Page 9 of 26 – SEC Filing During the fiscal second quarter earnings call on May 23, 2016,
management reaffirmed revenue guidance for the fiscal year ending October 1, 2016 of between $960 million and $985 million, representing
growth of between 4% and 7% relative to the prior year. Management also reaffirmed full year Adjusted EBITDA guidance of between
$72 million and $75 million, an increase of between 3% and 7%. Profits are growing as a result of the improving product mix (propane
and gasoline-powered buses carry higher gross margins); growing, higher margin parts and service revenue; higher productivity and
fixed cost leverage.
Blue Bird generates substantial free cash flow and its business
model is not capital intensive. The Company operates with negative working capital as dealers pay for buses before suppliers are
paid and capital expenditures have averaged less than one percent of revenue. Free cash flow is a key driver of shareholder value
as it will support continued debt pay down and deleveraging of the balance sheet, investment in the business and return of capital
to stockholders5. Based on management’s guidance of free cash flow of between
$30 million and $35 million for the full year, the Company will generate between $47 million and $52 million of free cash flow
in the second half ending October 1, 2016, a mere nine weeks away. Second half free cash flow represents between $1.81 and $2.00
in incremental value per share. Management signaled its confidence in the Company’s cash flow by making a $25 million prepayment
on its term loan on June 30, 2016. We estimate that the Company will generate a further $98 million of free cash flow over the
next two fiscal years, representing $3.80 in incremental value per share.
It should therefore come as no surprise that we believe that
the Proposal dramatically undervalues the Company. At $12.80 to $13.10 per share, the Proposal represents less than seven times
the consensus estimate of Fiscal 2016 Adjusted EBITDA and about six times the consensus estimate for Fiscal 2017. The Proposal
provides no value to stockholders for the Company’s revenue growth or improving margins. Equally, the Proposal provides no
value for the free cash flow generation outlined above.
We believe that modest assumptions regarding revenue growth,
EBITDA margin and free cash flow support a near term value of between $22 and $28 per share. Our analysis is based on projected
fiscal 2018 revenue of $1,056 million, representing annual growth of only 4%; adjusted EBITDA margin of 8.5%, below management’s
long term objective of 10%; and cumulative free cash flow of $145 million6. By
the end of the 2018 fiscal year, the Company will have nearly extinguished all of its debt, thereby eliminating any balance sheet
risk and creating substantial financial flexibility to further drive shareholder value through investment in the business, potential
M&A, as well as distributions to shareholders in the form of dividends and stock repurchases, as appropriate. We summarize
our analysis below and have attached our valuation framework as an attachment to this letter, together with slides from the Company’s
presentations.
5
The Company’s net debt resulted from a $227 million special dividend paid to the Company’s former majority owner and
was not incurred to finance investment in or by the Company.
6 From April 2, 2016 through September 30, 2018.
Page 2 of 4
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During the fiscal second quarter earnings call on May 23, 2016,
management reaffirmed revenue guidance for the fiscal year ending October 1, 2016 of between $960 million and $985 million, representing
growth of between 4% and 7% relative to the prior year. Management also reaffirmed full year Adjusted EBITDA guidance of between
$72 million and $75 million, an increase of between 3% and 7%. Profits are growing as a result of the improving product mix (propane
and gasoline-powered buses carry higher gross margins); growing, higher margin parts and service revenue; higher productivity and
fixed cost leverage.
Blue Bird generates substantial free cash flow and its business
model is not capital intensive. The Company operates with negative working capital as dealers pay for buses before suppliers are
paid and capital expenditures have averaged less than one percent of revenue. Free cash flow is a key driver of shareholder value
as it will support continued debt pay down and deleveraging of the balance sheet, investment in the business and return of capital
to stockholders5. Based on management’s guidance of free cash flow of between
$30 million and $35 million for the full year, the Company will generate between $47 million and $52 million of free cash flow
in the second half ending October 1, 2016, a mere nine weeks away. Second half free cash flow represents between $1.81 and $2.00
in incremental value per share. Management signaled its confidence in the Company’s cash flow by making a $25 million prepayment
on its term loan on June 30, 2016. We estimate that the Company will generate a further $98 million of free cash flow over the
next two fiscal years, representing $3.80 in incremental value per share.
It should therefore come as no surprise that we believe that
the Proposal dramatically undervalues the Company. At $12.80 to $13.10 per share, the Proposal represents less than seven times
the consensus estimate of Fiscal 2016 Adjusted EBITDA and about six times the consensus estimate for Fiscal 2017. The Proposal
provides no value to stockholders for the Company’s revenue growth or improving margins. Equally, the Proposal provides no
value for the free cash flow generation outlined above.
We believe that modest assumptions regarding revenue growth,
EBITDA margin and free cash flow support a near term value of between $22 and $28 per share. Our analysis is based on projected
fiscal 2018 revenue of $1,056 million, representing annual growth of only 4%; adjusted EBITDA margin of 8.5%, below management’s
long term objective of 10%; and cumulative free cash flow of $145 million6. By
the end of the 2018 fiscal year, the Company will have nearly extinguished all of its debt, thereby eliminating any balance sheet
risk and creating substantial financial flexibility to further drive shareholder value through investment in the business, potential
M&A, as well as distributions to shareholders in the form of dividends and stock repurchases, as appropriate. We summarize
our analysis below and have attached our valuation framework as an attachment to this letter, together with slides from the Company’s
presentations.
5
The Company’s net debt resulted from a $227 million special dividend paid to the Company’s former majority owner and
was not incurred to finance investment in or by the Company.
6 From April 2, 2016 through September 30, 2018.
| Page 2 of 4 |
