through September 30, 2023, with the maximum threshold amended thereafter as follows:
Period
Maximum Total Net Leverage Ratio
Fiscal Quarter ending December 30, 2023 through the fiscal quarter ending March 30, 2024
4.00:1.00
Fiscal quarter ending June 29, 2024 and thereafter
3.50:1.00
The pricing grid in the Amended Credit Agreement, which is based on the TNLR, is applicable to both term loan and revolving borrowings and is determined in accordance with the amended pricing matrix set forth below:
Level
Total Net Leverage Ratio
ABR Loans
SOFR Loans
I
Less than 2.00x
0.75%
1.75%
II
Greater than or equal to 2.00x and less than 2.50x
1.00%
2.00%
III
Greater than or equal to 2.50x and less than 3.00x
1.25%
2.25%
IV
Greater than or equal to 3.00x and less than 3.25x
1.50%
2.50%
V
Greater than or equal to 3.25x and less than 3.50x
1.75%
2.75%
VI
Greater than or equal to 3.50x and less than 4.00x
2.00%
3.00%
VII
Greater than or equal to 4.00x and less than 4.50x
2.75%
3.75%
VIII
Greater than or equal to 4.50x and less than 5.00x
3.75%
4.75%
IX
Greater than 5.00x
4.75%
5.75%
Further, the pricing margins for levels VII though IX above are each increased (x) by 0.25% if the aggregate revolving borrowings are equal to or greater than $50.0 million and less than or equal to $80.0 million and (y) by 0.50% if the aggregate revolving borrowings are greater than $80.0 million.On the sixth amendment effective date, the interest rate was set at SOFR plus 5.75% and will be adjusted, as applicable, for future fiscal quarter in accordance with the amended pricing grid set forth above.
Finally, the Company is required to deliver to the administrative agent, on a quarterly basis, a projected consolidated balance sheet and consolidated statements of projected operations and cash flows containing the next four fiscal quarters.
The Company incurred approximately $3.3 million in lender fees and other issuance costs relating to the sixth amendment. Of such total, approximately $1.2 million and $1.5 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 Amended Credit Agreement. The remaining approximate $0.5 million was recorded to loss on debt modification on the Condensed Consolidated Statements of Operations.
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Term debt consisted of the following at the dates indicated:
(in thousands of dollars)
December 31, 2022
October 1, 2022
2023 term loan, net of deferred financing costs of $2,509 and $1,410, respectively
$
144,141
$
150,190
Less: current portion of long-term debt
19,800
19,800
Long-term debt, net of current portion
$
124,341
$
130,390
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 December 31, 2022 and October 1, 2022, $146.7 million and $151.6 million, respectively, were outstanding on the term loans.
At December 31, 2022 and October 1, 2022, the stated interest rates on the term loans were 10.5% and 7.9%, respectively. At December 31, 2022 and October 1, 2022, the weighted-average annual effective interest rates for the term loans were 9.6% and 8.0%, respectively, which includes amortization of the deferred financing costs and interest relating to the interest rate collar, as applicable.
At December 31, 2022, $6.3 million of letters of credit were outstanding, which reduces the availability on the revolving line of credit. There were $5.0 million in borrowings outstanding on the revolving credit facility; therefore, the Company would have been able to borrow $78.7 million on the revolving line of credit.
Interest expense on all indebtedness was $4.2 million and $3.1 million for the three months ended December 31, 2022 and January 1, 2022, respectively.
The schedule of remaining principal payments through maturity for the term loans is as follows:
(in thousands of dollars)
Fiscal Year
Principal Payments
2023
$
14,850
2024
19,800
2025
112,000
Total remaining principal payments
$
146,650
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 annual forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily in the U.S. In periods where our pre-tax 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.
Three Months
The effective tax rate for the three months ended December 31, 2022 was 20.8%, which aligned with the statutory federal income tax rate of 21% and is comprised of normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), with discrete period items having a nominal impact on the effective rate during the quarter.
The effective tax rate for the three months ended January 1, 2022 was 35.6%, which differed from the statutory federal income tax rate of 21%. The difference was mainly due to normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), which was partially offset by discrete period tax expense resulting from net non-deductible compensation expenses and other tax adjustments.
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6. Guarantees, Commitments and Contingencies
Litigation
At December 31, 2022, 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.
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 U.S., Canada and in certain limited 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 and certain large fleet customers. Management evaluates the segments based primarily upon revenues and gross profit, which are reflected in the tables below for the periods presented:
Net sales
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Bus (1)
$
213,249
$
112,437
Parts (1)
22,483
16,786
Segment net sales
$
235,732
$
129,223
(1) Parts segment revenue includes $1.1 million and $0.8 million for the three months ended December 31, 2022 and January 1, 2022, respectively, related to inter-segment sales of parts that were eliminated by the Bus segment upon consolidation.
