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Item 7. Management’s Discussion and Analysis

2020-12-17 compared with 2019-12-12 · 207 added, 163 removed, 304 unchanged (55% of the section changed)

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 audited financial statements for the fiscal years ended September 28, 2019 , September 29, 2018 and September 30, 2017 and related notes appearing elsewhere in this Report.

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s audited financial statements for the fiscal years ended October 3, 2020 , September 28, 2019 and September 29, 2018 and related notes appearing elsewhere in this Report.

Our actual results may not be indicative of future performance.

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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 28, 2019 as “fiscal 2019 ”.

We refer to the fiscal year ended October 3, 2020 as “fiscal 2020 ”.

We refer to the fiscal year ended September 28, 2019 as “fiscal 2019 ” and we refer to the fiscal year ended September 29, 2018 as “fiscal 2018 ”.

Fiscal years 2019 , 2018 , and 2017 , each contained 52 weeks.

There were 53 weeks in fiscal year 2020 and there were 52 weeks in fiscal years 2019 and 2018 .

Executive Overview

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Blue Bird also sells directly to major fleet operators, the United States Government, state governments, and authorized dealers in a number of foreign countries.

Impact of COVID-19 on Our Business

Beginning in our second fiscal quarter of 2020, the novel coronavirus known as "COVID-19" began to spread throughout the world, resulting in a global pandemic.

The pandemic triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions are expected to continue for an extended period of time.

In early April, in an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, address the reduced demand from our customers and be responsive and efficient with supply chain constraints, we closed our manufacturing facilities for two weeks and requested our office employees to work from home.

In late April, we successfully restarted manufacturing operations and have continued to manufacture buses since that time without further material disruption.

While we have not experienced any pervasive COVID-19 illnesses to date, if we were to experience some form of outbreak within our facilities, we would take all appropriate measures to protect the health and safety of our employees, which could include another temporary halt in production.

The pandemic has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected our business.

It will continue to adversely impact our business for a significant portion of our fiscal year 2021 and perhaps beyond.

Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic and its impact on the overall U.S and global economy.

While the global market downturn, closures and limitations on movement are expected to be temporary, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.

The full impacts from COVID-19 on the Company's financial results in fiscal year 2020 negatively affected our revenues and profits.

We continue to monitor and assess the level of future customer demand, the ability of school boards to make timely decisions, the ability of suppliers to resume and maintain operations, the ability of our employees to continue to work, and our ability to maintain continuous production as we plan for fiscal 2021 and beyond.

A prolonged economic downturn would have a material adverse impact on our sales and financial results beyond fiscal 2020.

See PART I, Item 1A.

"Risk Factors", of this Annual Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

The Company has taken actions to control spending and secure adequate liquidity, including minor headcount rationalization and changes to the minimum required financial covenants via execution of a third amendment to the Credit Agreement in December 2020.

Further detail and discussion of this amendment can be found in the "Liquidity and Capital Resources" section of this Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K.

Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential longer-term impacts on our business from the pandemic.

Our actions may include reducing hiring activities, limiting discretionary spending, limiting spending on capital investment projects or other steps necessary to preserve adequate liquidity.

We will continue to actively monitor the situation and may need to take further actions required by federal, state or local authorities, or enact measures we determine are in the best interests of our employees, customers, suppliers and shareholders.

For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 7.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K.

Factors Affecting Our Revenues

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Property tax revenues are a function of land and building prices, based 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.

Student enrollment and delivery mechanisms for learning .

Increases or decreases in the number of school bus riders have a direct impact on school district demand.

Due to the COVID-19 pandemic and evolving protocols for social distancing and public health concerns, the future form of educational delivery is uncertain, and increased remote learning could reasonably be expected to decrease the number of school bus riders.

Revenue mix .

We are able to charge more for certain of our products ( e.g.

, Type C propane-powered school buses, Electric buses, Type D buses, and buses with higher option content) than other products.

We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Electric 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.

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These actions can impact total purchases by fleets in a given year.

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.

The seasonality and annual variations of seasonality could impact the ability to compare results between fiscal periods.

Historically, our sales have been subject to seasonal variation based on the school calendar with the peak season during our third and fourth fiscal quarters.

Sales during the third and fourth fiscal quarters were typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year.

With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality has become unpredictable.

Seasonality and variations from historical seasonality have impacted the comparison of results between fiscal periods.

F actors Affecting Our Expenses and Other Items

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Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt.

Interest expense also includes unrealized gains or losses from interest rate hedges, if any, as well as expenses related to debt guarantees, if any.

Interest expense also includes unrealized gains or losses from interest rate hedges, if any, and changes in the fair value of interest rate derivatives not designated in hedge accounting relationships, if any, as well as expenses related to debt guarantees, if any.

Income taxes .

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and “Free Cash Flow”.

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 operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities, income taxes, depreciation and amortization including the component of operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets, 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;

Adjusted EBITDA and Free Cash Flow are financial metrics that are utilized by management and the board of directors to determine (a) the annual cash bonus payouts, if any, to be made to certain members of management based upon the terms of the Company’s Management Incentive Plan, and (b) whether the performance criteria have been met for the vesting of certain equity awards granted annually to certain members of management based upon the terms of the Company’s Omnibus Equity Incentive Plan.

Additionally, consolidated EBITDA, which is an adjusted EBITDA metric defined by our Amended Credit Agreement that could differ from Adjusted EBITDA discussed above as the adjustments to the calculations are not uniform, is used to determine the Company's ongoing compliance with several financial covenant requirements, including being utilized in the denominator of the calculation of the Total Net Leverage Ratio.

Accordingly, management views these non-GAAP financial metrics as key for the above purposes and as a useful way to evaluate the performance of our operations as discussed further below.

Adjusted EBITDA is defined as net income prior to interest income;

interest expense including the component of operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities;

income taxes;

and depreciation and amortization including the component of operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets;

as adjusted for certain non-cash charges or credits that we may record on a recurring basis such as stock-compensation expense and unrealized gains or losses on certain derivative financial instruments;

net gains or losses on the disposal of assets as well as certain charges such as (i) significant product design changes;

(ii) transaction related costs;

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.

(iii) discrete expenses related to major cost cutting initiatives;

or (iv) costs directly attributed to the COVID-19 pandemic.

While certain of the charges that are added back in the Adjusted EBITDA calculation, such as transaction related costs and operational transformation and major product redesign initiatives, represent operating expenses that may be recorded in more than one annual period, the significant project or transaction giving rise to such expenses is not considered to be indicative of the Company’s normal operations.

