Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 30, 2017

OR
[ ]
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ................................ to ...............................................

Commission File Number 001-36267

BLUE BIRD CORPORATION
(Exact name of registrant as specified in its charter)
  Delaware
 
46-3891989
(State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer
Identification No.)
        
3920 Arkwright Road, 2nd Floor, Macon, Georgia 31210
(Address of principal executive offices)
(Zip Code)

(478) 822-2801
(Registrant’s telephone number, including area code)

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 X No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes X No     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 
o
 
 
Accelerated filer
 
x
Non-accelerated filer 
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

As of February 5, 2018, there were issued and outstanding 24,031,788 shares of the registrant’s common stock, $0.0001 par value.


BLUE BIRD CORPORATION
FORM 10-Q

TABLE OF CONTENTS

 
 







Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) of Blue Bird Corporation (“Blue Bird” or the “Company”) contains forward-looking statements. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:

•
the future financial performance of the Company;
•
changes in the market for Blue Bird products; and
•
expansion plans and opportunities.

These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2017 Form 10-K, filed with the SEC on December 8, 2017. 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 2017 Form 10-K, filed with the SEC on December 8, 2017.

Available Information

We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.





PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).

BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands except for share data)
December 30, 2017
 
September 30, 2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
23,208

 
$
62,616

Accounts receivable, net
6,279

 
10,148

Inventories
74,332

 
76,155

Other current assets
9,980

 
11,528

Total current assets
$
113,799

 
$
160,447

Property, plant and equipment, net
36,185

 
34,708

Goodwill
18,825

 
18,825

Intangible assets, net
56,979

 
57,481

Equity investment in affiliate
11,675

 
11,625

Deferred tax assets
10,283

 
11,755

Other assets
1,091

 
975

Total assets
$
248,837

 
$
295,816

Liabilities and Stockholders' Deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
60,669

 
$
87,331

Warranty
8,113

 
8,573

Accrued expenses
10,943

 
18,229

Deferred warranty income
6,821

 
6,776

Other current liabilities
8,078

 
9,847

Current portion of senior term debt
8,000

 
8,000

Total current liabilities
$
102,624

 
$
138,756

Long-term liabilities
 
 
 
Long-term debt
$
141,418

 
$
143,224

Warranty
11,675

 
12,337

Deferred warranty income
12,387

 
12,519

Other liabilities
15,233

 
15,064

Pension
30,816

 
32,426

Total long-term liabilities
$
211,529

 
$
215,570

Guarantees, commitments and contingencies (Note 6)

 

Stockholders' deficit
 
 
 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 400,000 issued with liquidation preference of $40,000 at December 30, 2017 and September 30, 2017
$
40,000

 
$
40,000

Common stock, $0.0001 par value, 100,000,000 shares authorized, 23,914,310 and 23,739,344 issued and outstanding at December 30, 2017 and September 30, 2017, respectively
2

 
2

Additional paid-in capital
45,888

 
45,418

Accumulated deficit
(107,894
)
 
(100,055
)
Accumulated other comprehensive loss
(43,312
)
 
(43,875
)
Total stockholders' deficit
$
(65,316
)
 
$
(58,510
)
Total liabilities and stockholders' deficit
$
248,837

 
$
295,816


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 except for share data)
December 30, 2017
 
December 31, 2016
Net sales
$
162,549

 
$
136,660

Cost of goods sold
141,901

 
118,462

Gross profit
$
20,648

 
$
18,198

Operating expenses
 
 
 
Selling, general and administrative expenses
25,918

 
18,192

Operating (loss) profit
$
(5,270
)
 
$
6

Interest expense
(1,452
)
 
(2,688
)
Interest income
15

 
7

Other income (expense), net
170

 
(127
)
Loss on debt extinguishment
—

 
(10,142
)
Loss before income taxes
$
(6,537
)
 
$
(12,944
)
Income tax (expense) benefit
(1,352
)
 
3,672

Equity in net income of non-consolidated affiliate
50

 
749

Net loss
$
(7,839
)
 
$
(8,523
)
 
 
 
 
Earnings per share:
 
 
 
Net loss (from above)
$
(7,839
)
 
$
(8,523
)
Less: preferred stock dividends
770

 
953

Net loss available to common stockholders
$
(8,609
)
 
$
(9,476
)
 
 
 
 
Basic weighted average shares outstanding
23,924,045

 
22,596,314

Diluted weighted average shares outstanding
23,924,045

 
22,596,314

 
 
 
 
Basic loss per share
$
(0.36
)
 
$
(0.42
)
Diluted loss per share
$
(0.36
)
 
$
(0.42
)
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)
December 30, 2017
 
December 31, 2016
Net loss
$
(7,839
)
 
$
(8,523
)
Other comprehensive income, net of tax
 
 
 
Net change in defined benefit pension plan
563

 
1,006

Net unrealized gain on cash flow hedges
—

 
149

Total other comprehensive income
$
563

 
$
1,155

Comprehensive loss
$
(7,276
)
 
$
(7,368
)

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 30, 2017
 
December 31, 2016
Cash flows from operating activities
 
 
 
Net loss
$
(7,839
)
 
$
(8,523
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,097

 
2,023

Amortization of debt costs
194

 
514

Share-based compensation
624

 
—

Equity in net income of affiliate
(50
)
 
(749
)
Deferred taxes
1,155

 
(3,875
)
Amortization of deferred actuarial pension losses
880

 
1,573

Loss on debt extinguishment
—

 
10,142

Changes in assets and liabilities:
 
 
 
Accounts receivable
3,869

 
1,363

Inventories
1,823

 
(18,059
)
Other assets
1,432

 
(23
)
Accounts payable
(26,285
)
 
(10,831
)
Accrued expenses, pension and other liabilities
(11,708
)
 
(5,761
)
Total adjustments
$
(25,969
)
 
$
(23,683
)
Total cash used in operating activities
$
(33,808
)
 