Gross profit
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Bus
$
(3,731)
$
9,642
Parts
11,188
6,555
Segment gross profit
$
7,457
$
16,197
The following table is a reconciliation of segment gross profit to consolidated loss before income taxes for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Segment gross profit
$
7,457
$
16,197
Adjustments:
Selling, general and administrative expenses
(16,832)
(18,233)
Interest expense
(4,196)
(3,082)
Other (expense) income, net
(236)
736
Loss on debt modification
(537)
(561)
Loss before income taxes
$
(14,344)
$
(4,943)
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Sales are attributable to geographic areas based on customer location and were as follows for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
United States
$
204,541
$
100,547
Canada
30,521
26,304
Rest of world
670
2,372
Total net sales
$
235,732
$
129,223
8. Revenue
The following table disaggregates revenue by product category for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Diesel buses
$
71,494
$
46,033
Alternative power buses (1)
131,946
57,637
Other (2)
10,455
9,297
Parts
21,837
16,256
Net sales
$
235,732
$
129,223
(1) Includes buses sold with any power source other than diesel (e.g., gasoline, propane, compressed natural gas ("CNG") or electric).
(2) Includes shipping and handling revenue, extended warranty income, surcharges and chassis and bus shell sales.
9. Loss Per Share
The following table presents the loss per share computation for the periods presented:
Three Months Ended
(in thousands except for share data)
December 31, 2022
January 1, 2022
Numerator:
Net loss
$
(11,294)
$
(4,082)
Denominator:
Weighted-average common shares outstanding
32,026,311
28,118,450
Weighted-average shares and dilutive potential common shares (1)
32,026,311
28,118,450
Loss per share:
Basic loss per share
$
(0.35)
$
(0.15)
Diluted loss per share
$
(0.35)
$
(0.15)
(1) Potentially dilutive securities representing 0.8 million and 0.4 million shares of common stock were excluded from the computation of diluted loss per share for the three months ending December 31, 2022 and January 1, 2022, 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
(in thousands of dollars)
Defined Benefit Pension Plan
Total AOCL
December 31, 2022
Beginning Balance
$
(41,930)
$
(41,930)
Amounts reclassified and included in earnings
299
299
Total before taxes
299
299
Income taxes
(72)
(72)
Ending Balance December 31, 2022
$
(41,703)
$
(41,703)
January 1, 2022
Beginning Balance
$
(44,794)
$
(44,794)
Amounts reclassified and included in earnings
291
291
Total before taxes
291
291
Income taxes
(70)
(70)
Ending Balance January 1, 2022
$
(44,573)
$
(44,573)
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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 the Company should be read in conjunction with the Company’s unaudited condensed consolidated financial statements as of and for the three months ended December 31, 2022 and January 1, 2022 and related notes appearing in Part I, Item 1 of this Quarterly Report on 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.
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 include or 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.
•future impacts resulting from Russia's invasion of Ukraine, which include or could include, among other effects:
◦disruption in global commodity and other markets;
◦supply shortages and supplier financial risk, especially from suppliers providing inventory that is dependent on resources originating from either of these countries; and
◦negative impacts to manufacturing operations resulting from inventory cost volatility or the supply chain due to shutdowns or other disruptions in operations.
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
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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 2022 Form 10-K, filed with the SEC on December 12, 2022. 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 2022 Form 10-K, filed with the SEC on December 12, 2022.
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 in the United States of America ("U.S."), Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs. In addition, Blue Bird is the market leader in alternative powered product offerings 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 U.S. 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 U.S. Government, state governments, and authorized dealers in certain limited foreign countries.
Throughout this Report, we refer to the fiscal year ending September 30, 2023 as "fiscal 2023," the fiscal year ended October 1, 2022 as "fiscal 2022" and the fiscal year ended October 2, 2021 as “fiscal 2021.” There will be or were 52 weeks in fiscal 2023, fiscal 2022 and fiscal 2021. The first quarters of fiscal 2023 and fiscal 2022 both included 13 weeks.
Impacts of COVID-19 and Subsequent Supply Chain Constraints on Our Business
Beginning in our second quarter of the fiscal year that ended October 3, 2020 ("fiscal 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 into the early months of calendar year 2021. Countermeasures taken to address the COVID-19 pandemic included virtual and hybrid schooling in many jurisdictions throughout the U.S. and Canada. The uncertainty of when and how schools would open materially affected demand within the Type C and Type D school bus industry in the second half of the Company's fiscal 2020.
While demand for school buses remained suppressed during the first half of fiscal 2021 as a result of the continuing impact of the COVID-19 pandemic, it strengthened substantially during the second half of the fiscal year as COVID-19 vaccines were administered and many jurisdictions began preparing for a return to in-person learning environments for the new school year that began in mid-August to early September 2021. However, during the second half of fiscal 2021, the Company, and automotive industry as a whole, began experiencing significant supply chain constraints resulting from, among others, labor shortages due to the ‘great resignation;’ the lack of maintenance on, and acquisition of, capital assets during the extended COVID-19 global lockdowns; significant increased demand for consumer products containing certain materials required for the production of vehicles, such as microchips, as consumers spent stimulus and other funds on items for their homes; etc. These supply chain disruptions have had a significant adverse impact our operations and results due to higher purchasing costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders primarily during the latter half of fiscal 2021 and most of fiscal 2022. Specifically, management estimates that the sale of approximately 2,000 units was deferred from fiscal 2021 into fiscal 2022 as a result of the shortage of critical components that prevented the Company from initiating
18
or completing, as applicable, the production process for certain units that were otherwise scheduled to be delivered to customers during the year. Including these units, the Company's backlog exceeded 4,200 units as of October 2, 2021.
