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Section 1: 10-Q (10-Q)

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 March 30, 2019

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 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 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

At May 3, 2019, 26,455,514 shares of the registrant’s common stock, $0.0001 par value, were outstanding.



BLUE BIRD CORPORATION
FORM 10-Q

TABLE OF CONTENTS

 
 








Special 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 2018 Form 10-K, filed with the SEC on December 12, 2018. 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 2018 Form 10-K, filed with the SEC on December 12, 2018.

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 of dollars, except for share data)
March 30, 2019
 
September 29, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
25,600

 
$
60,260

Accounts receivable, net
8,272

 
24,067

Inventories
125,940

 
57,333

Other current assets
11,624

 
8,183

Total current assets
$
171,436

 
$
149,843

Property, plant and equipment, net
92,485

 
66,054

Goodwill
18,825

 
18,825

Intangible assets, net
56,279

 
55,472

Equity investment in affiliate
11,439

 
11,123

Deferred tax assets
4,494

 
4,437

Other assets
412

 
1,676

Total assets
$
355,370

 
$
307,430

Liabilities and Stockholders' Deficit
 
 
 
Current liabilities
 
 
 
Accounts payable
$
112,886

 
$
95,780

Warranty
8,608

 
9,142

Accrued expenses
28,549

 
21,935

Deferred warranty income
8,169

 
8,159

Other current liabilities
6,023

 
3,941

Current portion of long-term debt
9,900

 
9,900

Total current liabilities
$
174,135

 
$
148,857

Long-term liabilities
 
 
 
Revolving credit facility
$
20,000

 
$

Long-term debt
177,729

 
132,239

Warranty
12,912

 
13,504

Deferred warranty income
14,732

 
15,032

Other liabilities
13,225

 
5,121

Pension
20,227

 
21,013

Total long-term liabilities
$
258,825

 
$
186,909

Guarantees, commitments and contingencies (Note 6)

 

Stockholders' deficit
 
 
 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 and 93,000 issued with liquidation preference of $0 and $9,300 at March 30, 2019 and September 29, 2018, respectively
$

 
$
9,300

Common stock, $0.0001 par value, 100,000,000 shares authorized, 26,440,663 and 27,259,262 shares outstanding at March 30, 2019 and September 29, 2018, respectively
3

 
3

Additional paid-in capital
81,889

 
70,023

Accumulated deficit
(71,842
)
 
(69,235
)
Accumulated other comprehensive loss
(37,379
)
 
(38,427
)
Treasury stock, at cost, 1,782,568 and 0 shares at March 30, 2019 and September 29, 2018, respectively
(50,261
)
 

Total stockholders' deficit
$
(77,590
)
 
$
(28,336
)
Total liabilities and stockholders' deficit
$
355,370

 
$
307,430


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
 
Six Months Ended
(in thousands of dollars except for share data)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Net sales
$
211,642

 
$
216,628

 
$
366,568

 
$
379,177

Cost of goods sold
185,688

 
194,960

 
321,504

 
336,861

Gross profit
$
25,954

 
$
21,668

 
$
45,064

 
$
42,316

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
22,928

 
18,280

 
40,201

 
43,737

Operating profit (loss)
$
3,026

 
$
3,388

 
$
4,863

 
$
(1,421
)
Interest expense
(3,998
)
 
(1,826
)
 
(6,872
)
 
(3,278
)
Interest income

 
2

 
9

 
17

Other (expense) income, net
(275
)
 
559

 
(624
)
 
268

(Loss) income before income taxes
$
(1,247
)
 
$
2,123

 
$
(2,624
)
 
$
(4,414
)
Income tax benefit (expense)
179

 
(471
)
 
415

 
(1,823
)
Equity in net income of non-consolidated affiliate
395

 
184

 
316

 
234

Net (loss) income
$
(673
)
 
$
1,836

 
$
(1,893
)
 
$
(6,003
)
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Net (loss) income (from above)
$
(673
)
 
$
1,836

 
$
(1,893
)
 
$
(6,003
)
Less: preferred stock dividends

 
763

 

 
1,533

Net (loss) income available to common stockholders
$
(673
)
 
$
1,073

 
$
(1,893
)
 
$
(7,536
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
26,595,280

 
23,899,772

 
26,449,072

 
23,911,909

Diluted weighted average shares outstanding
26,595,280

 
25,127,082

 
26,449,072

 
23,911,909

 
 
 
 
 
 
 
 
Basic (loss) earnings per share
$
(0.03
)
 
$
0.04

 
$
(0.07
)
 
$
(0.32
)
Diluted (loss) earnings per share
$
(0.03
)
 
$
0.04

 
$
(0.07
)
 
$
(0.32
)
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) INCOME
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Net (loss) income
$
(673
)
 
$
1,836

 
$
(1,893
)
 
$
(6,003
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
Net change in defined benefit pension plan
524

 
669

 
1,048

 
1,232

Total other comprehensive income
$
524

 
$
669

 
$
1,048

 
$
1,232

Comprehensive (loss) income
$
(149
)
 
$
2,505

 
$
(845
)
 
$
(4,771
)

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)
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
Cash flows from operating activities
 
 
 
Net loss
$
(1,893
)
 
$
(6,003
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
4,844

 
4,173

Non-cash interest expense
2,451

 
384

Share-based compensation
2,045

 
1,510

Equity in net income of affiliate
(316
)
 
(234
)
Loss on disposal of fixed assets
27

 
78

Deferred taxes
83

 
1,098

Amortization of deferred actuarial pension losses
1,379

 
1,760

Foreign currency hedges
109

 
(1,036
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
15,795

 
(2,042
)
Inventories
(68,607
)
 
(29,232
)
Other assets
(3,992
)
 
(335
)
Accounts payable
16,378

 
9,151

Accrued expenses, pension and other liabilities
4,925

 
(12,329
)
Total adjustments
$
(24,879
)
 
$
(27,054
)
Total cash used in operating activities
$
(26,772
)
 
$
(33,057
)
Cash flows from investing activities
 
 
 