$
(32,206
)
Cash flows from investing activities
 
 
 
Cash paid for fixed assets
(3,449
)
 
(2,956
)
Total cash used in investing activities
$
(3,449
)
 
$
(2,956
)
Cash flows from financing activities
 
 
 
Repayments under the former senior term loan
$
—

 
$
(161,500
)
Borrowings under the new term loan
—

 
156,887

Repayments under the new term loan
(2,000
)
 
—

Cash paid for capital leases
(38
)
 
(42
)
Cash paid for debt issuance costs
—

 
(210
)
Cash paid to extinguish debt
—

 
(507
)
Payment of dividends on preferred stock
(770
)
 
(953
)
Cash paid for employee taxes on stock option exercises
—

 
(613
)
Proceeds from exercises of warrants
3,640

 
2,790

Common stock repurchases under the share repurchase program
(2,983
)
 
—

Total cash used in financing activities
$
(2,151
)
 
$
(4,148
)
Change in cash and cash equivalents
(39,408
)
 
(39,310
)
Cash and cash equivalents, beginning of period
62,616

 
52,309

Cash and cash equivalents, end of period
$
23,208

 
$
12,999

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest paid, net of interest received
1,289

 
1,866

Income tax paid, net of tax refunds
25

 
503

Non-cash Investing and Financing activities
 
 
 
Change in accounts payable for capital additions to property, plant and equipment
(377
)
 
(1,866
)
Cashless exercise of stock options
—

 
2,900

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

BLUE BIRD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

Blue Bird Body Company, a wholly-owned subsidiary of Blue Bird Corporation, was incorporated in 1958 and has manufactured, assembled and sold school buses to a variety of municipal, federal and commercial customers since 1927. The majority of Blue Bird’s sales are made to an independent distributor network, which in turn sells buses to ultimate end users. We are headquartered in Macon, Georgia. References in these notes to financial statements to “Blue Bird”, the “Company,” “we,” “our,” or “us” refer to Blue Bird Corporation and its wholly-owned subsidiaries, unless the context specifically indicates otherwise.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Article 8 of Regulation S-X. The Company’s fiscal year ends on the Saturday closest to September 30 with its quarters consisting of thirteen weeks in most years. In fiscal year 2018, there is a total of 52 weeks. For fiscal years 2018 and 2017, the first quarters 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 generally accepted accounting principles for complete financial statements.

The Condensed Consolidated Balance Sheet data as of September 30, 2017 was derived from the Company’s audited financial statements but do not include all disclosures required by generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the fiscal year ended September 30, 2017 as set forth in the Company's 2017 Form 10-K filed on December 8, 2017.

Use of Estimates and Assumptions

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions. At the date of the financial statements, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, and during the reporting period, these estimates and assumptions affect the reported amounts of revenues and expenses. For example, significant management judgments are required in determining excess, obsolete, or unsalable inventory, allowance for doubtful accounts, potential impairment of long-lived assets, goodwill and intangibles, the accounting for self-insurance reserves, warranty reserves, pension obligations, income taxes, environmental liabilities and contingencies. Future events 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 Recent Accounting Standards

The Company’s significant accounting policies are described in the Company’s 2017 Form 10-K, filed with the SEC on December 8, 2017. 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 30, 2017.

Recently Issued Accounting Standards

We believe that no new accounting guidance was issued during the three months ended December 30, 2017 that is relevant to our financial statements.

6


Recently Adopted Accounting Standards

In the first quarter of fiscal 2018, the Company adopted ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires inventory to be measured at the lower of cost or net realizable value. The adoption of this pronouncement did not have any impact on any component of our financial statements.

3. Supplemental Financial Information

Inventory

The Company values inventories at the lower of cost or net realizable value. The Company uses a standard costing methodology, which approximates cost on a first-in, first-out basis. The Company reviews the standard costs of raw materials, work-in-process and finished goods inventory on a periodic basis to ensure that its inventories approximate current actual costs. Manufacturing cost includes raw materials, direct labor and manufacturing overhead. The following table presents the components of inventory at the dates indicated:
(in thousands of dollars)
December 30, 2017
 
September 30, 2017
Raw materials
$
60,788

 
$
54,379

Work in process
8,570

 
14,660

Finished goods
4,974

 
7,116

Total inventory
$
74,332

 
$
76,155


Product Warranties

The Company’s products are generally warranted against defects in material and workmanship for a period of one to five years. A provision for estimated warranty costs is recorded at the time the unit is sold. The methodology to determine the warranty reserve calculates average expected warranty claims using warranty claims by body type, by month, over the life of the bus, which is then multiplied by remaining months under warranty, by warranty type. Management believes the methodology provides an accurate reserve estimate. Actual claims incurred could differ from the original estimates, requiring future adjustments.

The following table reflects activity in accrued warranty cost (current and long-term portion combined) for the periods presented:
 
Three Months Ended
(in thousands of dollars)
December 30, 2017
 
December 31, 2016
Balance at beginning of period
$
20,910

 
$
19,444

Add current period accruals
1,959

 
1,453

Current period reductions of accrual
(3,081
)
 
(2,579
)
Balance at end of period
$
19,788

 
$
18,318

The Company also sells extended warranties related to its products. Revenue related to these contracts is recognized on a straight-line basis over the contract period and costs thereunder are expensed as incurred. All warranty expenses are recorded in the cost of goods sold line in the Condensed Consolidated Statements of Operations. The methodology to determine the short-term extended warranty income reserve is based on twelve months of the remaining warranty value for each effective extended warranty at the balance sheet date.
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 30, 2017
 
December 31, 2016
Balance at beginning of period
$
19,295

 
$
16,187

Add current period deferred income
2,063

 
1,129

Current period recognition of income
(2,150
)
 
(1,507
)
Balance at end of period
$
19,208

 
$
15,809


7


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 30, 2017
 
September 30, 2017
Current portion
$
3,465

 
$
3,194

Long-term portion
2,199

 
2,251

Total accrued self-insurance
$
5,664

 
$
5,445


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 represent costs billed to customers and are included in net sales. Shipping and handling costs incurred are included in cost of goods sold. Shipping and handling revenues were $3.5 million and $3.3 million for the three months ended December 30, 2017 and December 31, 2016, respectively. The related cost of goods sold was $2.8 million and $2.8 million for the three months ended December 30, 2017 and December 31, 2016, respectively.