Although there were pockets of COVID-19 outbreaks in the U.S. throughout fiscal 2022, most school systems maintained partial or full in-person learning environments for the entirety of the school year. Accordingly, new bus orders during fiscal 2022 remained extremely robust, primarily due to pent-up demand resulting from the cumulative effect of the COVID-19 pandemic when many school systems conducted virtual learning (i.e., approximately January 2020 through June 2021). This strong demand, when coupled with an already challenged global supply chain for automotive parts that continued from fiscal 2021 but that was further impacted, including continuing escalating inventory purchase costs, by additional stress resulting from Russia’s invasion of Ukraine in February 2022 (see further discussion below) and several complete shutdowns in China as a result of widespread COVID-19 outbreaks, resulted in the Company’s order backlog continuing to grow during fiscal 2022, exceeding 5,000 units as of October 1, 2022 (only minimal sales orders were canceled during the fiscal year as a result of continued delays in our production process).
Shortages of key components during the second half of fiscal 2021 and most of fiscal 2022 hindered the Company's ability to complete the production of buses to fulfill sales orders, which had a significant, adverse impact on the Company's revenues during these periods. The Company has also experienced significant increased purchase costs for many of its raw materials as a result of supply chain disruptions over these same periods and continuing into the first quarter of fiscal 2023 that have negatively impacted the gross profit it recognized on sales. In response, beginning in July 2021 and continuing throughout fiscal 2022, the Company announced a number of sales price increases that apply to new sales orders and partially applied to backlog orders that were both intended to mitigate the impact of rising purchase costs on our operations and results. Additionally, during fiscal 2022, the Company began including price escalation provisions when bidding on contracts so that it can consider economic fluctuations between the bid date and the contract date to determine whether increased costs should be passed along to customers. Most of these price increases were generally not realized in the first half of fiscal 2022 as sales recorded during such quarters related to the backlog of orders that existed prior, and therefore were not subject, to the price increases. While they began to impact sales and gross profit in the latter half of fiscal 2022, such impact did not offset the significant continued increase in the Company's production costs, resulting in further deterioration of the Company's gross profit during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023 as it produced and sold the oldest units included in the backlog as of the end of fiscal 2022. However, they are expected to have a positive impact on sales and gross profit during the remainder of fiscal 2023 as the Company fulfills sales orders (i) from the backlog existing as of the end of fiscal 2022 and (ii) that are taken during fiscal 2023, both of which contained, or will contain, most or all of the cumulative sales prices increases that have been announced since July 2021.
New bus orders during the first quarter of fiscal 2023 remained extremely robust, primarily due to a combination of (i) pent-up demand resulting from the cumulative effect of the COVID-19 pandemic when many school systems conducted virtual learning and (ii) the challenged global supply chain for automotive parts that hindered the school bus industry's ability to produce and sell buses during the latter half of fiscal 2021 and most of fiscal 2022. Accordingly, the Company's backlog remained in excess of 5,000 units as of December 31, 2022 despite it selling almost 2,000 units during the first quarter of fiscal 2023 that were included in the backlog that existed as of October 1, 2022.
In general, management believes that supply chain disruptions could continue in future periods and could 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 COVID-19 pandemic and subsequent supply chain constraints have resulted, and could to continue to result, in significant economic disruption and have adversely affected our business. They could continue to adversely impact our business for the remainder of fiscal 2023 and perhaps beyond. Significant uncertainty exists concerning the magnitude of the impact and duration of any future COVID-19 outbreaks and their potential impact on the overall economy, both within the U.S and globally. Accordingly, the magnitude and duration of any demand reductions, production and supply chain disruptions, and related financial impacts on our business cannot be estimated at this time.
The impacts from the COVID-19 pandemic and subsequent supply chain constraints on the Company's business and operations during the second half of fiscal 2020 and continuing through the first quarter of fiscal 2023 negatively affected our revenues, gross profit, income and cash flows. We continue to monitor and assess the level of future customer demand, the ability of school boards to maintain normal in-person learning in the foreseeable future, the ability of suppliers to resume and/or maintain operations and to provide parts and supplies in sufficient quantities to meet our production needs, the ability of our employees to continue to work, and our ability to maintain continuous production during the remainder of fiscal 2023 and beyond. See PART I, Item 1.A. "Risk Factors," of our 2022 Form 10-K, filed with the SEC on December 12, 2022, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic and subsequent supply chain constraints.
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Impact of Russia’s Invasion of Ukraine on Our Business
On February 24, 2022, Russian military forces launched a large-scale invasion of Ukraine. While the Company has no assets or customers in either of these countries, this military conflict has had a significant negative impact on the Company’s operations, cash flows and results during fiscal 2022 and continuing into the first quarter of fiscal 2023, primarily in an indirect manner since the Company does not sell to customers located in, or source goods directly from, either country.
Specifically, Ukraine has historically been a large exporter of ferroalloy materials used in the manufacture of steel and the disruption in the supply of these minerals resulted in a significant increase in the price of steel from $1,057 per ton the third week of February 2022 to as high as $1,492 per ton the third week of April 2022 before finally decreasing to an average of $1,078 per ton the last two weeks of June and continuing to decline to $791 and $664 per ton the last weeks in September and December 2022, respectively (source: sheet prices published by the CRU Index every Wednesday that provide price benchmarking in North America for U.S. Midwest Domestic Hot-Rolled Coil Steel). While the Company has generally mitigated its direct exposure to steel prices by executing fixed price purchase contracts (generally purchased one quarter in advance) for the majority of the significant amount of steel used in the manufacture of school bus bodies, many suppliers from which the Company purchases components containing steel increased the price that they charge the Company to acquire such inventory, primarily on a lagged basis, during the latter half of fiscal 2022 and continuing into the first quarter of fiscal 2023. These inventory costs impact gross profit when school buses are sold and cash flows when the related invoices are paid.