Cash paid for fixed and acquired intangible assets
$
(22,706
)
 
$
(7,021
)
Total cash used in investing activities
$
(22,706
)
 
$
(7,021
)
Cash flows from financing activities
 
 
 
Borrowings under the revolving credit facility
$
20,000

 
$

Borrowings under the senior term loan
50,000

 

Repayments under the senior term loan
(4,950
)
 
(4,000
)
Cash paid for capital leases

 
(77
)
Payment of dividends on preferred stock

 
(1,533
)
Cash paid for employee taxes on vested restricted shares and stock option exercises
(602
)
 
(571
)
Proceeds from exercises of warrants
740

 
9,504

Common stock repurchases under share repurchase programs

 
(15,512
)
Tender offer repurchase of common stock and preferred stock
(50,370
)
 

Total cash provided by (used in) financing activities
$
14,818

 
$
(12,189
)
Change in cash and cash equivalents
(34,660
)
 
(52,267
)
Cash and cash equivalents, beginning of period
60,260

 
62,616

Cash and cash equivalents, end of period
$
25,600

 
$
10,349

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest paid, net of interest received
$
5,055

 
$
2,948

Income tax paid, net of tax refunds
2,325

 
3,596

Non-cash investing and financing activities:
 
 
 
Changes in accounts payable for capital additions to property, plant and equipment and other current assets for capitalized intangible assets
$
1,728

 
$
(357
)
Cashless exercise of stock options
42

 
897

Cash receivable for warrant exercises
555

 

Right-of-use assets obtained in exchange for operating lease obligations
8,040

 

Conversion of preferred stock into common stock
9,264

 

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

5


BLUE BIRD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Unaudited)
 
Common Stock
 
Convertible Preferred Stock
 
 
 
 
 
Treasury Stock
 
 
(in thousands of dollars, except for share data)
 Shares
 
Par Value
 
Additional Paid-In-Capital
 
Shares
 
Amount
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Shares
 
Amount
 
Total Stockholders' Deficit
Balance, September 29, 2018
27,259,262

 
$
3

 
$
70,023

 
93,000

 
$
9,300

 
$
(38,427
)
 
$
(69,235
)
 

 
$

 
$
(28,336
)
Adoption of new revenue recognition standard (ASC 606) adjustment

 

 

 

 

 

 
(714
)
 

 

 
(714
)
Warrant exercises
112,635

 

 
1,295

 

 

 

 

 

 

 
1,295

Restricted stock activity
51,195

 

 
(596
)
 

 

 

 

 

 

 
(596
)
Stock option activity
524

 

 
(6
)
 

 

 

 

 

 

 
(6
)
Share-based compensation expense

 

 
1,982

 

 

 

 

 

 

 
1,982

Tender offer share repurchases
(1,782,568
)
 

 
(73
)
 
(364
)
 
(36
)
 

 

 
1,782,568

 
(50,261
)
 
(50,370
)
Preferred stock conversion
799,615

 

 
9,264

 
(92,636
)
 
(9,264
)
 

 

 

 

 

Net loss

 

 

 

 

 

 
(1,893
)
 

 

 
(1,893
)
Other comprehensive income, net of tax

 

 

 

 

 
1,048

 

 

 

 
1,048

Balance, March 30, 2019
26,440,663

 
$
3

 
$
81,889

 

 
$

 
$
(37,379
)
 
$
(71,842
)
 
1,782,568

 
$
(50,261
)
 
$
(77,590
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
23,739,344

 
$
2

 
$
45,418

 
400,000

 
$
40,000

 
$
(43,875
)
 
$
(100,055
)
 

 
$

 
$
(58,510
)
Warrant exercises
826,414

 

 
9,504

 

 

 

 

 

 

 
9,504

Restricted stock activity
33,963

 

 
(370
)
 

 

 

 

 

 

 
(370
)
Stock option activity
18,680

 

 
(201
)
 

 

 

 

 

 

 
(201
)
Preferred stock dividends

 

 
(1,533
)
 

 

 

 

 

 

 
(1,533
)
Share-based compensation expense

 

 
1,440

 

 

 

 

 

 

 
1,440

Share repurchase program
(706,213
)
 

 
(15,511
)
 

 

 

 

 

 

 
(15,511
)
Net loss

 

 

 

 

 

 
(6,003
)
 

 

 
(6,003
)
Other comprehensive income, net of tax

 

 

 

 

 
1,232

 

 

 

 
1,232

Balance, March 31, 2018
23,912,188

 
$
2

 
$
38,747

 
400,000

 
$
40,000

 
$
(42,643
)
 
$
(106,058
)
 

 
$

 
$
(69,952
)

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


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, 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 2019, there is a total of 52 weeks. For fiscal years 2019 and 2018, the second quarters both included 13 weeks and the six months ended both included 26 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 29, 2018 was derived from the Company’s audited financial statements but does 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 29, 2018 as set forth in the Company's 2018 Form 10-K filed on December 12, 2018.

Preferred Stock Conversion

On November 13, 2018, the Company converted all remaining outstanding shares of Preferred Stock, and issued 799,615 shares of Common Stock. There were no dividends paid with the conversion.

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.


7


2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards

The Company’s significant accounting policies are described in the Company’s 2018 Form 10-K, filed with the SEC on December 12, 2018. 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 six months ended March 30, 2019, except as follows (as also discussed in the Recently Adopted Accounting Standards section of this Note 2):

Revenue Recognition

The Company records revenue, net of tax, when the following five steps have been completed:

1.
Identification of the contract(s) with a customer;
2.
Identification of the performance obligation(s) in the contract;
3.
Determination of the transaction price;
4.
Allocation of the transaction price to the performance obligations in the contract; and
5.
Recognition of revenue when, or as, we satisfy performance obligations.

The Company records revenue when performance obligations are satisfied by transferring control of a promised good or service to the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, that good or service.