Pension Expense

Components of net periodic pension benefit cost were as follows for the periods presented:
 
Three Months Ended
(in thousands of dollars)
December 30, 2017
 
December 31, 2016
Interest cost
$
1,357

 
$
1,266

Expected return on plan assets
(1,776
)
 
(1,590
)
Amortization of prior loss
880

 
1,573

Net periodic benefit cost
$
461

 
$
1,249

Amortization of prior loss, recognized in other comprehensive income
880

 
1,573

Total recognized in net periodic pension benefit cost and other comprehensive income
$
(419
)
 
$
(324
)

Warrants

At December 30, 2017, there were a total of 4,292,100 warrants outstanding to purchase 2,146,050 shares of our Common Stock.

4. Debt

Debt consisted of the following at the dates indicated:
(in thousands of dollars)
December 30, 2017
 
September 30, 2017
2021 term loan, net of deferred financing costs of $2,582 and $2,776, respectively
$
149,418

 
$
151,224

Less: Current portion of long-term debt
8,000

 
8,000

Long-term debt, net of current portion
$
141,418

 
$
143,224


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 30, 2017 and September 30, 2017, $152.0 million and $154.0 million, respectively, were outstanding on the term loans.

8


At December 30, 2017 and September 30, 2017, the stated interest rates on the term loans were 3.1% and 2.8%, respectively. At December 30, 2017 and September 30, 2017, the weighted-average annual effective interest rates for the term loans were 3.6% and 4.5%, respectively, which included amortization of the deferred financing costs.

No borrowings were outstanding on the Revolving Credit Facility at December 30, 2017; however, since $7.7 million of Letters of Credit were outstanding on December 30, 2017, the Company would have been able to borrow $67.3 million on the revolving line of credit.

Interest expense on all indebtedness was $1.5 million and $2.7 million for the three months ended December 30, 2017 and December 31, 2016, respectively.

The schedules of remaining principal maturities for the term loan for the next five fiscal years are as follows:
(in thousands of dollars)
Year
 
Principal Payments
2018
 
$
6,000

2019
 
8,000

2020
 
11,000

2021
 
15,000

2022
 
112,000

Total remaining principal payments
 
$
152,000


5. Income Taxes

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the forecast pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily the United States.

Due mainly to $2.4 million in period expense to reflect the newly enacted U.S. tax reform, the effective tax rate for the three month period ended December 30, 2017 was (20.7)%, which differs significantly from our transitional 2018 statutory federal income tax rate of 24.5%. The tax reform adjustments include resetting our deferred tax accounts to the new rates as well as $1.1 million of expense from increasing the carrying value of our uncertain tax positions, and $0.5 million of additional valuation allowance for our foreign tax credit carryforward. Without these adjustments, our effective tax rate for this period would have been approximately 17%. This tax rate differs from our transitional 2018 statutory federal income tax rate of 24.5% mainly due to normal tax rate benefit items, such as the domestic production activities deduction and state tax credits, which were partially offset by accrued interest and penalties on uncertain tax positions.

The effective tax rate for the three month period ended December 31, 2016 was 28.4% and differed from the statutory federal income tax rate of 35%, mainly due to normal tax rate benefit items, such as the domestic production activities deduction and state tax credits. The benefit was partially offset by discrete items, the largest being interest and penalties on uncertain tax positions. 
 
6. Guarantees, Commitments and Contingencies

Litigation

At December 30, 2017, 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 environmental matters will not have a material adverse effect on the Company’s financial statements.

9


7. Segment Information

We manage our business in two operating segments, which are also our reportable segments. The Bus segment includes the manufacturing and assembly of buses to be sold to a variety of customers across the United States, Canada and in international markets. The Parts segment consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. Financial information is reported on the basis that it is used internally by the chief operating decision maker (the “CODM”) in evaluating segment performance and deciding how to allocate resources. 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. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources. The tables below present segment net sales and gross profit for the periods presented:

Net sales
 
Three Months Ended
(in thousands of dollars)
December 30, 2017
 
December 31, 2016
Bus
$
148,098

 
$
122,406

Parts
14,451

 
14,254

Segment net sales
$
162,549

 
$
136,660

 
Gross profit
 
Three Months Ended
(in thousands of dollars)
December 30, 2017
 
December 31, 2016
Bus
$
15,377

 
$
13,162

Parts
5,271

 
5,036

Segment gross profit
$
20,648

 
$
18,198


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 30, 2017
 
December 31, 2016
Segment gross profit
$
20,648

 
$
18,198

Adjustments:
 
 
 
Selling, general and administrative expenses
(25,918
)
 
(18,192
)
Interest expense
(1,452
)
 
(2,688
)
Interest income
15

 
7

Other income (expense), net
170

 
(127
)
Loss on debt extinguishment
—

 
(10,142
)
Loss before income taxes
$
(6,537
)
 
$
(12,944
)

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 30, 2017
 
December 31, 2016
United States
$
154,648

 
$
129,746

Canada
4,850

 
4,865

Rest of world
3,051

 
2,049

Total net sales
$
162,549

 
$
136,660



10

8. Earnings Per Share

We incurred a net loss for the three months ended December 30, 2017 and December 31, 2016. As a result, basic and diluted shares outstanding are equal to each other for those periods due to the exclusion of potentially dilutive shares from the calculation of earnings per share as the effect would be anti-dilutive. For the three months ended December 30, 2017 and December 31, 2016, potentially dilutive shares excluded from the calculation were 4,699,157 and 5,779,368, respectively.