Additionally, Russia has historically been a large global exporter of oil and many countries have ceased buying Russian oil in protest of the invasion and to comply with sanctions imposed by the U.S. and many European countries. Accordingly, the disruption in the supply of oil has significantly impacted the price of goods refined from oil, such as diesel fuel, which increased from $4.055 per gallon the week ending February 21, 2022 to as high as $5.810 per gallon the week ending June 20, 2022, before decreasing slightly throughout the remainder of our fiscal 2022 to $4.889 per gallon the week ending September 26, 2022 and fluctuating within a range from $5.341 and $4.537 per gallon during our first quarter of fiscal 2023 (source: U.S Energy Information Administration - Weekly U.S. No 2 Diesel Retail Prices). These increases have significantly impacted the Company both as a result of the price that suppliers charge the Company to acquire inventory (since diesel fuel impacts their cost of acquiring the inventory used in producing their goods) and the price that the Company pays for freight to deliver the inventory that it acquires. Additionally, such increases are generally implemented with very little lag so that they impact the purchase cost of inventory and cash flows on an almost real-time basis.
Finally, both countries have large quantities of other minerals that impact commodity costs, such as rubber and resin, among others, and the disruption caused by the ongoing military conflict has increased the cost and/or decreased the supply of components containing these materials, further impacting an already challenged global supply chain for automotive parts.
Russia’s invasion of Ukraine has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected our business. Specifically, it has contributed to higher inventory purchase costs, including freight costs, that negatively impacted the gross profit recognized on sales during the latter part of fiscal 2022 and continuing into the first quarter of fiscal 2023. Because peace negotiations do not appear to be productive and because Russia has announced its intention to continue military operations in Ukraine in the immediate term, we currently believe that this matter will continue to adversely impact our business for the remainder of fiscal 2023 and perhaps beyond. Significant uncertainty exists concerning the magnitude of the impact and duration of the ongoing military conflict and its impact on the overall economy, both within the U.S. and globally. Accordingly, the duration of any production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.
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 (“U.S. 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 2022 Form 10-K, filed with the SEC on December 12, 2022, 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 three months ended December 31, 2022.
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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. Evolving protocols for public health concerns and/or continued technological advancements could shift the future form of educational delivery away from in-person learning on a more permanent basis, with increased remote learning reasonably expected to decrease the number of school bus riders.
•Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, electric-powered 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 U.S. 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. Additionally, in certain cases, prices originally quoted with dealers and school districts may have become less favorable, or more unfavorable, to us given increasing inventory costs between the time the sales order was contractually agreed upon and the bus is built and delivered as a result of ongoing supply chain disruptions and general inflationary pressures.
•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 are typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. With the COVID-19 pandemic impacting the demand for Company products and the impact of the subsequent supply chain constraints hindering the Company's ability to produce and sell buses, seasonality has become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of results between fiscal periods.
•Inflation. As discussed previously above, supply chain disruptions developing subsequent to the COVID-19 pandemic and, more recently, Russia's invasion of Ukraine, have significantly increased our inventory purchase costs, including freight costs incurred to expedite receipt of critical components, reflected in cost of goods sold during the latter half of fiscal 2021, all of fiscal 2022 and continuing into the first quarter of fiscal 2023. In response, the Company announced several sales price increases that apply to new sales orders and partially applied to backlog orders that were both intended to mitigate the impact of rising purchase costs on our operations and results. Most of these price increases were generally not realized in the first half of fiscal 2022 as sales recorded during such quarters related to the backlog of orders that existed prior, and therefore were not subject, to the price increases. While they began to impact sales and gross profit in the latter half of fiscal 2022, such impact did not offset the significant continued increase in the Company's production costs, resulting in further deterioration of the Company's gross profit during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023 as it produced and sold the oldest units included in the backlog as of the end of fiscal 2022. However, they are expected to have a positive impact on sales and gross profit during the remainder of fiscal 2023 as the Company fulfills sales orders (i) from the
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backlog existing as of the end of fiscal 2022 and (ii) that are taken during fiscal 2023, both of which contained, or will contain, most or all of the cumulative sales prices increases that have been announced since July 2021.
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) including freight costs, 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, fluctuations in freight costs, 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 and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel.
•Interest expense. Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt. Interest expense also includes unrealized gains or losses from interest rate hedges, if any, and changes in the fair value of interest rate derivatives not designated in hedge accounting relationships, if any, as well as expenses related to debt guarantees, if any.
•Income taxes. We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken.
•Other expense/income, net. This balance includes periodic pension expense or income as well as gains or losses on foreign currency, if any. Other immaterial amounts not associated with operating expenses may also be included in this balance.
•Equity in net income or loss of non-consolidated affiliate. We include in this line item our 50% share of net income or loss from our investment in Micro Bird Holdings, Inc., our unconsolidated Canadian joint venture.