Accordingly, we believe that these, as well as the other credits and charges that comprise the amounts utilized in the determination of Adjusted EBITDA described above, should not be used in evaluating the Company’s ongoing annual operating performance.

We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net sales.

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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.

We believe that Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors in evaluating our performance because the measures consider the performance of our ongoing operations, excluding decisions made with respect to capital investment, financing, and certain other significant initiatives or transactions as outlined in the preceding paragraph.

We believe the non-GAAP measures offer additional financial metrics that, when coupled with the GAAP results and the reconciliation to GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business.

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.

Although we believe that Adjusted EBITDA and Adjusted EBITDA Margin may enhance an evaluation of our operating performance based on recent revenue generation and product/overhead cost control because they exclude the impact of prior decisions made about capital investment, financing, and certain other significant initiatives or transactions, (i) other companies in Blue Bird’s industry may define Adjusted EBITDA and Adjusted EBITDA Margin differently than we do and, as a result, they may not be comparable to similarly titled measures used by other companies in Blue Bird’s industry, and (ii) Adjusted EBITDA and Adjusted EBITDA Margin exclude certain financial information that some may consider important in evaluating our performance.

Our measure of Free Cash Flow is used in addition to and in conjunction with results presented in accordance with GAAP and it should not be relied upon to the exclusion of GAAP financial measures.

Free Cash Flow reflects an additional way of evaluating our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows.

We strongly encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

We define free cash flow as total cash provided by/used in operating activities minus cash paid for fixed assets and acquired intangible assets.

We define Free Cash Flow as total cash provided by/used in operating activities as adjusted for net cash paid for the acquisition or disposal of fixed assets and intangible assets.

We use Free Cash Flow, and ratios based on Free Cash Flow, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flow since purchases of fixed assets and intangible assets are a necessary component of ongoing operations.

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.

Accordingly, we expect Free Cash Flow to be less than operating cash flows.

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.

and (ii) the Parts segment, which includes the sale of replacement bus parts.

Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments.

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Management evaluates the segments based primarily upon revenues and gross profit.

Consolidated Results of Operations for the fiscal years ended September 28, 2019 and September 29, 2018 :

Consolidated Results of Operations for the fiscal years ended October 3, 2020 and September 28, 2019 :

(in thousands)

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Interest income

Other expense, net

Other income (expense), net

Income before income taxes

Income tax (expense) benefit

Income tax expense

Equity in net income of non-consolidated affiliate

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Gross Profit by Segment

Net sales were $1.019 billion for the fiscal year ended 2019 , a decrease of $6.1 million , or (0.6)% , compared to $1.025 billion for the fiscal year ended 2018 .

Bus sales decreased $10.5 million , or 1.1% , reflecting a decrease in units booked and higher sales prices.

Net sales were $879.2 million for the fiscal year ended 2020 , a decrease of $139.7 million , or 13.7% , compared to $1.019 billion for the fiscal year ended 2019 .

The decrease in net sales is attributed to the COVID-19 pandemic which caused the unplanned and abrupt increase in remote learning arrangements and an uncertainty in how school districts administered and will continue to administer schooling, resulting in a decreased demand for school buses.

Bus sales decreased $129.6 million , or 13.6% , reflecting a decrease in units booked which was partially offset by higher sales prices.

In the fiscal year ended 2020 , 8,878 units were booked compared to 11,017 units booked for the fiscal year ended 2019 .

The average net sales price per unit for the fiscal year ended 2019 was 4.6% higher than the price per unit for the fiscal year ended 2018 .

The increase in unit price mainly reflects pricing taken to partially offset commodity costs, as well as product and customer mix changes.

Parts sales increased $4.4 million , or 7.1% , for the fiscal year ended 2019 compared to fiscal year ended 2018 , resulting from higher volumes primarily due to incentive and shipping programs launched in the previous fiscal year.

The decrease in Bus revenue and volumes reflect the timing of orders being significantly impacted by COVID-19.

The 7.2% increase in unit price for the fiscal year ended 2020 compared to the fiscal year ended 2019 mainly reflects the full-year impact of pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales decreased $10.0 million , or 15.0% , for the fiscal year ended 2020 compared to the fiscal year ended 2019 , as we had lower sales volume, mainly from lower school bus units in operation due to school closures caused by the COVID-19 pandemic.

Stay at home orders and school closures reduced bus repair and maintenance activities due to lower bus use.

Cost of goods sold .

Total cost of goods sold was $783.0 million for the fiscal year ended 2020 , a decrease of $102.4 million , or 11.6% , compared to $885.4 million for the fiscal year ended 2019 .

As a percentage of net sales, total cost of goods sold decreased from 88.1% to 86.9% .

Bus segment cost of goods sold decreased $20.5 million , or 2.4% , for the fiscal year ended 2019 compared to the fiscal year ended 2018 .

The average cost of goods sold per unit for the fiscal year ended 2019 was 3.2% higher compared to the average cost of goods sold per unit for the fiscal year ended 2018 due to raw material price increases related to rising commodity costs and tariffs, which were partially offset by cost savings resulting from our operational improvement initiatives.

The $3.0 million , or 7.3% , increase in parts segment cost of goods sold for the fiscal year ended 2019 compared to the fiscal year ended 2018 was primarily attributed to increased parts sales volume.

As a percentage of net sales, total cost of goods sold increased from 86.9% to 89.1% .

Bus segment cost of goods sold decreased $95.7 million , or 11.4% , for the fiscal year ended 2020 compared to the fiscal year ended 2019 due to reduced sales volumes.

The average cost of goods sold per unit for the fiscal year ended 2020 was 10.0% higher compared to the average cost of goods sold per unit for the fiscal year ended 2019 due to increases in manufacturing costs from several COVID-19 related factors including hourly workforce absenteeism and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $6.7 million , or 15.5% , decrease in parts segment cost of goods sold for the fiscal year ended 2020 compared to the fiscal year ended 2019 aligned with the decrease in sales volume noted above.

Operating profit .

Operating profit was $43.8 million for the fiscal year ended 2019 , an increase of $8.8 million , or 25.0% , compared to $35.1 million for the fiscal year ended 2018 .

Profitability was positively impacted by an increase of $11.5 million in gross profit, which was partially offset by an increase of $2.7 million in selling, general and administrative expenses due in large part to several non-recurring product development initiatives as well as higher share-based compensation expense.

Operating profit was $22.0 million for the fiscal year ended 2020 , a decrease of $21.8 million , or 49.8% , compared to $43.8 million for the fiscal year ended 2019 .