9. Share-Based Compensation

Restricted Stock Awards

The following table summarizes the Company's restricted stock ("RSAs") and restricted stock units ("RSUs") award activity for the period presented:
 
 
Three Months Ended
 
 
December 30, 2017
Restricted Stock Activity
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Balance, beginning of period
 
75,590

 
$
15.83

Granted
 
107,720

 
18.10

Balance, end of period
 
183,310

 
17.16


Compensation expense for restricted stock awards, recognized in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations, was $0.4 million with associated tax benefits of $0.1 million for the three months ended December 30, 2017. At December 30, 2017, unrecognized compensation cost related to restricted stock awards totaled $1.9 million and is expected to be recognized over a weighted-average period of eleven months.

Stock Option Awards

The following table summarizes the Company's stock option activity for the period presented:
 
 
Three Months Ended
 
 
December 30, 2017
Stock Option Award Activity
 
Number of Options
 
Weighted Average Exercise Price per Share ($)
Outstanding options, beginning of period
 
623,962

 
$
11.15

Granted
 
215,530

 
16.83

Outstanding options, end of period (1)
 
839,492

 
12.55

Fully vested and exercisable options, end of period (2)
 
500,601

 
10.07

 
(1) Stock options outstanding at the end of the period had an aggregate intrinsic value totaling $6.4 million.
(2) Fully vested and exercisable options at the end of the period had an aggregate intrinsic value totaling $4.9 million with a weighted average contractual remaining term of 7.3 years.

Compensation expense for stock option awards, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations, was $0.2 million with associated tax benefits of $0.1 million for the three months ended December 30, 2017. At December 30, 2017, unrecognized compensation cost related to stock option awards totaled $1.3 million and is expected to be recognized over a weighted-average period of twelve months.

11



The fair value of each option award at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions and resulting grant-date fair value during the period presented:
 
 
Three Months Ended
 
 
December 30, 2017
Expected volatility
 
29.2
%
Expected dividend yield
 
0
%
Risk-free interest rate
 
2.16
%
Expected term (in years)
 
5.0 - 5.5

Weighted-average grant-date fair value
 
$
6.15


10. Accumulated Other Comprehensive Income

The following table provides information on changes in accumulated other comprehensive income (“AOCI”) for the periods presented:
 
 
Three Months Ended
(in thousands)
 
Defined Benefit Pension Plan
 
Cash Flow Hedges (Effective Portion)
 
Total AOCI
December 30, 2017
 
 
 
 
 
 
Balance, beginning of period
 
$
(43,875
)
 
$
—

 
$
(43,875
)
Other comprehensive income, gross
 
—

 
—

 
—

Amounts reclassified from other comprehensive income and included in earnings
 
880

 
—

 
880

Total other comprehensive income, before taxes
 
880

 
—

 
880

Income tax expense
 
(317
)
 
—

 
(317
)
Balance, end of period
 
$
(43,312
)
 
$
—

 
$
(43,312
)
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
Balance, beginning of period
 
$
(58,878
)
 
$
(13
)
 
$
(58,891
)
Other comprehensive income, gross
 
—

 
464

 
464

Amounts reclassified from other comprehensive income and included in earnings
 
1,573

 
(235
)
 
1,338

Total other comprehensive income, before taxes
 
1,573

 
229

 
1,802

Income tax expense
 
(567
)
 
(80
)
 
(647
)
Balance, end of period
 
$
(57,872
)
 
$
136

 
$
(57,736
)


12

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited financial statements for the three months ended December 30, 2017 and December 31, 2016 and related notes appearing elsewhere in this Report. Our actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.

We refer to the fiscal year ended September 30, 2017 as “fiscal 2017”. We refer to the quarter ended December 30, 2017 as the “first quarter of fiscal 2018” and we refer to the quarter ended December 31, 2016 as the “first quarter of fiscal 2017”. There were 13 weeks in the first quarters of both fiscal 2018 and fiscal 2017.

Introductory Note

On February 24, 2015, the Company consummated a business combination (the “Business Combination”), pursuant to which the Company acquired all of the outstanding capital stock of School Bus Holdings Inc. (“School Bus Holdings” or “SBH”) from The Traxis Group, B.V. (the “Seller”), in accordance with the purchase agreement, dated as of September 21, 2014, by and among the Company, the Seller and, solely for purposes of Section 10.01(a) thereof, Hennessy Capital Partners I LLC (the “HCAC Sponsor”), as amended on February 10, 2015 and February 18, 2015 (as so amended, the “Purchase Agreement”). Pursuant to the Purchase Agreement, the total purchase price was paid in a combination of cash in the amount of $100.0 million and 12,000,000 shares of the Company's Common Stock valued at $120.0 million.

In connection with the closing of the Business Combination, the Company changed its name from Hennessy Capital Acquisition Corp. to Blue Bird Corporation. Unless expressly stated otherwise in this Report, Blue Bird Corporation shall be referred to as “Blue Bird” or the “Company,” and includes its consolidated subsidiaries.

Pursuant to, and subject to the terms of, a Purchase and Sale Agreement, dated as of May 26, 2016 (the “Purchase and Sale Agreement”), by and among Seller, ASP BB Holdings LLC, a Delaware limited liability company (“ASP”), and the Company, Seller agreed to sell and ASP agreed to purchase all of the 12,000,000 shares of Common Stock of the Company owned by Seller (the “Transaction Shares”). Subject to the terms and conditions set forth in the Purchase and Sale Agreement, ASP acquired 7,000,000 Transaction Shares at an initial closing on June 3, 2016 for an amount in cash equal to $10.10 per share and 5,000,000 Transaction Shares at a second closing on June 8, 2016 for an amount in cash equal to $11.00 per share, for an aggregate purchase price of $125.7 million. There were no proceeds to the Company from this transaction.

Executive Overview

Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications, Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs. In addition, Blue Bird is the market leader in alternative diesel fuel applications with its propane-powered, gasoline-powered, and compressed natural gas (“CNG”)-powered school buses.