Key Non-GAAP Financial Measures We Use to Evaluate Our Performance
The condensed consolidated financial statements included in this Report in Item 1. "Financial Statements (Unaudited)" are prepared in conformity with U.S. GAAP. This Report also includes the following financial measures that are not prepared in accordance with U.S. GAAP ("non-GAAP"): “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 (defined below) 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 ("TNLR"), as and when applicable, which is also utilized in determining the interest rate we pay on borrowings under our Amended Credit Agreement (defined below). 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 or loss 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 U.S. 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 U.S. 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 share-based 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 and/or operational transformation initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. While certain of the charges that are
22
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 U.S. GAAP. The measures are used as a supplement to U.S. 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 paragraphs. We believe the non-GAAP measures offer additional financial metrics that, when coupled with the U.S. GAAP results and the reconciliation to U.S. GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business.
Adjusted EBITDA and Adjusted EBITDA Margin should not be considered as alternatives to net income or loss as an indicator of our performance or as alternatives to any other measure prescribed by U.S. 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 U.S. GAAP results, including providing a reconciliation to U.S. 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 U.S. GAAP and it should not be relied upon to the exclusion of U.S. GAAP financial measures. Free Cash Flow reflects an additional way of evaluating our liquidity that, when viewed with our U.S. 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 President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit.
23
Consolidated Results of Operations for the Three Months Ended December 31, 2022 and January 1, 2022:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Net sales
$
235,732
$
129,223
Cost of goods sold
228,275
113,026
Gross profit
$
7,457
$
16,197
Operating expenses
Selling, general and administrative expenses
16,832
18,233
Operating loss
$
(9,375)
$
(2,036)
Interest expense
(4,196)
(3,082)
Other (expense) income, net
(236)
736
Loss on debt modification
(537)
(561)
Loss before income taxes
$
(14,344)
$
(4,943)
Income tax benefit
2,981
1,762
Equity in net income (loss) of non-consolidated affiliate
69
(901)
Net loss
$
(11,294)
$
(4,082)
Other financial data:
Adjusted EBITDA
$
(4,245)
$
3,599
Adjusted EBITDA margin
(1.8)
%
2.8
%
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
December 31, 2022
January 1, 2022
Bus
$
213,249
$
112,437
Parts
22,483
16,786
Total
$
235,732
$
129,223
Gross (Loss) Profit by Segment
Bus
$
(3,731)
$
9,642
Parts
11,188
6,555
Total
$
7,457
$
16,197
Net sales. Net sales were $235.7 million for the first quarter of fiscal 2023, an increase of $106.5 million, or 82.4%, compared to $129.2 million for the first quarter of fiscal 2022. The increase in net sales is primarily due to increased unit bookings, product and mix changes, as well as pricing actions taken by management in response to increased inventory purchase costs. Significant supply chain disruptions began limiting the availability of certain critical components primarily beginning towards the end of the third quarter of fiscal 2021 and continuing throughout fiscal 2022. However, by the end of the first quarter of fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production relative to the first quarter of fiscal 2022.
Bus sales increased $100.8 million, or 89.7%, reflecting a 70.3% increase in units booked and a 11.4% increase in average sales price per unit. In the first quarter of fiscal 2023, 1,957 units were booked compared to 1,149 units booked for the same period in fiscal 2022. The increase in units sold was primarily due to constraints in the Company's ability to produce and deliver buses due to shortages of critical components in the first quarter of fiscal 2022. The 11.4% increase in unit price for the first quarter of fiscal 2023 compared to the same period in fiscal 2022 reflects pricing actions taken by management as well as product and customer mix changes.
Parts sales increased $5.7 million, or 33.9%, for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. This increase is primarily attributed to pricing actions taken by management to offset increases in purchased parts costs and increased inventory availability as supply chain constraints began to improve slightly during the first quarter of fiscal 2023 relative to the first quarter of fiscal 2022.
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Cost of goods sold. Total cost of goods sold was $228.3 million for the first quarter of fiscal 2023, an increase of $115.2 million, or 102.0%, compared to $113.0 million for the first quarter of fiscal 2022. As a percentage of net sales, total cost of goods sold increased from 87.5% to 96.8%.
Bus segment cost of goods sold increased $114.2 million, or 111.1%, for the first quarter of fiscal 2023 compared to the same period in fiscal 2022. The increase was primarily driven by the 70.3% increase in units booked, in the first quarter of fiscal 2023 compared to the same period in fiscal 2022. Also contributing was increased inventory costs, as the average cost of goods sold per unit for the first quarter of fiscal 2023 was 23.9% higher compared to the first quarter of fiscal 2022, primarily due to increases in manufacturing costs attributable to a) increased raw materials costs resulting from ongoing inflationary pressures and b) ongoing supply chain disruptions that resulted in higher purchase costs for components and freight.
The $1.1 million, or 10.4%, increase in parts segment cost of goods sold for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to the increase in sales volume noted above, increased purchased parts costs, driven by ongoing inflationary pressures and supply chain disruptions, as well as slight variations due to product and channel mix.