Profitability was negatively impacted by a decrease of $37.3 million in gross profit, which was partially offset by a decrease of $15.4 million in selling, general and administrative expenses due in large part to several significant product development initiatives during fiscal 2019 as well as cost control measures implemented in fiscal 2020, as a response to the COVID-19 pandemic, including headcount reductions and lower travel-related expense.

Interest expense .

Interest expense was $12.9 million for the fiscal year ended 2019 , an increase of $6.2 million , or 93.3% , compared to $6.7 million for the fiscal year ended 2018 .

The increase was primarily attributed to a point increase in the weighted-average annual effective interest rate on the term loan, higher average borrowing levels, and changes in the interest rate collar fair value recorded in interest expense.

Interest expense was $12.3 million for the fiscal year ended 2020 , a decrease of $0.6 million , or 4.9% , compared to $12.9 million for the fiscal year ended 2019 .

The decrease was primarily attributed to lower interest rates and a lower average borrowing level on the term debt.

Income taxes .

We recorded an income tax expense of $7.6 million for the fiscal year ended 2019 , compared to an income tax benefit of $2.6 million for the fiscal year ended 2018 .

We recorded income tax expense of $1.5 million for the fiscal year ended 2020 , compared to an income tax expense of $7.6 million for the fiscal year ended 2019 .

The reduction in expense was primarily attributed to lower amounts of taxable income in 2020 due to the impacts of COVID-19 on our operations.

The effective tax rate for the fiscal year ended 2020 differed from the statutory Federal income tax rate of 21.0% .

There were minor items that lowered the effective tax rate to 14.5% , primarily the impacts of tax credits and state taxes on the Federal rate.

These were offset to a lesser degree by the recording of a partial valuation allowance for state taxes and minor provision to return adjustments.

The effective tax rate for the fiscal year ended 2019 was 25.6% , which differed from the statutory federal income tax rate of 21% .

The difference is mainly due to the unfavorable impact of valuation allowances, share-based and other compensation limitations, and state taxes, which includes the application of tax credits claimed as offsets against our payroll tax liabilities.

The valuation allowance increased mainly due to the accrual of income tax credits that are greater than our ability to utilize before expiration.

The difference was mainly due to the unfavorable impact of valuation allowances, share-based and other compensation limitations, and state taxes, which included the application of tax credits claimed as offsets against our payroll tax liabilities.

The valuation allowance increased mainly due to the accrual of income tax credits that were greater than our ability to utilize before expiration.

These items were partially offset by benefits from federal and state tax credits.

The effective tax rate for the fiscal year ended 2018 was (9.7)% , which differed from the statutory federal income tax rate of 24.5% , reflecting the benefits of income tax credits, the domestic production activities deduction, and recording a tax windfall from share-based

compensation awards exercised, which were offset by the application of tax credits claimed as offsets against our payroll tax liabilities, and interest and penalties on uncertain tax positions.

Adjusted EBITDA .

Adjusted EBITDA was $81.8 million , or 8.0% of net sales, for the fiscal year ended 2019 , an increase of $11.5 million , or 16.3% , compared to $70.4 million , or 6.9% of net sales, for the fiscal year ended 2018 .

The increase in adjusted EBITDA was primarily the result of increased gross profit.

Adjusted EBITDA was $54.7 million , or 6.2% of net sales, for the fiscal year ended 2020 , a decrease of $27.1 million , or 33.2% , compared to $81.8 million , or 8.0% of net sales, for the fiscal year ended 2019 .

The decrease in Adjusted EBITDA was primarily the result of decreased revenues and gross profit due to the COVID-19 pandemic as well as higher manufacturing costs.

The decrease was partially offset by lower adjusted selling, general and administrative expenses.

The following table sets forth a reconciliation of net income to Adjusted EBITDA for the fiscal years presented:

(in thousands)

Discontinued operations income

Interest expense, net (1)

Income tax expense (benefit)

Income tax expense

Depreciation, amortization, and disposals (2)

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Product redesign initiatives

Restructuring charges

Costs directly attributed to the COVID-19 pandemic (3)

Adjusted EBITDA

Adjusted EBITDA Margin (percentage of net sales)

(1) Includes $0.4 million for fiscal 2019, representing interest expense on operating lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

(2) Includes $0.7 million for fiscal 2019, representing amortization on right-of-use operating lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

(1) Includes $0.4 million and $0.4 million for fiscal 2020 and 2019 , respectively, representing interest expense on operating lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

(2) Includes $0.7 million and $0.7 million for fiscal 2020 and 2019 , respectively, representing amortization on right-of-use operating lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees in response to the COVID-19 pandemic.

Consolidated Results of Operations for the fiscal years ended September 28, 2019 and September 29, 2018 :

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Other expense, net

Loss on debt extinguishment

Income before income taxes

Income tax benefit (expense)

Income tax (expense) benefit

Equity in net income of non-consolidated affiliate

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Gross Profit by Segment

Net sales were $1.02 billion for the fiscal year ended 2018 , an increase of $34.4 million , or 3.5% , compared to $990.6 million for the fiscal year ended 2017 .

Bus sales increased $32.0 million , or 3.4% , reflecting an increase in units booked and slightly higher sales prices.

Net sales were $1.02 billion for the fiscal year ended 2019 , a decrease of $6.1 million , or 0.6% , compared to $1.02 billion for the fiscal year ended 2018 .

Bus sales decreased $10.5 million , or 1.1% , reflecting a decrease in units booked partially offset by slightly higher sales prices.

In the fiscal year ended 2019 , 11,017 units were booked compared to 11,649 units booked in the fiscal year ended 2018 .

The average net sales price per unit for the fiscal year ended 2019 was 4.6% higher than the price per unit for the fiscal year ended 2018 .

The increase in unit price mainly reflects product and customer mix changes.

Parts sales increased $2.3 million , or 3.9% , for the fiscal year ended 2018 compared to the fiscal year ended 2017 , resulting from higher volumes primarily due to incentive and shipping programs launched in the previous fiscal year.

The increase in unit price mainly reflects pricing actions taken to partially offset commodity costs, as well as product and customer mix changes.

Parts sales increased $4.4 million , or 7.1% , for the fiscal year ended 2019 compared to the fiscal year ended 2018 , resulting from higher volumes primarily due to incentive and shipping programs launched in the fiscal year ended 2018.

Cost of goods sold .

Total cost of goods sold was $903.0 million for the fiscal year ended 2018 , an increase of $39.8 million , or 4.6% , compared to $863.2 million for the fiscal year ended 2017 .

As a percentage of net sales, total cost of goods sold increased from 87.1% to 88.1% .