Our product revenue includes sales of buses and bus parts, each of which are generally recognized as revenue at a point in time, once all conditions for revenue recognition have been met, as they represent our performance obligations in a sale. For buses, control is generally transferred and the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product when the product is delivered or when the product has been completed, is ready for delivery, has been paid for, its title has transferred and it is awaiting pickup by the customer. For certain bus sale transactions, we may provide incentives including payment of a limited amount of future interest charges our customers may incur related to their purchase and financing of the bus with third party financing companies. We reduce revenue at the recording date by the full amount of potential future interest we may be obligated to pay, which is an application of the "most likely amount" method. For parts sales, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with the point in time when the customer has assumed risk of loss and title has passed for the goods sold.

The Company sells extended warranties related to its products. Revenue related to these contracts is recognized based on the stand-alone selling price of the arrangement, on a straight-line basis over the contract period, and costs thereunder are expensed as incurred.

The Company includes shipping and handling revenues, which represents costs billed to customers, in net sales on the Condensed Consolidated Statements of Operations. The related costs incurred by the Company are included in cost of goods sold on the Condensed Consolidated Statements of Operations.

Leases

We determine if an arrangement is a lease at inception. Operating leases include lease right-of-use (“ROU”) assets, which we include in property, plant and equipment on our Condensed Consolidated Balance Sheets. The lease liabilities associated with operating leases are included in other current liabilities and other liabilities on our Condensed Consolidated Balance Sheets. We do not have any finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the leases recorded do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any base rental or lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term as a component of selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.


8


Derivative Instruments

In limited circumstances, we may utilize derivative instruments to manage certain exposures to changes in foreign currency exchange rates or as cash flow hedges for variable rate debt. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our operating results or included in other comprehensive income (loss), depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting treatment. If realized, gains and losses on derivative instruments are recognized in the operating results line item that reflects the underlying exposure that was hedged. The exchange of cash, if any, associated with derivative transactions is classified in the same category as the cash flows from the items subject to the economic hedging relationships.

Statement of Cash Flows

We classify distributions received from our equity method investment using the nature of distribution approach, such that distributions received are classified based on the nature of the activity of the investee that generated the distribution. Returns on investment are classified within operating activities, while returns of investment are classified within investing activities.

Recently Issued Accounting Standards

We believe that no new accounting guidance was issued during the three months ended March 30, 2019 that is relevant to our financial statements.

Recently Adopted Accounting Standards

ASU 2017-07 — In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component (if any) of pension expense in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

We adopted this new standard in the first quarter of fiscal 2019 on a retrospective basis, as required. There is no service cost component to our periodic pension expense. Previously all components of our pension expense were recorded as a component of operating expenses, and the new standard requires these expenses to be outside a subtotal of operating profit. As a result, we have revised previously reported results of operations, as follows:
 
March 31, 2018
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
As Previously Reported
 
New Standard Adjustment
 
As Restated
 
As Previously Reported
 
New Standard Adjustment
 
As Restated
Selling, general and administrative expenses
$
18,741

 
$
(461
)
 
$
18,280

 
$
44,659

 
$
(922
)
 
$
43,737

Operating profit (loss)
2,927

 
461

 
3,388

 
(2,343
)
 
922

 
(1,421
)
Other (expense) income, net
1,020

 
(461
)
 
559

 
1,190

 
(922
)
 
268

Net (loss) income
1,836

 

 
1,836

 
(6,003
)
 

 
(6,003
)

9


ASU 2018-15 — In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard on a prospective (applies only to eligible costs incurred after adoption) basis in the first quarter of fiscal 2019, and there was not a significant impact on our consolidated financial statements.

ASU 2017-12 — In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which intends to simplify the application of hedge accounting guidance and better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. We adopted this amended guidance in the first quarter of fiscal 2019 using the required modified retrospective approach; however we had no hedging relationships in effect at the adoption date that were impacted by the guidance. We do not expect the impact on the Company's consolidated financial statements to be material.

ASU 2016-12 and 2016-10 — In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and in April 2016 issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, both of which provide further clarification to be considered when implementing ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We adopted this standard in the first quarter of fiscal 2019 using the modified retrospective transition approach, which we applied to all contracts impacted by the new standard at the date of initial application. At adoption, we accounted for specific sales incentives offered to our customers by recording an increase of $0.9 million in accrued liabilities, a $0.7 million adjustment to retained earnings, and a $0.2 million deferred tax asset. Amounts recorded in prior comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Please see Note 8, Revenue, for additional information regarding the adoption of this new accounting standard.

ASU 2018-05 — In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates income tax accounting to reflect the SEC's interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. For more information regarding the impact of the Tax Act, see Note 5, Income Taxes.

ASU 2016-02 — In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize assets on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. The standard will also require certain qualitative and quantitative disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. We adopted this standard in the first quarter of fiscal 2019 using the modified retrospective adoption approach with a cumulative-effect adjustment recognized on the balance sheet on the adoption date with prior periods not recast, and electing the practical expedients allowed under the standard. At adoption, we recognized right-of-use assets totaling $7.3 million and operating lease liabilities totaling $9.2 million. The impact on our results of operations and cash flows was not material.

ASU 2016-15 — In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which made targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted this standard in the first quarter of fiscal 2019 and contemporaneous with adoption made a policy election to classify distributions received from our equity method investment using the nature of distribution approach. Adoption of the standard had no current impact on the Company's consolidated financial statements, as this is the manner in which we have recorded previous distributions from our equity method investee. There were no distributions in the six months ended March 30, 2019.