Blue Bird sells its buses and aftermarket parts through an extensive network of United States and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and D school buses. Blue Bird also sells directly to major fleet operators, the United States government, state governments and authorized dealers in a number of foreign countries.


13

Critical Accounting Policies and Estimates, Recent Accounting Pronouncements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2017 Form 10-K, filed with the SEC on December 8, 2017 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 30, 2017.

Recent Accounting Pronouncements

See discussion in Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements.

Factors Affecting Our Revenues

Our revenues are driven primarily by the following factors:

•
Property tax revenues. Property tax revenues are one of the major sources of funding for new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate.
•
Student enrollment. Increases or decreases in the number of school bus riders have a direct impact on school district demand.
•
Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period.
•
Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district.
•
Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that govern the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.
•
Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year.
•
Seasonality. Our sales are subject to seasonal variation based on the school calendar. The peak season has historically been during our third and fourth fiscal quarters. Sales during the third and fourth fiscal quarters are typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. There are, however, variations in the seasonal demands from year to year depending in large part upon municipal budgets, distinct replacement cycles and student enrollment. This seasonality and annual variations of this seasonality could impact the ability to compare results between fiscal periods.

14


Factors Affecting Our Expenses and Other Items

Our expenses and other line items in our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors:

•
Cost of goods sold. The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense and overhead. Our cost of goods sold may vary from period to period in part due to changes in sales volume and in part due to efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, the productivity of plant labor, delays in receiving materials and other logistical problems and the impact of overhead items such as utilities.
•
Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing and information technology services, as well as other administrative matters and functions. In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel.

•
Interest expense. Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt.
•
Income taxes. We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken.
•
Equity in net income of non-consolidated affiliate. We include in this line item our share of income or loss from our investment in Micro Bird, our unconsolidated 50/50 Canadian joint venture.

Key Non-GAAP Financial Measures We Use to Evaluate Our Performance

This filing includes the following non-GAAP financial measures “Adjusted EBITDA”, “Adjusted EBITDA Margin”, and “Free Cash Flow” because management views these metrics as a useful way to look at the performance of our operations between periods and to exclude decisions on capital investment and financing that might otherwise impact the review of profitability of the business based on present market conditions.

Adjusted EBITDA is defined as net income income prior to discontinued operations income or loss, interest income, interest expense, income taxes, and depreciation, amortization, and disposals, as adjusted to add back certain charges that we may record each year, such as stock-compensation expense and transaction costs, as these expenses are not considered an indicator of ongoing company performance. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures of performance defined in accordance with GAAP. The measures are used as a supplement to GAAP results in evaluating certain aspects of our business, as described below.

We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful to investors in evaluating our performance because the measures consider the performance of our operations, excluding decisions made with respect to capital investment, financing, and other expenses. We believe that the non-GAAP metrics offer additional financial metrics that, when coupled with the GAAP results and the reconciliation to GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business.

Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income as an indicator of our performance or as alternatives to any other measure prescribed by GAAP as there are limitations to using such non-GAAP measures. Although we believe the non-GAAP measures may enhance the evaluation of our operating performance based on recent revenue generation and product/overhead cost control because they exclude the impact of prior decisions made about capital investment, financing, and other expenses, (i) other companies in Blue Bird’s industry may define Adjusted EBITDA and Adjusted EBITDA margin differently than we do and, as a result, they may not be comparable to similarly titled measures used by other companies in Blue Bird’s industry, and (ii) Adjusted EBITDA and Adjusted EBITDA margin exclude certain financial information that some may consider important in evaluating our performance.

We compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and Adjusted EBITDA margin and GAAP results, including providing a reconciliation to GAAP results, to enable investors to perform their own analysis of our operating results.

15


Our measure of “Free Cash Flow” is used in addition to and in conjunction with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. We strongly encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

We define free cash flow as net cash provided by/used in continuing operations minus cash paid for fixed assets. We use free cash flow, and ratios based on the free cash flow, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flow since purchases of fixed assets and intangible assets are a necessary component of ongoing operations. In limited circumstances in which proceeds from sales of fixed or intangible assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate being a net seller of fixed or intangible assets, we expect free cash flow to be less than operating cash flows.

Our Segments

We manage our business in two operating segments, which are also our reportable segments: (i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties; and (ii) the Parts segment, which includes the sales of replacement bus parts. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit.


16

Consolidated Results of Operations for the Three Months Ended December 30, 2017 and December 31, 2016:
 
 
Three Months Ended
(in thousands of dollars)
 
December 30, 2017
 
December 31, 2016
Net sales
 
$
162,549

 
$
136,660

Cost of goods sold
 
141,901

 
118,462

Gross profit
 
$
20,648

 
$
18,198

Operating expenses
 
 
 
 
Selling, general and administrative expenses
 
25,918

 
18,192

Operating (loss) profit
 
$
(5,270
)
 
$
6

Interest expense
 
(1,452
)
 
(2,688
)
Interest income
 
15

 
7

Other income (expense), net
 
170

 
(127
)
Loss on debt extinguishment
 
—

 
(10,142
)
Loss before income taxes
 
$
(6,537
)
 
$
(12,944
)
Income tax (expense) benefit
 
(1,352
)
 
3,672

Equity in net income of non-consolidated affiliate
 
50

 
749

Net loss
 
$
(7,839
)
 
$
(8,523
)
Other financial data:
 
 
 
 
Adjusted EBITDA
 
$
5,296

 
$
2,618

Adjusted EBITDA margin
 
3.3
%
 
1.9
%

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 30, 2017
 
December 31, 2016
Bus
 
$
148,098

 
$
122,406

Parts
 
14,451

 
14,254

Total
 
$
162,549

 
$
136,660

 
 
 
 
 
Gross Profit by Segment
 
 
 
 
Bus
 
$
15,377

 
$
13,162

Parts
 
5,271

 
5,036

Total
 
$
20,648

 
$
18,198


Net sales. Net sales were $162.5 million for the first quarter of fiscal 2018, an increase of $25.9 million, or 18.9%, compared to $136.7 million for the first quarter of fiscal 2017

Bus sales increased $25.7 million, or 21.0%, reflecting an increase in units booked, which were 1,705 units for the first quarter of fiscal 2018 compared to 1,493 units for the first quarter of fiscal 2017. The average net sales price per unit for the first quarter of fiscal 2018 was 5.9% higher than the price per unit for the first quarter of fiscal 2017. This increase in unit price mainly reflects changes in product and customer mix.

Parts sales increased $0.2 million, or 1.4%, for the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017, primarily due to incentive and shipping programs launched in the previous fiscal year.

Cost of goods sold. Total cost of goods sold was $141.9 million for the first quarter of fiscal 2018, an increase of $23.4 million, or 19.8%, compared to $118.5 million for the first quarter of fiscal 2017. As a percentage of net sales, total cost of goods sold increased from 86.7% to 87.3%.




17

Bus segment cost of goods sold increased $23.5 million, or 21.5%, for the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. The average cost of good sold per unit for the first quarter of fiscal 2018 was 6.4% higher compared to the first quarter of fiscal 2017 due to changes in product and customer mix.

Parts segment cost of goods sold for the first quarter of fiscal 2018 remained relatively flat compared to the first quarter of fiscal 2017.

Operating (loss) profit. Operating loss was $5.3 million for the first quarter of fiscal 2018, a decrease of $5.3 million, compared to an operating profit of $0.0 million for the first quarter of fiscal 2017. Profitability was negatively impacted by an increase of $7.7 million in selling, general and administrative expenses driven by operational transformation initiatives and product redesign costs, which was partially offset by an increase of $2.5 million in gross profit.

Interest expense. Interest expense was $1.5 million for the first quarter of fiscal 2018, a decrease of $1.2 million, or 46.0%, compared to $2.7 million for the first quarter of fiscal 2017. The decrease was primarily attributed to lower average borrowing levels as well as a decrease in the interest rate resulting from the new credit facility we entered into in December 2016.

Income taxes. Income tax expense was $1.4 million for the first quarter of fiscal 2018, compared to income tax benefit of $3.7 million for the first quarter of fiscal 2017. The difference, driven primarily by a negative effective tax rate in the current quarter, is explained below.

The Tax Cuts and Jobs Act was enacted on December 22, 2017. This legislation reduces the U.S. federal corporate tax rate from 35% to 21%. Since we are a fiscal year taxpayer our tax rate reduction is pro-rated. Our statutory federal tax rate for fiscal 2018 is approximately 24.5%, and we will fully apply the new 21% statutory rate in 2019. This new legislation will also require companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, such as our joint venture investment in Micro Bird.

We provided $2.4 million of expense in our December 30, 2017 interim financial statements related to the tax reform, and this was included as a component of income tax expense. We believe this to be a reasonable estimate of the effects of this new law on our existing deferred tax balances and the one-time transition tax, in accordance with applicable U.S. GAAP.

Along with remeasuring our deferred tax balances to the new tax rate, the $2.4 million net tax reform adjustment amount includes $1.1 million in expense related to our tax liability for uncertain tax positions including the associated accrued interest. Our gross liability for this remains the same. We also had to reassess our ability to realize a deferred tax benefit for foreign tax credit carryforwards, as any future distributions from Micro Bird will not be taxable pursuant to the new legislation. Accordingly, we have recorded a valuation allowance against $0.5 million of our foreign tax credit carryforward in this period.

These estimates may be revised during the year, based on new information. In particular, the IRS is expected to issue further guidance regarding the one-time transition tax for foreign subsidiaries that may change our estimate, and we have further analysis and studies that will need to be completed.

We estimate an effective tax rate for fiscal 2018 of between 25%-30%, excluding one-time impacts for implementing the new legislation.

Due mainly to $2.4 million in period expense to reflect the newly enacted U.S. tax reform discussed above, the effective tax rate for the three month period ended December 30, 2017 was (20.7)%, which differs significantly from our transitional 2018 statutory federal income tax rate of 24.5%. The tax reform adjustments include resetting our deferred tax accounts to the new rates as well as $1.1 million of expense from increasing the carrying value of our uncertain tax positions, and $0.5 million of additional valuation allowance for our foreign tax credit carryforward. Without these adjustments, our effective tax for this period would have been approximately 17%. This tax rate differs from our transitional 2018 statutory federal income tax rate of 24.5% mainly due to normal tax rate benefit items, such as the domestic production activities deduction and state tax credits, which were partially offset by accrued interest and penalties on uncertain tax positions.

Adjusted EBITDA. Adjusted EBITDA was $5.3 million, or 3.3% of net sales, for the first quarter of fiscal 2018, an increase of $2.7 million, or 102.3%, compared to $2.6 million, or 1.9% of net sales, for the first quarter of fiscal 2017. The increase in adjusted EBITDA was primarily the result of increased gross profit.

18


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 30, 2017
 
December 31, 2016
Net loss
$
(7,839
)
 
$
(8,523
)
Adjustments:
 
 
 
Discontinued operations (income) loss
(87
)
 
127

Interest expense, net
1,437

 
2,681

Income tax expense (benefit)
1,352

 
(3,672
)
Depreciation, amortization, and disposals
2,111

 
2,037

Loss on debt extinguishment
—

 
10,142

Business combination expenses
—

 
(174
)
Operational transformation initiatives
6,958

 
—

Share-based compensation
624

 
—

Product redesign initiatives
740

 
—

Adjusted EBITDA
$
5,296

 
$
2,618

Adjusted EBITDA margin (percentage of net sales)
3.3
%
 
1.9
%





19

Liquidity and Capital Resources

Background. The Company’s primary sources of liquidity are cash generated from its operations, available cash and borrowings under its credit facility. At December 30, 2017, the Company had $23.2 million of available cash (net of outstanding checks) and $67.3 million of additional borrowings available under the revolving line of credit portion of its secured credit facility. The Company’s revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.

Indebtedness. On December 12, 2016 (the “Closing Date”), Blue Bird Body Company as the borrower (the "Borrower"), a wholly-owned subsidiary of the Company, executed a $235.0 million five-year credit agreement provided by Bank of Montreal, which acts as the administrative agent and an issuing bank, Fifth Third Bank, as co-syndication agent and an issuing bank, and Regions Bank, as Co-Syndication Agent, together with other lenders (the "Credit Agreement").

The credit facility provided for under the Credit Agreement consists of a term loan facility in an aggregate initial principal amount of $160.0 million (the “Term Loan Facility”) and a revolving credit facility with aggregate commitments of $75.0 million. The revolving credit facility includes a $15.0 million letter of credit sub-facility and $5.0 million swingline sub-facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, each a “Credit Facility” and collectively, the “Credit Facilities”). The borrowings under the Term Loan Facility, which were made at the Closing Date, may not be re-borrowed once they are repaid. The borrowings under the Revolving Credit Facility may be repaid and reborrowed from time to time at our election.

The Term Loan Facility and the Revolving Credit Facility each mature on December 12, 2021, which is the fifth anniversary of the effective date of the Credit Agreement. The interest rate on the Term Loan Facility is (i) from the Closing Date until April 1, 2017, an election of either base rate plus 1 point or LIBOR plus 2 points and (ii) commencing with the fiscal quarter ending on April 1, 2017 and thereafter, dependent on the Total Net Leverage Ratio (as defined below) of the Company, an election of either base rate or LIBOR pursuant to the table below:
Level
 
Total Net Leverage Ratio
 
ABR Loans
 
Eurodollar Loans
I
 
Less than 2.00x
 
0.75%
 
1.75%
II
 
Greater than or equal to 2.00x and less than 2.50x
 
1.00%
 
2.00%
III
 
Greater than or equal to 2.50x and less than 3.00x
 
1.25%
 
2.25%
IV
 
Greater than or equal to 3.00x
 
1.50%
 
2.50%

Under the Credit Agreement, the principal of the initial Term Loan Facility must be paid in quarterly installments on the last day of each fiscal quarter, in an amount equal to (i) $2.0 million per quarter beginning on the last day of the Company's second fiscal quarter in 2017 through the last day of the Company's first fiscal quarter in 2020, (ii) $3.0 million beginning on the last day of the second fiscal quarter of the Company in 2020 through the last day of the first fiscal quarter of the Company in 2021, and (iii) $4.0 million beginning on the last day of the second fiscal quarter of the Company in 2021 through the last day of the fourth fiscal quarter of the Company in 2021, with the remaining principal amount due at maturity. The loans under the Credit Facility may be prepaid without penalty or premium. Certain mandatory prepayments in respect of the outstanding loans or the term loans, as applicable, are required, including prepayments from the proceeds of certain dispositions and the incurrence of certain debt obligations, as well as prepayments based on the annual excess cash flow of the Company and its subsidiaries.

The obligations under the Credit Agreement and the related loan documents (including without limitation, the borrowings under the Credit Facilities and obligations in respect of certain cash management and hedging obligations owing to the agents, the lenders or their affiliates), are, in each case, secured by a lien on and security interest in substantially all of the assets of the Company and its subsidiaries including the Borrower, with certain exclusions as set forth in a Collateral Agreement entered into on the Closing Date.

Up to $75.0 million of additional term loans and/or revolving credit commitments may be incurred under the Credit Agreement (the “Incremental Facility”), subject to certain limitations as set forth in the Credit Agreement. The Incremental Facility is not a committed facility, and would require further commitments from the existing lenders or from new lenders.

There are customary events of default under the Credit Agreement and the Credit Agreement contains negative and affirmative covenants affecting the Company and its subsidiaries including the Borrower, with certain exceptions set forth in the Credit Agreement. The negative covenants and restrictions include, among others: limitations on liens, dispositions of assets, consolidations and mergers, loans and investments, indebtedness, transactions with affiliates (including management fees and compensation), dividends, distributions and other restricted payments, change in fiscal year, fundamental changes, amendments to and subordinated indebtedness, restrictive agreements, sale and leaseback transactions and certain permitted acquisitions. Dividends, distributions, and other restricted payments are permitted in certain circumstances is provided under the Credit Agreement, including, among other exceptions, (i) in an amount up to the cumulative available amount of excess free cash flow that is not required to be used to prepay the outstanding loans under the Credit Agreement, subject to certain adjustments (ii) in an amount that would not cause the Total Net Leverage Ratio to exceed 2.75 to 1.00, (iii) to make

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payments under the Certificate of Designations of the Company's outstanding preferred stock in an amount up to the cumulative available amount of excess free cash flow that is not required to be used to prepay the outstanding loans under the Credit Agreement, subject to certain adjustments, and (iv) in an amount not to exceed $15.0 million provided that there is not a continuing default.

The Company must also maintain a Total Net Leverage Ratio, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA (which includes certain add-backs that are not reflected in the definition of Adjusted EBITDA appearing elsewhere in this Report consisting of losses or gains on asset dispositions, and non-cash losses or gains on swap agreements) at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending. The Total Net Leverage Ratio requirements are as follows:
Period 
 
Maximum Total 
Net Leverage Ratio
Closing Date through the third fiscal quarter of the 2017 fiscal year
 
4.00:1.00
Fourth fiscal quarter of the 2017 fiscal year through the first fiscal quarter of the 2019 fiscal year
 
3.75:1.00
Second fiscal quarter of the 2019 fiscal year and thereafter
 
3.50:1.00

At December 30, 2017, the Borrower and the guarantors were in compliance with all covenants in the Credit Agreement.

Short-Term and Long-Term Liquidity Requirements

Our ability to make principal and interest payments on borrowings under the Credit Facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on the current level of operations, we believe that our existing cash balances and expected cash flows from operations will be sufficient to meet our operating requirements for at least the next 12 months.

Seasonality

Our business is highly seasonal. Most school districts seek to buy their new school buses so that they will be available for use on the first day of the school year, typically in mid-August to early September. As a result, our two busiest quarters are our third and fourth fiscal quarters, the latter ending on the Saturday closest to September 30. Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these seasonal patterns. For example, our revenues are typically highest in our third and fourth fiscal quarters. There are, however, variations in the seasonal demands from year to year depending, in part, on large direct sales to major fleet customers for which short-term trade credit is generally offered. Working capital, on the other hand, is typically a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter. We typically conduct planned shutdowns during our first fiscal quarter.



21

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 30, 2017
 
December 31, 2016
Cash and cash equivalents at beginning of period
$
62,616

 
$
52,309

Total cash used in operating activities
(33,808
)
 
(32,206
)
Total cash used in investing activities
(3,449
)
 
(2,956
)
Total cash used in financing activities
(2,151
)
 
(4,148
)
Change in cash and cash equivalents
$
(39,408
)
 
$
(39,310
)
Cash and cash equivalents at end of period
$
23,208

 
$
12,999

Depreciation and amortization
$
2,097

 
$
2,023

Capital expenditures
3,449

 
2,956


Total cash used in operating activities

Cash flows used in operating activities totaled $33.8 million for the three months ended December 30, 2017, as compared with $32.2 million of cash flows used in operating activities for the three months ended December 31, 2016. The $1.6 million decrease was primarily attributed to a decrease in customer deposits.

Total cash used in investing activities

Cash flows used in investing activities totaled $3.4 million for the three months ended December 30, 2017, as compared with $3.0 million of cash flows used in investing activities for the three months ended December 31, 2016. The $0.5 million increase was due primarily to increased spending on manufacturing assets.

Total cash used in financing activities

Cash flows used in financing activities totaled $2.2 million for the three months ended December 30, 2017, as compared with $4.1 million of cash flows used in financing activities for the three months ended December 31, 2016. The $2.0 million decrease in use was primarily attributed to a decrease of $3.3 million in cash paid for principal payments and debt extinguishment costs from the prior year, an increase of $0.9 million in cash received from warrant exercises, and a decrease of $0.6 million in cash paid for employee taxes on stock option exercises. The decreases in cash used were partially offset by $3.0 million in cash used to purchase common stock under the share repurchase program.
 
Free cash flow

Management believes the non-GAAP measurement of free cash flow, defined as net cash used in continuing operations less cash paid for fixed assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business. See “Key Measures We Use to Evaluate Our Performance”. The following table sets forth the calculation of free cash flow for the periods presented:
 
Three Months Ended
(in thousands of dollars)
December 30, 2017
 
December 31, 2016
Net cash used in continuing operations
$
(33,808
)
 
$
(32,206
)
Cash paid for fixed assets
(3,449
)
 
(2,956
)
Free cash flow
$
(37,257
)
 
$
(35,162
)

Free cash flow for the three months ended December 30, 2017 was $2.1 million lower than the three months ended December 31, 2016, primarily attributed to a decrease in customer deposits.



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Off-Balance Sheet Arrangements

We lease office buildings and fork lifts for use in our operations on an operating lease basis.

We had outstanding letters of credit totaling $7.7 million at December 30, 2017, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

At December 30, 2017, there were 2.1 million shares of common stock issuable upon exercise of outstanding warrants.


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have not been any material changes to the disclosures about our interest rate risk or commodity risk market risk factors previously disclosed in Part II, Item 7A of the Company’s 2017 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 Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on their evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 30, 2017.

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 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.







24

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 2017 Form 10-K. Such risk factors are expressly incorporated herein by reference, and could materially affect our business, financial condition, cash flows or future results. The risks described in the 2017 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of Company Common Stock

During the three fiscal months ended December 30, 2017, the Company executed purchases for 141,577 shares of its common stock at an average purchase price per share of $18.93, under the share repurchase program which was authorized in August 2017 by our Board of Directors. The repurchase program allows the Company to spend up to $50.0 million to repurchase, in open market or private transactions, outstanding common stock, series A convertible preferred stock, and/or warrants over a 24 month period ending August 2019.

The following table provides information regarding the Company's purchase of common stock during the three fiscal months ended December 30, 2017:
Period by fiscal month
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
Repurchases from October 1, 2017 - October 28, 2017
 
4,200

 
$
19.93

 
4,200

 
$
15,923

Repurchases from October 29, 2017 - November 25, 2017
 
55,100

 
18.97

 
55,100

 
14,875

Repurchases from November 26, 2017 - December 30, 2017
 
82,277

 
18.79

 
82,277

 
13,333

Total
 
141,577

 
 
 
141,577

 
 

Item 6. Exhibits.
        
The following Exhibits are filed with this Report:

Exhibit No.    Description                                                

2.1†

2.2

25

reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K, filed by the registrant with the SEC on February 11, 2015).

2.3

3.1

3.2

3.3

31.1*

31.2*

32.1*

101.INS*^
XBRL Instance Document.

101.SCH*^
XBRL Taxonomy Extension Schema Document.

101.CAL*^
XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*^
XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*^
XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*^
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Filed herewith.

†
The exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Registrant agrees to furnish supplementally a copy of all omitted exhibits and schedules to the Securities and Exchange Commission upon its request.

^
In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.





26

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.



 
Blue Bird Corporation
 
 
 
 
 
 
Dated:
February 7, 2018
 /s/ Philip Horlock
 
 
Philip Horlock
 
 
Chief Executive Officer
 
 
 
Dated:
February 7, 2018
 /s/ Phillip Tighe
 
 
Phillip Tighe
 
 
Chief Financial Officer

                                


27