Bus segment cost of goods sold increased $38.5 million , or 4.7% , for the fiscal year ended 2018 compared to the fiscal year ended 2017 .

The average cost of goods sold per unit was 1.7% higher compared to the average cost of goods sold per unit for the fiscal year ended 2017 due to raw material price increases related to rising commodity costs, which were partially offset by favorable changes in product and customer mix as well as cost savings resulting from our operational improvement initiatives.

Total cost of goods sold was $885.4 million for the fiscal year ended 2019 , a decrease of $17.6 million , or 1.9% , compared to $903.0 million for the fiscal year ended 2018 .

As a percentage of net sales, total cost of goods sold decreased from 88.1% to 86.9% .

Bus segment cost of goods sold decreased $20.5 million , or 2.4% , for the fiscal year ended 2019 compared to the fiscal year ended 2018 .

The average cost of goods sold per unit was 3.2% higher compared to the average cost of goods sold per unit for the fiscal year ended 2018 due to raw material price increases related to rising commodity costs and tariffs, which were offset by cost savings resulting from our operational improvement initiatives.

Operating profit .

Operating profit was $35.1 million for the fiscal year ended 2018 , a decrease of $24.5 million , or 41.1% , compared to $59.5 million for the fiscal year ended 2017 .

Profitability was negatively impacted by a decrease of $5.4 million in gross profit and an increase of $19.1 million in selling, general and administrative expenses due in large part to several non-recurring operational and product development initiatives.

Operating profit was $43.8 million for the fiscal year ended 2019 , an increase of $8.8 million , or 25.0% , compared to $35.1 million for the fiscal year ended 2018 .

Interest expense .

Interest expense was $6.7 million for the fiscal year ended 2018 , a decrease of $0.6 million , or 8.1% , compared to $7.3 million for the fiscal year ended 2017 .

The decrease was primarily attributed to lower average borrowing levels as well as a lower weighted-average annual effective interest rate.

Other expense, net .

Other expense, net was $1.6 million for the fiscal year ended 2018 , a decrease of $3.3 million , or 67.3% , compared to $4.9 million for the fiscal year ended 2017 .

The decrease was primarily attributed to changes in pension expense related to a change in the amortization of net loss from fiscal 2017 to fiscal 2018.

Pension expense was retroactively reclassified from selling, general and administrative expenses to other expense, net as we adopted ASU 2017-07 in fiscal 2019.

Refer to Note 2 , Summary of Significant Accounting Policies and Recently Issued Accounting Standards , for more information on adoption of the accounting pronouncement.

Interest expense was $12.9 million for the fiscal year ended 2019 , an increase of $6.2 million , or 93.3% , compared to $6.7 million for the fiscal year ended 2018 .

The increase was primarily attributed to a point increase in the weighed-average annual effective 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 $2.6 million for the fiscal year ended 2018 , compared to income tax expense of $11.9 million for the fiscal year ended 2017 .

The effective tax rate for the fiscal year ended 2018 was (9.7)% , which significantly differed from the federal statutory tax rate of 24.5% .

The difference is explained below.

We recorded several one-time tax items in the fiscal year ended 2018, including:

Release of a $7.6 million reserve for uncertain tax positions;

A total of $1.7 million of tax benefits from accelerated deductions reported on our prior year return;

Tax expense adjustments of $2.1 million related to the Tax Cuts and Jobs Act, which was enacted during our first fiscal quarter of 2018 (enacted on December 22, 2017).

Along with re-measuring our deferred tax balances to the new tax rate, the $2.1 million net tax reform adjustment amount cited above includes $1.1 million in expense related to our tax liability for uncertain tax positions with the associated accrued interest and $0.1 million associated with the deemed repatriation tax.

We also recorded normal tax rate benefit items, such as the domestic production activities deduction, federal and state tax credits, and share-based award related deductions in excess of recorded expense.

In fiscal 2018, we finalized our tax reform estimates under SAB 118.

The effective tax rate for the fiscal year ended 2017 was 31.7% , which differed from the statutory federal income tax rate of 35% , reflecting the benefits of income tax credits, the domestic production activities deduction, and recording a tax windfall from share-based compensation awards exercised, which were offset by the application of tax credits claimed as offsets against our payroll tax liabilities, and interest and penalties on uncertain tax positions.

We recorded income tax expense of $7.6 million for the fiscal year ended 2019 , compared to income tax benefit of $2.6 million for the fiscal year ended 2018 .

The effective tax rate for the fiscal year ended 2019 was 25.6% , which differed from the federal statutory tax rate of 21.0% .

The valuation allowance increased mainly due to the accrual of income tax credits that were greater than our ability to utilize before expiration.

These items were partially offset by benefits from federal and state tax credits.

The effective tax rate for the fiscal year ended 2018 was (9.7)% , which differed from the statutory federal income tax rate of 24.5% , mainly due to one-time events like the decrease in our uncertain tax positions and a re-measurement of our deferred tax assets and liabilities as a result of the Tax Act.

The rate was also favorably impacted by normal tax rate benefit items, such as the domestic production activities deduction, federal and state tax credits, and share based award related deductions in excess of recorded book expense.

Adjusted EBITDA .

The increase in adjusted EBITDA was primarily the result of a decrease in selling, general and administrative expenses when adjusted for specific non-recurring operational and product development initiatives, which was partially offset by decreased gross profit.

The increase in Adjusted EBITDA was primarily the result of increased gross profit.

The following table sets forth a reconciliation of net income to Adjusted EBITDA for the fiscal years presented:

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Interest expense, net (1)

Income tax (benefit) expense

Income tax expense (benefit)

Depreciation, amortization, and disposals (2)

Loss on debt extinguishment

Operational transformation initiatives

Foreign currency hedges

Share-based compensation

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Adjusted EBITDA Margin (percentage of net sales)

(1) Includes $0.4 million for fiscal 2019 , representing interest expense on operating lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

(2) Includes $0.7 million for fiscal 2019 , representing amortization on right-of-use operating lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Consolidated Statements of Operations.

Liquidity and Capital Resources

The Company's primary sources of liquidity are cash generated from operations, available cash, and borrowings under the credit facility.

At September 28, 2019 , the Company had $71.0 million of available cash and cash equivalents (net of outstanding checks) and $93.1 million of additional borrowings available under the revolving line of credit portion of its senior secured credit facilities.

At October 3, 2020 , the Company had $44.5 million of available cash and cash equivalents (net of outstanding checks) and $135.0 million of additional borrowings available under the revolving line of credit portion of its credit facility.

The Company’s revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.