3. Supplemental Financial Information

Inventories

The following table presents the components of inventories at the dates indicated:
(in thousands of dollars)
March 30, 2019
 
September 29, 2018
Raw materials
$
88,963

 
$
42,439

Work in process
32,707

 
13,141

Finished goods
4,270

 
1,753

Total inventories
$
125,940

 
$
57,333



10


Product Warranties

The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Balance at beginning of period
$
21,858

 
$
19,788

 
$
22,646

 
$
20,910

Add current period accruals
2,256

 
2,406

 
3,846

 
4,365

Current period reductions of accrual
(2,594
)
 
(2,911
)
 
(4,972
)
 
(5,992
)
Balance at end of period
$
21,520

 
$
19,283

 
$
21,520

 
$
19,283

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
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Balance at beginning of period
$
22,532

 
$
19,208

 
$
23,191

 
$
19,295

Add current period deferred income
2,440

 
2,763

 
3,806

 
4,826

Current period recognition of income
(2,071
)
 
(1,510
)
 
(4,096
)
 
(3,660
)
Balance at end of period
$
22,901

 
$
20,461

 
$
22,901

 
$
20,461


With the adoption of ASU No. 2016-12 (as described in Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards), 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 $5.1 million of the outstanding contract liability during the remainder of fiscal 2019, $6.2 million in fiscal 2020, 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)
March 30, 2019
 
September 29, 2018
Current portion
$
2,828

 
$
3,332

Long-term portion
1,897

 
1,901

Total accrued self-insurance
$
4,725

 
$
5,233


The current and long-term portions of the accrued self-insurance liability are reflected in accrued expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets.

Shipping and Handling Revenues

Shipping and handling revenues were $3.2 million and $3.5 million for the three months ended March 30, 2019 and March 31, 2018, respectively, and $6.5 million and $7.0 million for the six months ended March 30, 2019 and March 31, 2018, respectively. The related cost of goods sold was $2.7 million and $3.1 million for the three months ended March 30, 2019 and March 31, 2018, respectively, and $5.7 million and $5.9 million for the six months ended March 30, 2019 and March 31, 2018, respectively.

11



Pension Expense

Components of net periodic pension benefit cost were as follows for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Interest cost
$
1,511

 
$
1,357

 
$
3,023

 
$
2,714

Expected return on plan assets
(1,904
)
 
(1,776
)
 
(3,809
)
 
(3,552
)
Amortization of prior loss
690

 
880

 
1,379

 
1,760

Net periodic benefit cost
$
297

 
$
461

 
$
593

 
$
922

Amortization of prior loss, recognized in other comprehensive income
690

 
880

 
1,379

 
1,760

Total recognized in net periodic pension benefit cost and other comprehensive income
$
(393
)
 
$
(419
)
 
$
(786
)
 
$
(838
)

Pension expense is recognized as a component of other (expense) income, net on our Condensed Consolidated Statement of Operations. As disclosed in Note 2, we reclassified previously reported pension expense amounts of $0.5 million and $0.9 million from selling, general and administrative expenses to other (expense) income, net for the three and six months ended March 31, 2018, respectively.

Warrants

At March 30, 2019, there were a total of 856,114 warrants outstanding to purchase 428,057 shares of our Common Stock.

Derivative Instruments

We are charged variable rates of interest on our indebtedness outstanding under the Amended Credit Agreement (defined below) which exposes us to fluctuations in interest rates. On, October 24, 2018, the Company entered into a four-year interest rate collar with a $150.0 million notional value with an effective date of November 30, 2018. The collar was entered into in order to partially mitigate our exposure to interest rate fluctuations on our variable rate debt. The collar establishes a range where we will pay the counterparty if the three-month LIBOR rate falls below the established floor rate of 1.5%, and the counterparty will pay us if the three-month LIBOR rate exceeds the ceiling rate of 3.3%. The collar settles quarterly through the termination date of September 30, 2022. No payments or receipts are exchanged on the interest rate collar contracts unless interest rates rise above or fall below the contracted ceiling or floor rates.

Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At March 30, 2019, the fair value of the interest rate collar contract was $(0.3) million and is included in "other current liabilities" on the Condensed Consolidated Balance Sheets. The fair value of the interest rate collar is a Level 2 fair value measurement, based on quoted prices of similar items in active markets.

4. Debt

Amended Credit Agreement

On September 13, 2018, the Company entered into a first amendment of our December 12, 2016 credit agreement ("Amended Credit Agreement"). The Amended Credit Agreement provided for additional funding of $50.0 million and was funded in the first quarter of fiscal 2019. Substantially all the proceeds were used to complete a tender offer to purchase shares of our common and preferred stock.

The Amended Credit Agreement also increased the revolving credit facility to $100.0 million from $75.0 million. The amendment extended the maturity date to September 13, 2023, five years from the effective date of the first amendment. In connection with the Amended Credit Agreement, we incurred $2.0 million of debt discount and issuance costs, which were recorded as contra-debt and will be amortized over the life of the Amended Credit Agreement using the effective interest method.

12



Additional Disclosures

Term debt consisted of the following at the dates indicated:
(in thousands of dollars)
March 30, 2019
 
September 29, 2018
2023 and 2021 term loans, net of deferred financing costs of $3,571 and $4,011, respectively
$
187,629

 
$
142,139

Less: current portion of long-term debt
9,900

 
9,900

Long-term debt, net of current portion
$
177,729

 
$
132,239


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 March 30, 2019 and September 29, 2018, $191.2 million and $146.2 million, respectively, were outstanding on the term loans.

At March 30, 2019 and September 29, 2018, the stated interest rates on the term loans were 4.7% and 4.5%, respectively. At March 30, 2019 and September 29, 2018, the weighted-average annual effective interest rates for the term loans were 5.0% and 4.1%, respectively, which includes amortization of the deferred financing costs.

At March 30, 2019, $20.0 million in borrowings were outstanding on the Revolving Credit Facility and $6.9 million of Letters of Credit were outstanding; therefore, the Company would have been able to borrow $73.1 million on the revolving line of credit.

Interest expense on all indebtedness was $4.0 million and $1.8 million for the three months ended March 30, 2019 and March 31, 2018, respectively, and $6.9 million and $3.3 million for the six months ended March 30, 2019 and March 31, 2018, respectively.

The schedules of remaining principal maturities for total debt for the next five fiscal years are as follows:
(in thousands of dollars)
Year
 
Principal Payments
2019
 
$
4,950

2020
 
9,900

2021
 
9,900

2022
 
14,850

2023
 
171,600

Total remaining principal payments
 
$
211,200


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.