Operating loss. Operating loss was $9.4 million for the first quarter of fiscal 2023, an increase of $7.3 million, compared to operating loss of $2.0 million for the first quarter of fiscal 2022. Profitability was negatively impacted by a decrease of $8.7 million in gross profit as outlined in the revenue and cost of goods sold discussions. Specifically, the ongoing increases in manufacturing costs, when coupled with the fact that the Company produced and sold the oldest units in the backlog existing at the end of fiscal 2022, many of which had pricing from as early as fiscal 2021, resulted in the bus segment reporting gross loss of $3.7 million during the first quarter of fiscal 2023. The decrease in total gross profit was partially offset by a decrease of $1.4 million in selling, general and administrative expenses, primarily due to a decrease in share-based compensation expense as a result of the accelerated vesting of all outstanding stock awards for two of the Company's former executives in connection with their retirements during the first quarter of fiscal 2022, without comparable expense in the first quarter fiscal 2023. Additionally, selling, general and administrative expenses during the first quarter of fiscal 2023 benefited from actions taken by management to reduce labor costs and certain discretionary spending to mitigate the significant adverse impact of ongoing supply chain constraints on the Company's operations and results.
Interest expense. Interest expense was $4.2 million for the first quarter of fiscal 2023, an increase of $1.1 million, or 36.1%, compared to $3.1 million for the first quarter of fiscal 2022. The increase was primarily attributable to an increase in the stated term loan interest rate from 6.0% at January 1, 2022 to 10.5% at December 31, 2022.
Income taxes. We recorded income tax benefit of $3.0 million and $1.8 million for the first quarters of fiscal 2023 and fiscal 2022, respectively.
The effective tax rate for the three months ended December 31, 2022 was 20.8%, which aligned with the statutory federal income tax rate of 21% and is comprised of normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), with discrete period items having a nominal impact on the effective rate during the quarter.
The effective tax rate for the three months ended January 1, 2022 was 35.6%, which differed from the statutory federal income tax rate of 21%. The difference was mainly due to normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), which was partially offset by discrete period tax expense resulting from net non-deductible compensation expenses and other tax adjustments.
Adjusted EBITDA. Adjusted EBITDA was $(4.2) million, or (1.8)% of net sales, for the first quarter of fiscal 2023, a decrease of $7.8 million, or 217.9%, compared to $3.6 million, or 2.8% of net sales, for the first quarter of fiscal 2022. The decrease in Adjusted EBITDA primarily results from the $7.2 million increase in net loss, as a result of the factors discussed above.
25
The following table sets forth a reconciliation of net loss to adjusted EBITDA for the periods presented:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Net loss
$
(11,294)
$
(4,082)
Adjustments:
Interest expense, net (1)
4,289
3,157
Income tax benefit
(2,981)
(1,762)
Depreciation, amortization, and disposals (2)
3,815
3,523
Operational transformation initiatives
800
1
Share-based compensation
589
1,673
Product redesign initiatives
—
253
Restructuring and other charges
—
246
Costs directly attributed to the COVID-19 pandemic (3)
—
29
Loss on debt modification
537
561
Adjusted EBITDA
$
(4,245)
$
3,599
Adjusted EBITDA margin (percentage of net sales)
(1.8)
%
2.8
%
(1) Includes $0.1 million for both fiscal periods, representing interest expense on operating lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.4 million and $0.2 million for the three months ended December 31, 2022 and January 1, 2022, 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 represents costs incurred for third party cleaning services and personal protective equipment for our employees in response to the COVID-19 pandemic.
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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 December 31, 2022, the Company had $5.7 million of available cash (net of outstanding checks) and $78.7 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.
Sixth Amendment to the Credit Agreement
On November 21, 2022, BBBC (as "Borrower") executed a sixth amendment to the Credit Agreement, dated as of December 12, 2016 ("Credit Agreement"); as amended by the first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement"), the second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement"), the third amendment to the Credit Agreement, dated as of December 4, 2020 (the "Third Amended Credit Agreement"); the fourth amendment to the Credit Agreement, dated as of November 24, 2021 (the "Fourth Amended Credit Agreement:); the fifth amendment and limited waiver to the Credit Agreement, dated as of September 2, 2022 (the "Fifth Amended Credit Agreement"); and as further amended by the sixth amendment (the "Sixth Amended Credit Agreement" and collectively, the "Amended Credit Agreement"). The Sixth Amended Credit Agreement, among other things, extends the maturity date for both the term loan and revolving credit facilities from September 13, 2023 to December 31, 2024. The total revolving credit facility commitment is reduced to an aggregate principal amount of $90.0 million, of which $80.0 million is available for Borrower to draw, with the remaining $10.0 million subject to written approval from the lenders, which, once obtained, will be irrevocable. There was no change in the term loan facility commitment; however, the Sixth Amended Credit Agreement requires principal repayments approximating $5.0 million on a quarterly basis through September 30, 2024, with the remaining balance due upon maturity.There were $151.6 million of term loan borrowings outstanding on the sixth amendment effective date.
The Sixth Amended Credit Agreement also provides for temporary amendments to certain financial performance covenants during the period from the third amendment effective date, December 4, 2020, through and including April 1, 2023 (the “Amended Limited Availability Period:), which will terminate on the date on which the Company’s TNLR, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, for the two fiscal quarters most recently ended is each less than 4.00x and no default or event of default has occurred and is continuing. However, the Amended Limited Availability Period can re-occur upon a default or event of default or if the TNLR for the immediately preceding fiscal quarter is equal to or greater than 4.00x.
The minimum consolidated EBITDA that the Company is required to maintain during the Amended Limited Availability Period is updated as set forth in the table below (in millions):
Period
Minimum Consolidated EBITDA
Fiscal quarter ending July 1, 2023
$50.0
Fiscal quarter ending September 30, 2023
$60.0
For purposes of complying with the above minimum consolidated EBITDA covenant, the Company’s consolidated EBITDA for the (i) two fiscal quarter period ending July 1, 2023 is multiplied by 2 and (ii) three fiscal quarter period ending September 30, 2023 is multiplied by 4/3.