At October 3, 2020 , the Company was in compliance with all covenants required by the credit facility.

Credit Agreement

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The proceeds of the loans under the Credit Facilities that were borrowed on the Closing Date were used to finance in part, together with available cash on hand, (i) the repayment of certain existing indebtedness of the Company and its subsidiaries, and (ii) transaction costs associated with the consummation of the Credit Facilities.

The obligations under the Credit Agreement and the related loan documents (including without limitation, the borrowings under the Facilities (including the Incremental Term Loan) and obligations in respect of certain cash management and hedging obligations owing to the agents, the lenders or their affiliates), are, in each case, secured by a lien on and security interest in substantially all of the assets of the Company and its subsidiaries (including the Borrower), with certain exclusions as set forth in a collateral agreement entered into on December 12, 2016.

The obligations under the Credit Agreement and the related loan documents (including without limitation, the borrowings under the Credit Facilities (including the Incremental Term Loan discussed below) and obligations in respect of certain cash management and hedging obligations owing to the agents, the lenders or their affiliates), are, in each case, secured by a lien on and security interest in substantially all of the assets of the Company and its subsidiaries (including the Borrower), with certain exclusions as set forth in a collateral agreement entered into on December 12, 2016.

Up to $75.0 million of additional term loans and/or revolving credit commitments may be incurred under the Credit Agreement, subject to certain limitations as set forth in the Credit Agreement, and which additional loans and/or commitments would require further commitments from the existing lenders or from new lenders.

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The negative covenants and restrictions include, among others:

amendments to and subordinated indebtedness, restrictive agreements, sale and leaseback transactions and certain permitted acquisitions.

limitations on liens, dispositions of assets, consolidations and mergers, loans and investments, indebtedness, transactions with affiliates (including management fees and compensation), dividends, distributions and other restricted payments, change in fiscal year, fundamental changes, amendments to and subordinated indebtedness, restrictive agreements, sale and leaseback transactions and certain permitted acquisitions.

Dividends, distributions, and other restricted payments are permitted in certain circumstances under the Credit Agreement, generally based upon our levels of excess free cash flow and Unrestricted Cash (as defined in the Credit Agreement) and maintenance of specified Total Net Leverage Ratios.

Amended Credit Agreement

On September 13, 2018, the Company executed an amendment to the Credit Agreement (the "Amended Credit Agreement"), by and among the Company, the Borrower, and Bank of Montreal, acting as administrative agent together with other lenders.

The Amended Credit Agreement, provides for an aggregate lender commitment of $50.0 million in additional term loan borrowings (the “Incremental Term Loan”).

First Amended Credit Agreement

On September 13, 2018, the Company executed an amendment to the Credit Agreement (the "First Amended Credit Agreement"), by and among the Company, the Borrower, and Bank of Montreal, acting as administrative agent together with other lenders.

The First Amended Credit Agreement provided for an aggregate lender commitment of $50.0 million in additional term loan borrowings (the “Incremental Term Loan”).

The Incremental Term Loan was intended to finance a portion of a tender offer up to $50.0 million, which transaction closed in October 2018.

After giving effect to the Amended Credit Agreement, the initial $160.0 million Term Loan Facility, with a balance of $146.2 million at September 29, 2018, increased $50.0 million, and the initial $75.0 million Revolving Credit Facility increased $25.0 million.

The amended Credit Facilities each mature on September 13, 2023, the fifth anniversary of the effective date of the Amended Credit Agreement.

After giving effect to the Amended Credit Agreement, the interest payable with respect to the Term Loan Facility is (i) from the first amendment effective date until the first quarter ended on or about September 30, 2018, LIBOR plus 2.25% and (ii) commencing with the fiscal quarter ended on or about September 30, 2018 and thereafter, dependent on the Total Net Leverage Ratio of the Company, an election of either base rate or LIBOR pursuant to the table below.

The Company's Total Net Leverage Ratio is defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, which includes certain add-backs that are not reflected in the definition of Adjusted EBITDA appearing in the Company’s Annual Report on Form 10-K, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending.

After giving effect to the First Amended Credit Agreement, the initial $160.0 million Term Loan Facility, with a balance of $146.2 million at September 29, 2018, increased $50.0 million, and the initial $75.0 million Revolving Credit Facility increased $25.0 million.

The amended Credit Facilities each mature on September 13, 2023, the fifth anniversary of the effective date of the First Amended Credit Agreement.

After giving effect to the First Amended Credit Agreement, the interest payable with respect to the Term Loan Facility was (i) from the first amendment effective date until the first quarter ended on or about September 30, 2018, LIBOR plus 2.25% and (ii) commencing with the fiscal quarter ended on or about September 30, 2018 and thereafter, dependent on the Total Net Leverage Ratio of the Company, an election of either base rate or LIBOR pursuant to the table below.

The Company's Total Net Leverage Ratio is defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, which is an adjusted EBITDA metric that could differ from Adjusted EBITDA appearing in the Company’s periodic filings on Form 10-K or Form 10-Q as the adjustments to the calculations are not uniform, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending.

Total Net Leverage Ratio

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Greater than 3.50x

Under the Amended Credit Agreement, the principal of the Term Facility must be paid in quarterly installments on the last day of each fiscal quarter, in an amount equal to:

Under the First Amended Credit Agreement, the principal of the Term Facility must be paid in quarterly installments on the last day of each fiscal quarter, in an amount equal to:

$2,475,000 per quarter beginning on the last day of the Company’s first fiscal quarter of 2019 through the last day of the Company’s third fiscal quarter in 2021;

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$4,950,000 per quarter beginning on the last day of the Company’s fourth fiscal quarter in 2022 through the last day of the Company’s second fiscal quarter in 2023, with the remaining principal amount due at maturity.

There are customary events of default under the Amended Credit Agreement, including, among other things, events of default resulting from (i) failure to pay obligations when due under the Amended Credit Agreement, (ii) insolvency of the Company or its material subsidiaries, (iii) defaults under other material debt, (iv) judgments against the Company or its subsidiaries, (v) failure to comply with certain financial maintenance covenants (as set forth in the Amended Credit Agreement), or (vi) a change of control of the Company, in each case subject to limitations and exceptions as set forth in the Amended Credit Agreement.

The Amended Credit Agreement contains customary covenants and warranties including, among other things, an amended Total Net Leverage Ratio financial maintenance covenant which requires compliance as follows:

There are customary events of default under the First Amended Credit Agreement, including, among other things, events of default resulting from (i) failure to pay obligations when due under the First Amended Credit Agreement, (ii) insolvency of the Company or its material subsidiaries, (iii) defaults under other material debt, (iv) judgments against the Company or its subsidiaries, (v) failure to comply with certain financial maintenance covenants (as set forth in the First Amended Credit Agreement), or (vi) a change of control of the Company, in each case subject to limitations and exceptions as set forth in the First Amended Credit Agreement.