Three Months

The effective tax rate for the three month period ended March 30, 2019 was 14.4%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

The effective tax rate for the three month period ended March 31, 2018 was 22.2%, which differed from the transitional 2018 statutory federal tax rate of 24.5%. The difference is mainly due to normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense. These benefits were partially offset by accrued interest and penalties on uncertain tax positions.


13


Six Months

The effective tax rate for the six month period ended March 30, 2019 was 15.8%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, primarily federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

The effective tax rate for the six month period ended March 31, 2018 was (41.3)% and significantly differed from the statutory federal income tax rate of 24.5%. The difference is mainly due to $2.4 million in period expense recorded in the prior fiscal quarter to reflect the newly enacted Tax Act. The Tax Act 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. Our rate was further impacted by accrued interest and penalties on uncertain tax positions. These items were partially offset by normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense.

6. Guarantees, Commitments and Contingencies

Litigation

At March 30, 2019, 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.

Guarantees

In the ordinary course of business, we may provide guarantees for certain transactions entered into by our dealers. At March 30, 2019, we had $4.0 million in aggregate guarantees outstanding which relate to guarantees of indebtedness for term loans with remaining maturities of up to 3.8 years. The $4.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote. At March 30, 2019, $0.5 million was included in other current liabilities on our Condensed Consolidated Balance Sheets for the estimated fair value of the guarantees.    

Lease Commitments

We lease office and warehouse space for use in our operations, which are accounted for as operating leases. The operating leases have remaining terms ranging from nine months to 8.7 years. One of our leases includes a renewal option to extend the lease for five years.

Total operating lease expense was $0.5 million and $1.0 million for the three and six months ended March 30, 2019, respectively, and is recorded in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. Total rent expense was $0.1 million and $0.2 million for the three and six months ended March 31, 2018, respectively, and is recorded in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows was $0.8 million for the six months ended March 30, 2019.

At March 30, 2019, right-of-use assets totaling $7.7 million were included in property, plant and equipment, net, and lease liabilities totaling $1.7 million and $8.2 million were included in other current liabilities and other liabilities (non-current), respectively.

At March 30, 2019, the weighed average remaining lease term was 7.2 years and the weighted average discount rate used to calculate the present value of future lease payments was 4.5%.


14


Maturities of operating lease liabilities at March 30, 2019 are as follows:
(in thousands of dollars)
 
 
Fiscal Years Ended
 
Amount
2019
 
$
1,199

2020
 
1,577

2021
 
1,399

2022
 
1,421

2023
 
1,441

Thereafter
 
4,624

Total future minimum lease payments
 
11,661

Less: imputed interest
 
1,769

Total operating lease liabilities
 
$
9,892


7. Segment Information

We manage our business in two operating segments: (i) the Bus segments, which includes the manufacturing and assembly of buses to be sold to a variety of customers across the United States, Canada and in international markets; and (ii) the Parts segment, which consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. The tables below present segment net sales and gross profit for the periods presented:

Net sales
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Bus (1)
$
195,065

 
$
201,774

 
$
334,275

 
$
349,872

Parts (1)
16,577

 
14,854

 
32,293

 
29,305

Segment net sales
$
211,642

 
$
216,628

 
$
366,568

 
$
379,177

 
(1) Parts segment revenue includes $0.9 million and $1.5 million for the three months ended March 30, 2019 and March 31, 2018, respectively, and $0.9 million and $1.2 million for the six months ended March 30, 2019 and March 31, 2018, respectively, related to inter-segment sales of parts that was eliminated by the Bus segment upon consolidation.

Gross profit
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Bus
$
20,142

 
$
16,343

 
$
33,657

 
$
31,720

Parts
5,812

 
5,325

 
11,407

 
10,596

Segment gross profit
$
25,954

 
$
21,668

 
$
45,064

 
$
42,316


The following table is a reconciliation of segment gross profit to consolidated (loss) income before income taxes for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Segment gross profit
$
25,954

 
$
21,668

 
$
45,064

 
$
42,316

Adjustments:
 
 
 
 
 
 
 
Selling, general and administrative expenses
(22,928
)
 
(18,280
)
 
(40,201
)
 
(43,737
)
Interest expense
(3,998
)
 
(1,826
)
 
(6,872
)
 
(3,278
)
Interest income

 
2

 
9

 
17

Other (expense) income, net
(275
)
 
559

 
(624
)
 
268

(Loss) income before income taxes
$
(1,247
)
 
$
2,123

 
$
(2,624
)
 
$
(4,414
)


15


Sales are attributable to geographic areas based on customer location and were as follows for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
United States
$
191,684

 
$
198,414

 
$
343,169

 
$
353,062

Canada
18,784

 
17,609

 
21,860

 
22,459

Rest of world
1,174

 
605

 
1,539

 
3,656

Total net sales
$
211,642

 
$
216,628

 
$
366,568

 
$
379,177


8. Revenue

As noted in Note 2, Summary of Significant Accounting Policies and Recently Issued Accounting Standards, the Company adopted the new revenue recognition guidance (ASC 606) effective September 30, 2018 using the modified retrospective approach. As a result, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at September 30, 2018. Adopting the new standard primarily impacted the timing of recognition of specific sales incentives offered to our customers. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The difference in revenue recognized under the new guidance versus the previous guidance was an increase of $0.5 million for the six months ended March 30, 2019. Under the new guidance, at adoption, we recorded $0.9 million in accrued liabilities, a deferred tax asset of $0.2 million, and a $0.7 million retained earnings adjustment. Under previous guidance, we would not have recorded any accrued liabilities or deferred tax assets resulting in no retained earnings impact to our Condensed Consolidated Balance Sheets.