The minimum liquidity (in the form of undrawn availability under the revolving credit facility and unrestricted cash and cash equivalents) that the Company is required to maintain at the end of each fiscal month during the Amended Limited Availability Period is amended as set forth in the table below (in millions):
Period
Minimum Liquidity
Sixth amendment effective date through December 30, 2023
$30.0
Additionally, the financial performance covenant requiring that school bus units manufactured by the Company (“Units”) not fall below certain pre-set thresholds on a three month trailing basis (“Units Covenant”) is amended for Units to be calculated at the end of each applicable fiscal month on a cumulative basis, with the minimum cumulative threshold that the Company is required to maintain during the Amended Limited Availability Period amended as set forth in the table below. The Units Covenant is triggered only if the Company’s liquidity for the most-recently ended fiscal month is less than $50.0 million during the Amended Limited Availability Period:
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Period
Minimum Units Manufactured
Period from October 2, 2022 and ending October 29, 2022
450
Period from October 2, 2022 and ending November 26, 2022
900
Period from October 2, 2022 and ending December 31, 2022
1,400
Period from October 2, 2022 and ending January 28, 2023
1,900
Period from October 2, 2022 and ending February 25, 2023
2,400
Period from October 2, 2022 and ending April 1, 2023
3,000
The Company is not required to comply with a maximum TNLR financial maintenance covenant for any fiscal quarters from the sixth amendment effective date through September 30, 2023, with the maximum threshold amended thereafter as follows:
Period
Maximum Total Net Leverage Ratio
Fiscal Quarter ending December 30, 2023 through the fiscal quarter ending March 30, 2024
4.00:1.00
Fiscal quarter ending June 29, 2024 and thereafter
3.50:1.00
The pricing grid in the Amended Credit Agreement, which is based on the TNLR, is applicable to both term loan and revolving borrowings and is determined in accordance with the amended pricing matrix set forth below:
Level
Total Net Leverage Ratio
ABR Loans
SOFR Loans
I
Less than 2.00x
0.75%
1.75%
II
Greater than or equal to 2.00x and less than 2.50x
1.00%
2.00%
III
Greater than or equal to 2.50x and less than 3.00x
1.25%
2.25%
IV
Greater than or equal to 3.00x and less than 3.25x
1.50%
2.50%
V
Greater than or equal to 3.25x and less than 3.50x
1.75%
2.75%
VI
Greater than or equal to 3.50x and less than 4.00x
2.00%
3.00%
VII
Greater than or equal to 4.00x and less than 4.50x
2.75%
3.75%
VIII
Greater than or equal to 4.50x and less than 5.00x
3.75%
4.75%
IX
Greater than 5.00x
4.75%
5.75%
Further, the pricing margins for levels VII though IX above are each increased (x) by 0.25% if the aggregate revolving borrowings are equal to or greater than $50.0 million and less than or equal to $80.0 million and (y) by 0.50% if the aggregate revolving borrowings are greater than $80.0 million.On the sixth amendment effective date, the interest rate was set at SOFR plus 5.75% and will be adjusted, as applicable, for future fiscal quarter in accordance with the amended pricing grid set forth above.
Finally, the Company is required to deliver to the administrative agent, on a quarterly basis, a projected consolidated balance sheet and consolidated statements of projected operations and cash flows containing the next four fiscal quarters.
Detailed descriptions of the Credit Agreement as well as the First, Second, Third, Fourth, and Fifth Amended Credit Agreements 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 1, 2022, filed with the SEC on December 12, 2022.
At December 31, 2022, the Borrower and the guarantors under the Amended Credit Agreement were in compliance with all covenants.
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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 adverse impacts from ongoing supply chain disruptions, which were further exacerbated by Russia's invasion of Ukraine in February 2022, materially impacted our operations and results during the second half of fiscal 2021 and all of fiscal 2022 due to higher purchasing costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders. Towards the end of fiscal 2022 and continuing throughout the first quarter of fiscal 2023, there were slight improvements in the supply chain's ability to deliver the parts and components necessary to support our production operations, resulting in increased (i) manufacturing efficiencies and (ii) production of buses to fulfill sales orders during the first quarter of fiscal 2023. However, the higher costs charged by suppliers to procure inventory continued into the first quarter of fiscal 2023 and had a significant adverse impact on our operations and results as such costs outpaced the increases in sales prices that we charged for the buses that were sold during the quarter, all of which were included in the backlog of fixed price sales orders originating in fiscal 2021 and 2022 that carried forward into fiscal 2023. The development and fluidity of ongoing or future supply chain constraints preclude any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity. See PART I, Item 1.A. "Risk Factors," of our 2022 Form 10-K, filed with the SEC on December 12, 2022, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic and subsequent supply chain constraints.
Future COVID-19 outbreaks and/or continuing supply chain constraints could cause a more 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) minimum consolidated EBITDA, which is 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 trailing four fiscal quarter period most recently then ended for fiscal 2022 and at the end of the third and fourth fiscal quarters of fiscal 2023 calculated on an annualized basis; (ii) for fiscal 2022 through December 30, 2023, minimum liquidity at the end of each fiscal month; (iii) when applicable during fiscal 2022 through April 1, 2023, minimum school bus units manufactured calculated on a three month trailing basis at the end of each fiscal month for fiscal 2022 and on a cumulative basis at the end of each fiscal month for the first and second fiscal quarters of fiscal 2023; and (iv) beginning in the fiscal year ending September 28, 2024 ("fiscal 2024") and thereafter, TNLR at the end of each fiscal quarter. 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.