The First Amended Credit Agreement contains customary covenants and warranties including, among other things, an amended Total Net Leverage Ratio financial maintenance covenant which requires compliance as follows:

Maximum Total

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Fourth quarter of the 2021 fiscal year and thereafter

At September 28, 2019 , the Borrower and the guarantors were in compliance with all covenants in the Amended Credit Agreement.

Second Amended Credit Agreement

On May 7, 2020, the Company entered into a second amendment which amended the First Amended Credit Agreement, dated as of September 13, 2018 (the “Second Amended Credit Agreement”).

The Second Amended Credit Agreement provided $41.9 million in additional revolving commitments bringing the total revolving commitments to $141.9 million.

The revolving commitments under the Second Amended Credit Agreement matures on September 13, 2023, which is the fifth anniversary of the effective date of the First Amended Credit Agreement.

The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0% to 0.75%.

Third Amended Credit Agreement

On December 4, 2020, the Company executed a third amendment to the Credit Agreement, the First Amended Credit Agreement and the Second Amended Credit Agreement (the "Third Amended Credit Agreement" and collectively, the "Amended Credit Agreement").

The Third Amended Credit Agreement, among other things, provides for certain temporary amendments to the Credit Agreement from the third amendment effective date through and including the first date on which (a)(i) a compliance certificate is timely delivered with respect to a fiscal quarter ending on or after March 31, 2022 demonstrating compliance with certain financial performance covenants for such fiscal quarter (the “Limited Availability Period”), or (ii) the Borrower elects to terminate the Limited Availability Period;

and (b) the absence of a default or event of default under the Amended Credit Agreement.

Amendments to the financial performance covenants provide that during the Limited Availability Period, a higher maximum Total Net Leverage Ratio is permitted, and requires the Company to maintain liquidity (in the form of undrawn availability under the Revolving Credit Facility and unrestricted cash and cash equivalents) of at least $15.0 million.

For the duration between the fiscal quarter ending December 31, 2020 and the fiscal quarter ending September 30, 2021 that falls within the Limited Availability Period, a quarterly minimum consolidated EBITDA covenant applies instead of a maximum Total Net Leverage Ratio.

The pricing grid in the First Amended Credit Agreement, which is based on the ratio of the Company’s consolidated net debt to consolidated EBITDA, remains unchanged.

However, during the Limited Availability Period, an additional margin of 0.50% applies.

During the Limited Availability Period, the Amended Credit Agreement requires that the Borrower prepay existing revolving loans and, if undrawn and unreimbursed letters of credit exceed $7.0 million, cash collateralize letters of credit if unrestricted cash and cash equivalents exceed $20.0 million, as determined on a semimonthly basis.

Any issuance, amendment, renewal, or extension of credit during the Limited Availability Period may not cause unrestricted cash and cash equivalents to exceed $20.0 million, or cause the aggregate outstanding Revolving Credit Facility principal to exceed $100.0 million.

The Third Amended Credit Agreement also implements a cap on permissible investments, restricted payments, certain payments of indebtedness and the fair market value of all assets subject to permitted dispositions during the Limited Availability Period.

For the duration of the Limited Availability Period, the Amended Credit Agreement sets forth additional monthly reporting requirements, and requires subordination agreements and intercreditor arrangements for certain other indebtedness and liens subject to administrative agent approval.

Short-Term and Long-Term Liquidity Requirements

Our ability to make principal and interest payments on borrowings under the Amended Credit Agreement and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.

Based on the current level of operations, we believe that our existing cash balances and expected cash flows from operations will be sufficient to meet operating requirements for at least the next 12 months.

Our business is highly seasonal.

Most school districts seek to buy their new school buses so that they will be available for use on the first day of the school year, typically in mid-August to early September.

As a result, our two busiest quarters are our third and fourth fiscal quarters, the latter ending on the Saturday closest to September 30.

Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these seasonal patterns.

For example, our revenues are typically highest in our third and fourth fiscal quarters.

There are, however, variations in the seasonal demands from year to year depending, in part, on large direct sales to major fleet customers for which short-term trade credit is generally offered.

Working capital, on the other hand, is typically a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter.

We typically conduct planned shutdowns during our first fiscal quarter.

Our ability to make principal and interest payments on borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.

During fiscal 2020, the novel coronavirus known as "COVID-19" spread throughout the world, resulting in a global pandemic.

The pandemic materially impacted our fiscal 2020 results causing lower customer orders for both buses and parts, supply disruptions, higher rates of absenteeism among our hourly production workforce, and a temporary shutdown of manufacturing.

The continuing development and fluidity of the pandemic precludes any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity.

A prolonged economic downturn resulting from the continuing pandemic would likely have a material adverse impact on our financial results.

See PART I, Item 1A.

"Risk Factors", of this Annual Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

The pandemic could cause a severe contraction in our profits and/or liquidity which could lead to issues complying with our Credit Facility covenants.

Our primary financial covenants are (i) for fiscal 2021, minimum consolidated EBITDA, an adjusted EBITDA metric that could differ from Adjusted EBITDA appearing in the Company’s periodic filings on Form 10-K or Form 10-Q as the adjustments to the calculations are not uniform, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending;

b) for fiscal 2021 and the first two quarters of fiscal 2022, minimum liquidity at the end of each month, and (iii) beginning in fiscal 2022 and thereafter, Total Net Leverage Ratio, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA.

We may need to seek additional covenant relief or even refinance the debt to a "covenant light" or "no covenant" structure.

We cannot assure our investors that we would be successful in amending or refinancing our existing debt.

An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses than included in our historical financial statements.

On March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law.

The CARES Act, among other things, includes provisions related to the deferment of employer-side social security payments (the Employer Payroll Tax Payment Deferral Provision).

We have elected to defer these payments that would otherwise be due and payable through December 31, 2020.

A 50% minimum payment of the deferred amount is due on December 31, 2021 with the remainder due by December 31, 2022.

We estimate between $4.0 and $6.0 million in payments could be delayed.

We also have and expect to defer contributions to our defined benefit pension plan of approximately $3.2 million for fiscal 2020.

The delayed contribution payments are due on January 4, 2021.

Historically, our business has been highly seasonal with school districts buying their new schools buses so that they will be available for use on the first day of the school year, typically in mid-August to early September.