The following table disaggregates revenue by product category for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Diesel buses
$
110,487

 
$
132,914

 
$
200,307

 
$
235,998

Alternative fuel buses (1)
75,320

 
64,790

 
118,401

 
104,878

Other (2)
9,773

 
4,555

 
16,575

 
9,984

Parts
16,062

 
14,369

 
31,285

 
28,317

Net sales
$
211,642

 
$
216,628

 
$
366,568

 
$
379,177

 
(1) Includes buses sold with any fuel source other than diesel (e.g. gasoline, propane, CNG, electric).
(2) Includes shipping and handling revenue, extended warranty income, chassis and bus shell sales.


16


9. Earnings Per Share

The following table presents the earnings per share computation for the periods presented:
 
Three Months Ended
 
Six Months Ended
(in thousands except for share data)
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(673
)
 
$
1,836

 
$
(1,893
)
 
$
(6,003
)
Less: convertible preferred stock dividends

 
763

 

 
1,533

Net (loss) income available to common stockholders
$
(673
)
 
$
1,073

 
$
(1,893
)
 
$
(7,536
)
 
 
 
 
 
 
 
 
Basic earnings per share (1):
 
 
 
 
 
 
 
Weighted average common shares outstanding
26,595,280

 
23,899,772

 
26,449,072

 
23,911,909

Basic (loss) earnings per share
$
(0.03
)
 
$
0.04

 
$
(0.07
)
 
$
(0.32
)
 
 
 
 
 
 
 
 
Diluted earnings per share (2):
 
 
 
 
 
 
 
Weighted average common shares outstanding
26,595,280

 
23,899,772

 
26,449,072

 
23,911,909

Weighted average dilutive securities, restricted stock

 
14,797

 

 

Weighted average dilutive securities, warrants

 
939,107

 

 

Weighted average dilutive securities, stock options

 
273,406

 

 

Weighted average shares and dilutive potential common shares
26,595,280

 
25,127,082

 
26,449,072

 
23,911,909

Diluted (loss) earnings per share
$
(0.03
)
 
$
0.04

 
$
(0.07
)
 
$
(0.32
)
 
(1) Basic (loss) earnings per share is calculated by dividing income available to common stockholders by the weighted average common shares outstanding during the period.
(2) Since we incurred a net loss for the three and six months ended March 30, 2019 and the six months ended March 31, 2018, basic and diluted shares outstanding are equal to each other due to the exclusion of 320,222, 573,949 and 4,701,112 of potentially dilutive shares, respectively, from the calculation of earnings per share, as the effect would be anti-dilutive. For the three months ended March 31, 2018, 3,451,251 shares of convertible preferred stock were excluded from the dilutive calculation as the if-converted impact would be anti-dilutive.

10. Share-Based Compensation

Restricted Stock Awards

The following table summarizes the Company's restricted stock awards ("RSAs") and restricted stock units ("RSUs") award activity for the period presented:
 
 
Six Months Ended
 
 
March 30, 2019
Restricted Stock Activity
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
Balance, beginning of period
 
118,074

 
$
18.59

Granted
 
157,888

 
16.99

Vested
 
(82,430
)
 
18.24

Forfeited/canceled
 
(27,060
)
 
18.10

Balance, end of period
 
166,472

 
17.33



17


Compensation expense for restricted stock awards, recognized in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations, was $0.7 million and $1.2 million with associated tax benefits of $0.2 million and $0.3 million for the three and six months ended March 30, 2019, respectively. At March 30, 2019, unrecognized compensation cost related to restricted stock awards totaled $1.9 million and is expected to be recognized over a weighted-average period of nine months.

Stock Option Awards

The following table summarizes the Company's stock option activity for the period presented:
 
 
Six Months Ended
 
 
March 30, 2019
Stock Option Award Activity
 
Number of Options
 
Weighted Average Exercise Price per Share ($)
Outstanding options, beginning of period
 
498,427

 
$
13.38

Granted
 
326,249

 
16.77

Exercised (1)
 
(2,683
)
 
15.50

Forfeited
 
(55,619
)
 
16.57

Outstanding options, end of period (2)
 
766,374

 
14.59

Fully vested and exercisable options, end of period (3)
 
440,125

 
12.97

 
(1) Stock options exercised in the period had an immaterial aggregate intrinsic value.
(2) Stock options outstanding at the end of the period had an aggregate intrinsic value totaling $2.0 million.
(3) Fully vested and exercisable options at the end of the period had an aggregate intrinsic value totaling $1.8 million with a weighted average contractual remaining term of 7.2 years.

Compensation expense for stock option awards, recognized in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations, was $0.5 million and $0.8 million with associated tax benefits of $0.1 million and $0.2 million for the three and six months ended March 30, 2019, respectively. At March 30, 2019, unrecognized compensation cost related to stock option awards totaled $1.3 million and is expected to be recognized over a weighted-average period of nine months.

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:
 
 
Six Months Ended
 
 
March 30, 2019
Expected volatility
 
31.0
%
Expected dividend yield
 
0
%
Risk-free interest rate
 
2.75
%
Expected term (in years)
 
4.5 - 5.5

Weighted-average grant-date fair value
 
$
5.58



18


11. Accumulated Other Comprehensive Loss

The following table provides information on changes in accumulated other comprehensive loss for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
(in thousands of dollars)
 
Defined Benefit Pension Plan
 
Total
 
Defined Benefit Pension Plan
 
Total
March 30, 2019
 
 
 
 
 
 
 
 
Beginning Balance
 
$
(37,903
)
 
$
(37,903
)
 
$
(38,427
)
 
$
(38,427
)
Amounts reclassified from other comprehensive loss and included in earnings
 
690

 
690

 
1,379

 
1,379

Total other comprehensive income, before taxes
 
690

 
690

 
1,379

 
1,379

Income tax expense
 
(166
)
 
(166
)
 
(331
)
 
(331
)
Ending Balance March 30, 2019
 
$
(37,379
)
 
$
(37,379
)
 
$
(37,379
)
 
$
(37,379
)
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
 
 
Beginning Balance
 
$
(43,312
)
 
$
(43,312
)
 
$
(43,875
)
 
$
(43,875
)
Amounts reclassified from other comprehensive loss and included in earnings
 
880

 
880

 
1,760

 
1,760

Total other comprehensive income, before taxes
 
880

 
880

 
1,760

 
1,760

Income tax expense
 
(211
)
 
(211
)
 
(528
)
 
(528
)
Ending Balance March 31, 2018
 
$
(42,643
)
 
$
(42,643
)
 
$
(42,643
)
 
$
(42,643
)


19


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 and six months ended March 30, 2019 and March 31, 2018 and related notes appearing in Part I, Item 1 of this Report. Our actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been 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 29, 2018 as “fiscal 2018”. We refer to the quarter ended March 30, 2019 as the “second quarter of fiscal 2019” and we refer to the quarter ended March 31, 2018 as the “second quarter of fiscal 2018”. There were 13 weeks in the second quarters of both fiscal 2019 and fiscal 2018.

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 to diesel fuel applications with its propane-powered, gasoline-powered, compressed natural gas (“CNG”)-powered school buses and all-electric school buses.

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

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 2018 Form 10-K, filed with the SEC on December 12, 2018 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 six months ended March 30, 2019, except as follows:

Revenue Recognition

The Company records revenue, net of tax, when the following five steps have been completed:

1.
Identification of the contract(s) with a customer;
2.
Identification of the performance obligation(s) in the contract;
3.
Determination of the transaction price;
4.
Allocation of the transaction price to the performance obligations in the contract; and
5.
Recognition of revenue when, or as, we satisfy performance obligations.

The Company records revenue when performance obligations are satisfied by transferring control of a promised good or service to the customer. The Company evaluates the transfer of control primarily from the customer’s perspective where the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from that good or service.


20


Our product revenue includes sales of buses and bus parts, each of which are generally recognized as revenue at a point in time, once all conditions for revenue recognition have been met, as they represent our performance obligations in a sale. For buses, control is generally transferred and the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product when the product is delivered or when the product has been completed, is ready for delivery, has been paid for, its title has transferred and it is awaiting pickup by the customer. For certain bus sale transactions, we may provide incentives including payment of a limited amount of future interest charges our customers may incur related to their purchase and financing of the bus with third party financing companies. We reduce revenue at the recording date by the full amount of potential future interest we may be obligated to pay, which is an application of the "most likely amount" method. For parts sales, control is generally transferred when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the products, which generally coincides with the point in time when the customer has assumed risk of loss and title has passed for the goods sold.

The Company sells extended warranties related to its products. Revenue related to these contracts is recognized based on the stand-alone selling price of the arrangement, on a straight-line basis over the contract period and costs thereunder are expensed as incurred.

The Company includes shipping and handling revenues, which represents costs billed to customers, in net sales on the Condensed Consolidated Statements of Operations. The related costs incurred by the Company are included in cost of goods sold on the Condensed Consolidated Statements of Operations.

Leases

We determine if an arrangement is a lease at inception. Operating leases include lease right-of-use (“ROU”) assets, which we include in property, plant and equipment on our Condensed Consolidated Balance Sheets. The lease liabilities associated with operating leases are included in other current liabilities and other liabilities on our Condensed Consolidated Balance Sheets. We do not have any finance leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the leases recorded do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any base rental or lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term as a component of selling, general and administrative expenses on Condensed Consolidated Statements of Operations.

Derivative Instruments

In limited circumstances, we may utilize derivative instruments to manage certain exposures to changes in foreign currency exchange rates or as cash flow hedges for variable rate debt. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our operating results or included in other comprehensive income (loss), depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting treatment. If realized, gains and losses on derivative instruments are recognized in the operating results line item that reflects the underlying exposure that was hedged. The exchange of cash, if any, associated with derivative transactions is classified in the same category as the cash flows from the items subject to the economic hedging relationships.

Statement of Cash Flows

We classify distributions received from our equity method investment using the nature of distribution approach, such that distributions received are classified based on the nature of the activity of the investee that generated the distribution. Returns on investment are classified within operating activities, while returns of investment are classified within investing activities.

21



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 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. Increases or decreases in the number of school bus riders has a direct impact on school district demand.
Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period.
Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district.
Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.
Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year.
Seasonality. 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.

Factors Affecting Our Expenses and Other Items

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

Cost of goods sold. The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense and overhead. Our cost of goods sold may vary from period to period in part due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities.
Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing 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.


22


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 prior to interest income, interest expense including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities, income taxes, depreciation and amortization including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets, and disposals, as adjusted to add back certain charges that we may record each year, such as stock-compensation expense, as well as non-recurring charges such as (i) significant product design changes; (ii) transaction related costs; or (iii) discrete expenses related to major cost cutting initiatives. We believe these expenses and non-recurring charges are not considered an indicator of ongoing company performance. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures of performance defined in accordance with GAAP. The measures are used as a supplement to GAAP results in evaluating certain aspects of our business, as described below.

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

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

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

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

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


23


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.


24


Consolidated Results of Operations for the Three Months Ended March 30, 2019 and March 31, 2018:
 
 
Three Months Ended
(in thousands of dollars)
 
March 30, 2019
 
March 31, 2018
Net sales
 
$
211,642

 
$
216,628

Cost of goods sold
 
185,688

 
194,960

Gross profit
 
$
25,954

 
$
21,668

Operating expenses
 
 
 
 
Selling, general and administrative expenses
 
22,928

 
18,280

Operating profit
 
$
3,026

 
$
3,388

Interest expense
 
(3,998
)
 
(1,826
)
Interest income
 

 
2

Other (expense) income, net
 
(275
)
 
559

(Loss) income before income taxes
 
$
(1,247
)
 
$
2,123

Income tax benefit (expense)
 
179

 
(471
)
Equity in net income of non-consolidated affiliate
 
395

 
184

Net (loss) income
 
$
(673
)
 
$
1,836

Other financial data:
 
 
 
 
Adjusted EBITDA
 
$
12,202

 
$
10,048

Adjusted EBITDA margin
 
5.8
%
 
4.6
%

The following provides the results of operations of Blue Bird’s two reportable segments:
(in thousands of dollars)
 
Three Months Ended
Net Sales by Segment
 
March 30, 2019
 
March 31, 2018
Bus
 
$
195,065

 
$
201,774

Parts
 
16,577

 
14,854

Total
 
$
211,642

 
$
216,628

 
 
 
 
 
Gross Profit by Segment
 
 
 
 
Bus
 
$
20,142

 
$
16,343

Parts
 
5,812

 
5,325

Total
 
$
25,954

 
$
21,668


Net sales. Net sales were $211.6 million for the second quarter of fiscal 2019, a decrease of $5.0 million, or 2.3%, compared to $216.6 million for the second quarter of fiscal 2018.

Bus sales decreased $6.7 million, or 3.3%, reflecting a decrease in units booked, which was partially offset by higher sales prices per unit. In the second quarter of fiscal 2019, 2,271 units were booked compared to 2,441 units booked for the same period in fiscal 2018. Bus volumes were negatively impacted by supplier delays. The average net sales price per unit for the second quarter of fiscal 2019 was 3.9% higher than the price per unit for the second quarter of fiscal 2018. The increase in unit price mainly reflects pricing actions.

Parts sales increased $1.7 million, or 11.6%, for the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018, as we had higher sales volumes.

Cost of goods sold. Total cost of goods sold was $185.7 million for the second quarter of fiscal 2019, a decrease of $9.3 million, or 4.8%, compared to $195.0 million for the second quarter of fiscal 2018. As a percentage of net sales, total cost of goods sold improved from 90.0% to 87.7%.

Bus segment cost of goods sold decreased $10.5 million, or 5.7%, for the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. The average cost of goods sold per unit for the second quarter of fiscal 2019 was 1.4% higher compared to the second quarter of fiscal 2018 mainly due to changes in product and customer mix.


25


The $1.2 million, or 13.0%, increase in parts segment cost of goods sold for the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018 was primarily attributed to increased parts sales volume.

Operating profit. Operating profit was $3.0 million for the second quarter of fiscal 2019, a decrease of $0.4 million, compared to operating profit of $3.4 million for the second quarter of fiscal 2018. Profitability was negatively impacted by an increase of $4.6 million in selling, general and administrative expenses related to costs from our operational transformation initiatives and product redesign initiatives, which was partially offset by an increase of $4.3 million in gross profit.

Interest expense. Interest expense was $4.0 million for the second quarter of fiscal 2019, an increase of $2.2 million, or 118.9%, compared to $1.8 million for the second quarter of fiscal 2018. The increase was primarily attributed to a point increase in the stated interest rate on the term loan, higher average borrowing levels, and changes in the interest rate collar fair value recorded in interest expense.

Income taxes. We recorded an income tax benefit of $0.2 million for the second quarter of fiscal 2019, compared to income tax expense of $0.5 million for the same period in fiscal 2018.

The effective tax rate for the three month period ended March 30, 2019 was 14.4%, which differed from the 2019 statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

The effective tax rate for the three month period ended March 31, 2018 was 22.2%, which differed from the transitional 2018 statutory federal tax rate of 24.5%. The difference is mainly due to normal tax rate benefit items, such as the domestic production activities deduction, state tax credits, and share based award related deductions in excess of recorded book expense. These benefits were partially offset by accrued interest and penalties on uncertain tax positions.

Adjusted EBITDA. Adjusted EBITDA was $12.2 million, or 5.8% of net sales, for the second quarter of fiscal 2019, an increase of $2.2 million, or 21.4%, compared to $10.0 million, or 4.6% of net sales, for the second quarter of fiscal 2018. The increase in Adjusted EBITDA is primarily the result of an increase of $4.3 million in gross profit, which was partially offset by higher adjusted selling, general and administrative expenses.

The following table sets forth a reconciliation of net (loss) income to adjusted EBITDA for the periods presented:
 
Three Months Ended
(in thousands of dollars)
March 30, 2019
 
March 31, 2018
Net (loss) income
$
(673
)
 
$
1,836

Adjustments:
 
 
 
Discontinued operations loss

 
6

Interest expense, net (1)
4,102

 
1,824

Income tax (benefit) expense
(179
)
 
471

Depreciation, amortization, and disposals (2)
2,833

 
2,169

Operational transformation initiatives
3,270

 
3,420

Foreign currency hedges

 
(1,036
)
Share-based compensation
1,193

 
886

Product redesign initiatives
1,652

 
455

Other
4

 
17

Adjusted EBITDA
$
12,202

 
$
10,048

Adjusted EBITDA margin (percentage of net sales)
5.8
%
 
4.6
%
 
(1) Includes $0.1 million, representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.
(2) Includes $0.2 million, 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.

26


Consolidated Results of Operations for the Six Months Ended March 30, 2019 and March 31, 2018:
 
 
Six Months Ended
(in thousands of dollars)
 
March 30, 2019
 
March 31, 2018
Net sales
 
$
366,568

 
$
379,177

Cost of goods sold
 
321,504

 
336,861

Gross profit
 
$
45,064

 
$
42,316

Operating expenses
 
 
 
 
Selling, general and administrative expenses
 
40,201

 
43,737

Operating profit (loss)
 
$
4,863

 
$
(1,421
)
Interest expense
 
(6,872
)
 
(3,278
)
Interest income
 
9

 
17

Other (expense) income, net
 
(624
)
 
268

Loss before income taxes
 
$
(2,624
)
 
$
(4,414
)
Income tax benefit (expense)
 
415

 
(1,823
)
Equity in net income of non-consolidated affiliate
 
316

 
234

Net loss
 
$
(1,893
)
 
$
(6,003
)
Other financial data:
 
 
 
 
Adjusted EBITDA
 
$
19,419

 
$
17,117

Adjusted EBITDA margin
 
5.3
%
 
4.5
%

The following provides the results of operations of Blue Bird’s two reportable segments:
(in thousands of dollars)
 
Six Months Ended
Net Sales by Segment
 
March 30, 2019
 
March 31, 2018
Bus
 
$
334,275

 
$
349,872

P