To increase our liquidity in future periods, we could pursue raising additional capital via an equity or debt offering utilizing a currently effective "shelf" registration statement. However, we cannot assure our investors that we would be successful in raising this additional capital, which could also lead to increased expense and larger up-front fees when compared with 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 representing our two busiest quarters from a sales and production perspective, the latter ending on the Saturday closest to September 30. Our quarterly results of operations, cash flows, and liquidity have historically been, and are likely to be in future periods, impacted by seasonal patterns. Working capital has historically been a significant use of cash during the first fiscal quarter due to planned shutdowns and a significant source of cash generation in the fourth fiscal quarter. With the COVID-19 pandemic and subsequent supply chain constraints, 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.
29
Cash Flows
The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows:
Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Cash and cash equivalents at beginning of period
$
10,479
$
11,709
Total cash provided by (used in) operating activities
19,926
(33,077)
Total cash used in investing activities
(1,146)
(1,570)
Total cash (used in) provided by financing activities
(23,359)
27,007
Change in cash and cash equivalents
$
(4,579)
$
(7,640)
Cash and cash equivalents at end of period
$
5,900
$
4,069
Total cash provided by (used in) operating activities
Cash flows provided by operating activities totaled $19.9 million for the three months ended December 31, 2022, an increase of $53.0 million from the $33.1 million of cash flows used in operating activities during the three months ended January 1, 2022. The increase was primarily due to $30.6 million, $27.7 million, and $9.0 million increases in cash provided by favorable changes in inventory, accounts payable, and accrued expenses, pension and other liabilities, respectively. At the end of fiscal 2022 and during the first quarter of fiscal 2023, inflationary pressures and supply chain disruptions significantly increased our purchase costs for components and freight, which, when coupled with increased production and sales volumes during the first quarter of fiscal 2023, resulted in a significant increase in the accounts payable balance (a net source of cash) when compared with a significant decrease in the accounts payable balance at the end of the first quarter of fiscal 2022 (a net use of cash). Additionally, we became more efficient at managing supply chain disruptions, and thus building and selling buses, during the latter months of fiscal 2022 and continuing into the first quarter of fiscal 2023 when compared with the first quarter of fiscal 2022. These efficiencies resulted in us consuming more inventory in production, which resulted in a significant decrease in the inventory balance at the end of the first quarter of fiscal 2023 (a net source of cash) when compared with a significant increase in the inventory balance at the end of the corresponding period of fiscal 2022 (a net use of cash).
These favorable changes were partially offset by several unfavorable changes including a $7.2 million increase in net loss, a $1.1 million decrease in share-based compensation, and a $2.7 million decrease in cash provided by changes in other assets.
Total cash used in investing activities
Cash flows used in investing activities totaled $1.1 million for the three months ended December 31, 2022, as compared to $1.6 million for the three months ended January 1, 2022. The $0.4 million decrease was primarily due to a reduction in spending on fixed assets to mitigate the ongoing impact of supply chain constraints on our operations, financial results and cash flows.
Total cash (used in) provided by financing activities
Cash flows used in financing activities totaled $23.4 million for the three months ended December 31, 2022, as compared to $27.0 million of cash flows provided by financing activities for the three months ended January 1, 2022. The $50.4 million decrease between fiscal periods was primarily attributable to $75.0 million of proceeds received from the issuance and sale of common stock in a private placement transaction during the first quarter of fiscal 2022 with no similar activity in the corresponding period of fiscal 2023. This cash inflow was partially offset by a net $25.0 million decrease (i.e., repayments) in revolving credit facility borrowings in the three months ended December 31, 2022 compared to the three months ended January 1, 2022.
Free cash flow
Management believes the non-GAAP measurement of Free Cash Flow, defined as net cash provided by (used in) operating activities less cash paid for fixed assets and acquired intangible 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 Financial Measures We Use to Evaluate Our Performance” for further discussion. The following table sets forth the calculation of Free Cash Flow for the periods presented:
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Three Months Ended
(in thousands of dollars)
December 31, 2022
January 1, 2022
Net cash provided by (used in) operating activities
$
19,926
$
(33,077)
Cash paid for fixed assets
(1,146)
(1,570)
Free Cash Flow
$
18,780
$
(34,647)
Free Cash Flow for the three months ended December 31, 2022 was $53.4 million higher than the three months ended January 1, 2022, due to a $53.0 million increase in cash provided by (used in) operating activities, as well as a decrease of $0.4 million in cash paid for fixed assets, both as discussed above.
Off-Balance Sheet Arrangements
We had outstanding letters of credit totaling $6.3 million at December 31, 2022, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have not been any material changes to our interest rate, commodity or currency risks previously disclosed in Part II, Item 7A of the Company’s 2022 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 December 31, 2022.
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 December 31, 2022 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 2022 Form 10-K. Such risk factors are expressly incorporated herein by reference, and could materially adversely affect our business, financial condition, cash flows or operating results. The risks described in the 2022 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 may also 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)
* 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.
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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.