This has resulted in our third and fourth fiscal quarters becoming our two busiest quarters, the latter ending on the Saturday closest to September 30.

Our quarterly results of operations, cash flows, and liquidity have been and are likely to be impacted by the seasonal patterns.

Working capital has historically been a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter with planned shutdowns during our first fiscal quarter.

With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality and working capital trends have become unpredictable.

Seasonality and variations from historical seasonality have impacted the comparison of working capital and liquidity results between fiscal periods.

The following table sets forth general information derived from our statement of cash flows for the fiscal years presented:

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Cash and cash equivalents, end of year

Depreciation and amortization expense

Cash paid for fixed assets and acquired intangible assets

Total cash provided by operating activities

Cash flows provided by operating activities totaled $3.5 million for the fiscal year ended 2020 , as compared with $55.7 million of cash flows provided by operating activities for the fiscal year ended 2019 .

The primary drivers of the $52.2 million decrease were the following:

A year over year reduction of $12.1 million in net income.

The effect of net changes in operating assets and liabilities negatively impacted 2020 operating cash flow by $35.0 million compared to 2019 .

The primary drivers in this category were the unfavorable changes in accounts payable and accrued expenses of $75.7 million as well as accounts receivable of $10.6 million , which were partially offset by improvements in inventory level changes of $43.8 million and other assets of $9.7 million .

The impact of non-cash items (net source of cash) were $5.1 million higher in fiscal 2019 compared to fiscal 2020 .

Non-cash items impact net income, but do not have direct cash outflows associated with them.

The significant differences were the impact of higher amounts of deferred taxes of $6.6 million , share-based compensation of $0.1 million , and pension amortization expense of $1.0 million in fiscal 2019 compared to fiscal 2020 .

These were partially offset by an increase in depreciation and amortization expense in fiscal 2020 of $4.0 million .

Cash flows provided by operating activities totaled $55.7 million for the fiscal year ended 2019 , as compared with $48.4 million of cash flows provided by operating activities for the fiscal year ended 2018 .

The primary drivers of the $7.4 million increase were the following:

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In fiscal 2019, the pension liability increased by $24.5 million (source of cash) compared to fiscal 2018.

In fiscal 2018, the pension liability decreased by $11.3 million (use of cash) compared to fiscal 2017.

The release of $7.6 million in fiscal 2018 for uncertain tax positions lowered the accrued expense balance (use of cash) compared to fiscal 2017.

Non-cash items (source of cash) were $5.4 million higher in fiscal 2019 compared to the prior year.

In fiscal 2018, the pension liability decreased by $11.3 million (use of cash).

The release of $7.6 million in fiscal 2018 for uncertain tax positions lowered the accrued expense balance (use of cash).

Non-cash items (source of cash) were $5.4 million higher compared to the fiscal year ended 2018.

Non-cash items impact net income, but do not have direct cash outflows associated with them.

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The cash flow difference due to changes in other assets was a $4.7 million decrease (source of cash) from fiscal 2018 to fiscal 2019, but a $2.8 million increase (use of cash) from fiscal 2017 to fiscal 2018.

The combined changes are a $7.4 million decrease in fiscal 2019 from the prior year.

The primary driver of the change is a $3.8 million federal income tax receivable recorded in fiscal 2019 that was not recorded in fiscal 2018.

The combined changes resulted in $7.4 million decrease in fiscal 2019 from the prior year.

The primary driver of the change was a $3.8 million federal income tax receivable recorded in fiscal 2019 that was not recorded in fiscal 2018.

Net income was lower by $6.5 million in fiscal 2019 compared to the prior year.

Cash flows provided by operating activities totaled $48.4 million for the fiscal year ended 2018 , as compared with $47.6 million of cash flows provided by operating activities for the fiscal year ended 2017 .

The $0.7 million increase was primarily attributed to a $2.0 million increase in net income, an improvement in the cash flow impacts of changes to working capital and other assets of $19.0 million, and $2.2 million in additional non-cash components to net income in the year.

The sources of operating cash were largely offset by a $15.3 million negative difference in the cash flow impacts of accrued expenses between the years which includes the release of our uncertain tax position, as well as a decrease of $2.8 million in dividends received from our Micro Bird joint venture.

Total cash used in investing activities

Cash flows used in investing activities totaled $18.8 million for the fiscal year ended 2020 , as compared with $35.5 million of cash flows used in investing activities for the fiscal year ended 2019 .

The $3.4 million increase in cash used was primarily due to increased spending on manufacturing assets associated with our new paint facility.

The $16.7 million decrease in cash used was primarily due to decreased spending on manufacturing assets associated with our new paint facility in fiscal 2020 as compared to fiscal 2019.

Cash flows used in investing activities totaled $35.5 million for the fiscal year ended 2019 , as compared with $32.1 million of cash flows used in investing activities for the fiscal year ended 2018 .

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Cash used in financing activities totaled $11.1 million for the fiscal year ended 2020 , as compared with $9.5 million in cash used in financing activities for the fiscal year ended 2019 .

The $9.1 million decrease in cash used was mainly attributed to no share repurchase programs in fiscal 2019 compared to fiscal 2018 (a $26.6 million decrease), no cash dividends paid on preferred stock in fiscal 2019 compared to fiscal 2018 (a $1.9 million decrease), no cash paid for debt issuance costs in fiscal 2019 compared to fiscal 2018 (a $2.0 million decrease), and a decrease of $1.6 million in cash paid for vested restricted shares and stock option exercises.

The decreases in use were partially offset by a $20.6 million decrease in proceeds received from warrant exercises and a $2.1 million increase in debt principal payments.

In fiscal 2019 , the Company received $50.0 million in borrowings under the senior term loan;

however, the net impact on cash was not significant as the proceeds from the borrowings were used to fund a tender offer to purchase 1,782,568 shares of our common stock and 364 shares of our preferred stock at a purchase price totaling $50.4 million (which includes fees and expenses related to the tender offer).

In fiscal 2020 we used more cash compared to the prior year on finance leases totaling $0.8 million million, debt issuance costs totaling $0.9 million , and payments of employee taxes for share-based compensation activity totaling $2.9 million .

An increased source of cash, which partially offset cash use, was $2.7 million more in cash received for warrant exercises compared to the prior year.

All of our existing warrants are now expired or exercised so this component of cash from financing activities is not expected to repeat in future years.

Cash used in financing activities totaled $9.5 million for the fiscal year ended 2019 , as compared with $18.6 million in cash used in financing activities for the fiscal year ended 2018 .

The $9.1 million decrease in cash used was mainly attributed to a decrease of $26.6 million in cash spent on share repurchases under share repurchase programs, a $1.9 million decrease in cash dividends paid on preferred stock, and a $2.1 million decrease in debt principal payments.

The decreases in cash used were partially offset by an increase of $1.7 million paid for debt issuance costs and a $1.2 million increase in cash taxes paid for employee taxes on vested restricted shares and stock option exercises.

The decreases in cash used were partially offset by an increase of $2.0 million paid for debt issuance costs and a $1.6 million increase in cash taxes paid for employee taxes on vested restricted stock and stock option exercises.

In fiscal 2019 , the Company received $50.0 million in borrowings under the term loan;

Free cash flow

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Free cash flow

Free cash flow for the fiscal year ended 2019 was $4.0 million higher than free cash flow for the fiscal year ended 2018 , primarily due to an increase of $3.4 million in cash paid for manufacturing assets, which was partially offset by a $7.4 million increase from cash provided by operating activities as discussed above.

Free cash flow for the fiscal year ended 2018 was $22.2 million lower than free cash flow for the fiscal year ended 2017 , primarily due to an increase of $22.9 million in cash paid for manufacturing assets, which was partially offset by a $0.7 million increase from cash provided by operating activities as discussed above.

Commitments and Contractual Obligations

In the normal course of business, we enter into various contractual obligations that impact, or could impact, our liquidity.

The table below outlines our projected cash payments for material obligations at September 28, 2019 .

Also refer to Note 10 , Guarantees, Commitments and Contingencies , to the accompanying consolidated financial statements for further information on our commitments and contractual obligations.

Payments Due by Period

(in thousands)

Less than 1 year

More than 5 years

Debt obligations (1)

Interest expense on long-term debt obligations (2)

Accrued warranty costs (3)

Operating lease obligations (4)

Future pension plan contributions (5)

Finance lease obligations (6)

Purchase commitments (7)

Total commitments and contractual obligations

(1) Reflects principal payments under the amended credit agreement.

Refer to Note 8 , Debt , for further information.

(2) Reflects estimated interest expense using the stated interest rate at the end of the period.

(3) Reflects accrued anticipated warranty costs based on the historical average per unit warranty cost of the relevant bus model type.

(4) Represents the future minimum lease payments under non-cancelable operating leases with original terms exceeding one year.

(5) Represents expected future minimum IRS contributions required to fund Blue Bird's pension plan, based on current actuarial assumptions.

(6) Represents the future minimum lease payments under non-cancelable finance leases, including interest.

(7) Reflects non-cancelable purchase commitments for manufacturing inventory and capital assets.

Free cash flow for the fiscal year ended 2020 was $35.7 million lower than free cash flow for the fiscal year ended 2019 , primarily due to a $52.2 million decrease in cash provided by operating activities as discussed above.

This was partially offset by a reduction of $16.5 million in cash paid for manufacturing assets as we limited capital expenditures in fiscal 2020 and had significant capital expenditures related to our new paint facility in fiscal 2019 that did not recur.

Free cash flow for the fiscal year ended 2019 was $4.0 million higher than free cash flow for the fiscal year ended 2018 , primarily due to a $7.4 million increase from cash provided by operating activities as discussed above, partially offset by an increase of $3.4 million in cash paid for manufacturing assets.

Off-Balance Sheet arrangements

We had outstanding letters of credit totaling $6.9 million at September 28, 2019 , the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

At September 28, 2019 , there were 0.4 million shares of common stock issuable upon exercise of outstanding warrants.

We had outstanding letters of credit totaling $6.9 million at October 3, 2020 , the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had a $3.0 million guarantee outstanding at October 3, 2020 which relates to a guarantee of indebtedness for a term loan with a remaining maturity up to 2.3 years .

The $3.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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Use of Estimates and Assumptions

T he preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S.

T he preparation of financial statements in accordance with U.S.

GAAP requires management to make estimates and assumptions.

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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 Consolidated Statements of Operations.

The Company includes shipping and handling revenues, which are costs billed to customers, in net sales on the Consolidated Statements of Operations.

The related costs incurred by the Company are included in cost of goods sold on the Consolidated Statements of Operations.

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Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using loss development factors and actuarial assumptions followed in the insurance industry and historical loss development experience.

At September 28, 2019 and September 29, 2018 , reserves totaled approximately $4.7 million and $5.2 million , respectively.

At October 3, 2020 and September 28, 2019 , reserves totaled approximately $5.0 million and $4.7 million , respectively.

The Company values inventories at the lower of cost or net realizable value.

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Goodwill represents the excess of the purchase price of acquired businesses over the fair value of the assets acquired less liabilities assumed in connection with such acquisition.

In accordance with the provisions of ASC 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill and intangible assets with indefinite useful lives acquired in an acquisition are not amortized, but instead are tested for impairment at least annually or more frequently should an event occur or circumstances indicate that the carrying amount may be impaired.

In accordance with the provisions of Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill and intangible assets with indefinite useful lives acquired in an acquisition are not amortized, but instead are tested for impairment at least annually or more frequently should an event occur or circumstances indicate that the carrying amount may be impaired.

Such events or circumstances may be a significant change in business climate, economic and industry trends, legal factors, negative operating performance indicators, significant competition, changes in strategy or disposition of a reporting unit or a portion thereof.

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If a qualitative assessment is not performed or if a quantitative assessment is otherwise required, then the entity compares the fair value of an asset to its carrying amount and the amount of the impairment loss, if any, is the difference between fair value and carrying value.

The fair value of our trade name is derived by using the relief from royalty method, which discounts the estimated cash savings we realized by owning the name instead of otherwise having to license or lease it.

The fair value of our trade name is derived by using the relief from royalty method, which discounts the estimated cash savings we realize by owning the name instead of otherwise having to license or lease it.

During the fourth quarter of each fiscal year presented, we performed our annual impairment assessment of our trade name which did not indicate that an impairment existed.

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These differences may result in a significant impact to the measurement of our pension benefit obligations, and to the amount of pension benefits expense we may record.

For example, at September 28, 2019 , a one-half percent increase in the discount rate would reduce the projected benefit obligation of our pension plans by approximately $9.6 million , while a one-half percent decrease in the discount rate would increase the projected benefit obligation of our pension plans by approximately $10.9 million .

For example, at October 3, 2020 , a one-half percent increase in the discount rate would reduce the projected benefit obligation of our pension plans by approximately $10.2 million , while a one-half percent decrease in the discount rate would increase the projected benefit obligation of our pension plans by approximately $11.7 million .

Product Warranty Costs

18 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis