Blue Bird Corp 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Stockholders and Board of Directors Blue Bird Corporation Macon, Georgia Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Blue Bird Corporation (the “Company”) as of October 3, 2020 and September 28, 2019, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended October 3, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 3, 2020 and September 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 3, 2020 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of October 3, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated December 17, 2020 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company's auditor since 2016. Atlanta, Georgia December 17, 2020 43 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Blue Bird Corporation Macon, Georgia Opinion on Internal Control over Financial Reporting We have audited Blue Bird Corporation’s (the “Company’s”) internal control over financial reporting as of October 3, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 3, 2020, based on the COSO criteria . We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of October 3, 2020 and September 28, 2019, the related consolidated statements of operations and comprehensive income, stockholders’ deficit, and cash flows for each of the three years in the period ended October 3, 2020, and the related notes and schedule and our report dated December 17, 2020 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP Atlanta, Georgia December 17, 2020 44 BLUE BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands except for share data) October 3, 2020 September 28, 2019 Assets Current assets Cash and cash equivalents $ 44,507 $ 70,959 Accounts receivable, net 7,623 10,537 Inventories 56,523 78,830 Other current assets 8,243 11,765 Total current assets $ 116,896 $ 172,091 Property, plant and equipment, net 103,372 100,058 Goodwill 18,825 18,825 Intangible assets, net 51,632 54,720 Equity investment in affiliate 14,320 11,106 Deferred tax assets 4,365 3,600 Finance lease right-of-use assets 6,983 4,638 Other assets 1,022 375 Total assets $ 317,415 $ 365,413 Liabilities and Stockholders' Deficit Current liabilities Accounts payable $ 57,602 $ 102,266 Warranty 8,336 9,161 Accrued expenses 15,773 28,697 Deferred warranty income 8,540 8,632 Finance lease obligations 1,280 716 Other current liabilities 10,217 10,310 Current portion of long-term debt 9,900 9,900 Total current liabilities $ 111,648 $ 169,682 Long-term liabilities Long-term debt $ 164,204 $ 173,226 Warranty 13,038 13,182 Deferred warranty income 14,048 15,413 Deferred tax liabilities 254 168 Finance lease obligations 5,879 3,921 Other liabilities 14,315 12,108 Pension 47,259 45,524 Total long-term liabilities $ 258,997 $ 263,542 Guarantees, commitments and contingencies (Note 10) Stockholders' deficit Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 issued with liquidation preference of $0 at October 3, 2020 and September 28, 2019 $ — $ — Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,048,404 and 26,476,336 shares outstanding at October 3, 2020 and September 28, 2019, respectively. 3 3 Additional paid-in capital 88,910 84,271 Accumulated deficit ( 33,464 ) ( 45,649 ) Accumulated other comprehensive loss ( 58,397 ) ( 56,154 ) Treasury stock, at cost, 1,782,568 shares at October 3, 2020 and September 28, 2019 ( 50,282 ) ( 50,282 ) Total stockholders' deficit $ ( 53,230 ) $ ( 67,811 ) Total liabilities and stockholders' deficit $ 317,415 $ 365,413 The accompanying notes are an integral part of these consolidated financial statements. 45 BLUE BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended (in thousands except for share data) 2020 2019 2018 Net sales $ 879,221 $ 1,018,874 $ 1,024,976 Cost of goods sold 783,021 885,400 902,988 Gross profit $ 96,200 $ 133,474 $ 121,988 Operating expenses Selling, general and administrative expenses 74,206 89,642 86,911 Operating profit $ 21,994 $ 43,832 $ 35,077 Interest expense ( 12,252 ) ( 12,879 ) ( 6,661 ) Interest income 11 9 70 Other income (expense), net 738 ( 1,331 ) ( 1,613 ) Income before income taxes $ 10,491 $ 29,631 $ 26,873 Income tax (expense) benefit ( 1,519 ) ( 7,573 ) 2,620 Equity in net income of non-consolidated affiliate 3,213 2,242 1,327 Net income $ 12,185 $ 24,300 $ 30,820 Earnings per share: Net income (from above) $ 12,185 $ 24,300 $ 30,820 Less: preferred stock dividends — — 1,896 Net income available to common stockholders $ 12,185 $ 24,300 $ 28,924 Basic weighted average shares outstanding 26,850,999 26,455,436 25,259,595 Diluted weighted average shares outstanding 27,086,555 27,043,814 28,616,862 Basic earnings per share $ 0.45 $ 0.92 $ 1.15 Diluted earnings per share $ 0.45 $ 0.90 $ 1.08 The accompanying notes are an integral part of these consolidated financial statements. 46 BLUE BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Years Ended (in thousands) 2020 2019 2018 Net income $ 12,185 $ 24,300 $ 30,820 Other comprehensive (loss) income, net of tax Net change in defined benefit pension plan ( 2,243 ) ( 17,727 ) 5,448 Total other comprehensive (loss) income, net of tax $ ( 2,243 ) $ ( 17,727 ) $ 5,448 Comprehensive income $ 9,942 $ 6,573 $ 36,268 The accompanying notes are an integral part of these consolidated financial statements. 47 BLUE BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended (in thousands) 2020 2019 2018 Cash flows from operating activities Net income $ 12,185 $ 24,300 $ 30,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,400 10,383 9,042 Non-cash interest expense 3,651 3,822 771 Share-based compensation 4,141 4,273 2,628 Equity in net income of affiliate ( 3,213 ) ( 2,242 ) ( 1,327 ) (Gain) loss on disposal of fixed assets ( 76 ) 5 114 Deferred taxes 29 6,632 5,655 Amortization of deferred actuarial pension losses 1,720 2,758 3,521 Foreign currency hedges — 109 ( 109 ) Changes in assets and liabilities: Accounts receivable 2,914 13,530 ( 13,920 ) Inventories 22,308 ( 21,497 ) 17,786 Other assets 5,068 ( 4,651 ) 2,755 Accounts payable ( 40,258 ) 6,318 3,096 Accrued expenses, pension and other liabilities ( 19,410 ) 9,707 ( 14,307 ) Dividend from equity investment in affiliate — 2,259 1,828 Total adjustments $ ( 8,726 ) $ 31,406 $ 17,533 Total cash provided by operating activities $ 3,459 $ 55,706 $ 48,353 Cash flows from investing activities Cash paid for fixed assets and acquired intangible assets $ ( 18,968 ) $ ( 35,514 ) $ ( 32,118 ) Proceeds from sale of fixed assets 165 47 14 Total cash used in investing activities $ ( 18,803 ) $ ( 35,467 ) $ ( 32,104 ) Cash flows from financing activities Borrowings under the term loan $ — $ 50,000 $ — Repayments of the term loan ( 9,900 ) ( 9,900 ) ( 7,850 ) Principal payments on finance leases ( 945 ) ( 133 ) — Cash paid for capital leases — — ( 158 ) Cash paid for debt issuance costs ( 935 ) — ( 2,006 ) Payment of dividends on preferred stock — — ( 1,896 ) Cash paid for employee taxes on vested restricted shares and stock option exercises ( 3,568 ) ( 636 ) ( 2,211 ) Proceeds from exercises of warrants 4,240 1,499 22,102 Common stock, preferred stock, and warrant repurchases under share repurchase programs — — ( 26,586 ) Tender offer repurchase of common stock and preferred stock — ( 50,370 ) — Total cash used in financing activities $ ( 11,108 ) $ ( 9,540 ) $ ( 18,605 ) Change in cash and cash equivalents ( 26,452 ) 10,699 ( 2,356 ) Cash and cash equivalents, beginning of year 70,959 60,260 62,616 Cash and cash equivalents, end of year $ 44,507 $ 70,959 $ 60,260 48 Fiscal Years Ended (in thousands) 2020 2019 2018 Supplemental disclosures of cash flow information Cash paid or received during the period: Interest paid, net of interest received $ 7,591 $ 10,408 $ 5,782 Income tax (received) paid, net of tax refunds ( 1,542 ) 4,586 3,673 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 $ ( 5,422 ) $ 8,040 $ 6,389 Cashless exercise of stock options 5,246 481 3,570 Cashless exercise of warrants — 416 — Right-of-use assets obtained in exchange for operating lease obligations — 8,040 — Right-of-use assets obtained in exchange for finance lease obligations 3,496 4,770 — Conversion of preferred stock into common stock — 9,264 — The accompanying notes are an integral part of these consolidated financial statements. 49 BLUE BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Common Stock Convertible Preferred Stock Treasury Stock (in thousands 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 30, 2017 23,739,344 $ 2 $ 45,418 400,000 $ 40,000 $ ( 43,875 ) $ ( 100,055 ) — $ — $ ( 58,510 ) Exercise of stock warrants 1,921,901 1 22,102 — — — — — — 22,103 Restricted stock activity 33,963 — ( 370 ) — — — — — — ( 370 ) Stock option activity 97,504 — ( 1,841 ) — — — — — — ( 1,841 ) Preferred stock dividends — — ( 1,896 ) — — — — — — ( 1,896 ) Share repurchase program ( 1,183,412 ) — ( 26,586 ) — — — — — — ( 26,586 ) Preferred stock conversion 2,649,962 — 30,700 ( 307,000 ) ( 30,700 ) — — — — — Share-based compensation expense — — 2,496 — — — — — — 2,496 Net income — — — — — — 30,820 — — 30,820 Other comprehensive income, net of tax — — — — — 5,448 — — — 5,448 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 ) Exercise of stock warrants 144,996 — 1,499 — — — — — — 1,499 Restricted stock activity 51,195 — ( 596 ) — — — — — — ( 596 ) Stock option activity 3,836 — ( 40 ) — — — — — — ( 40 ) Tender offer share repurchases ( 1,782,568 ) — ( 52 ) ( 364 ) ( 36 ) — — 1,782,568 ( 50,282 ) ( 50,370 ) Preferred stock conversion 799,615 — 9,264 ( 92,636 ) ( 9,264 ) — — — — — Share-based compensation expense — — 4,173 — — — — — — 4,173 Net income — — — — — — 24,300 — — 24,300 Other comprehensive loss, net of tax — — — — — ( 17,727 ) — — — ( 17,727 ) Balance, September 28, 2019 26,476,336 $ 3 $ 84,271 — $ — $ ( 56,154 ) $ ( 45,649 ) 1,782,568 $ ( 50,282 ) $ ( 67,811 ) Exercise of stock warrants 368,712 — 4,240 — — — — — — 4,240 Restricted stock activity 94,724 — ( 1,623 ) — — — — — — ( 1,623 ) Stock option activity 108,632 — ( 1,945 ) — — — — — — ( 1,945 ) Share-based compensation expense — — 3,967 — — — — — — 3,967 Net income — — — — — — 12,185 — — 12,185 Other comprehensive loss, net of tax — — — — — ( 2,243 ) — — — ( 2,243 ) Balance, October 3, 2020 27,048,404 $ 3 $ 88,910 — $ — $ ( 58,397 ) $ ( 33,464 ) 1,782,568 $ ( 50,282 ) $ ( 53,230 ) The accompanying notes are an integral part of these consolidated financial statements. 50 BLUE BIRD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Basis of Presentation Nature of Business Blue Bird Body Company, a wholly-owned subsidiary of Blue Bird, 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. COVID-19 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 impacted our fiscal 2020 results, causing lower customer orders for both buses and bus 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. Basis of Presentation The accompanying 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 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 2020 there were 53 weeks and there were 52 weeks in fiscal years 2019 and 2018 . 2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards 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, including the extent and duration of the COVID-19 related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s 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. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 51 Allowance for Doubtful Accounts Accounts receivable consist of amounts owed to the Company by customers. The Company monitors collections and payments from customers, and generally does not require collateral. Accounts receivable are generally due within 30 to 90 days. The Company provides for the possible inability to collect accounts receivable by recording an allowance for doubtful accounts. The Company reserves for an account when it is considered potentially uncollectible. The Company estimates its allowance for doubtful accounts based on historical experience, aging of accounts receivable and information regarding the creditworthiness of its customers. To date, losses have been within the range of management’s expectations. The Company writes off accounts receivable if it determines that the account is uncollectible. Revenue Recognition The Company records revenue 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 are costs billed to customers, in net sales on the Consolidated Statements of Operations. Shipping and handling costs incurred are included in cost of goods sold. See Note 12 , Revenue , for further revenue information. See Note 3 , Supplemental Financial Information , for further information on warranties. Self-Insurance The Company is self-insured for the majority of its workers’ compensation and medical claims. The expected ultimate cost for claims incurred as of the balance sheet date is not discounted and is recognized as a liability. 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. See Note 3 , Supplemental Financial Information , and Note 16 , Benefit Plans , for further information. Financial Instruments The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, accounts payable, revolving credit facilities and long-term debt. The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate their fair values because of the short-term maturity and highly liquid nature of these instruments. The carrying value of the Company’s term loan approximates fair value due to the variable interest rate. See Note 8 , Debt , for further discussion. 52 Derivative Instruments In limited circumstances, we may utilize derivative instruments to manage certain exposures to changes in foreign currency exchange rates or interest rates relating to 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 mitigated. The exchange of cash, if any, associated with derivative transactions is classified in the same category as the cash flows from the underlying items giving rise to the foreign currency or interest rate exposures. Inventories The Company values inventories at the lower of cost or net realizable value. The Company uses a standard costing methodology, which approximates cost on a first-in, first-out (“FIFO”) basis. The Company reviews the standard costs of raw materials, work-in-process and finished goods inventory on a periodic basis to ensure that its inventories approximate current actual costs. Manufacturing cost includes raw materials, direct labor and manufacturing overhead. Obsolete inventory amounts are based on historical usage and assumptions about future demand. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis using the following periods, which represent the estimated useful lives of the assets: Years Buildings 15 - 33 Machinery and equipment 5 - 10 Office furniture, equipment and other 3 - 10 Computer equipment and software 3 - 7 Costs, including capitalized interest and certain design, construction and installation costs related to assets that are under construction and are in the process of being readied for their intended use, are recorded as construction in progress and are not depreciated until such time as the subject asset is placed in service. Repairs and maintenance that do not extend the useful life of the asset are expensed as incurred. Upon sale, retirement, or other disposition of these assets, the costs and related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included on our Consolidated Statements of Operations. Leases We determine if an arrangement is or contains a lease at inception. The Company enters into lease arrangements primarily for office space, warehouse space, or a combination of both. We elected to account for leases with initial terms of 12 months or less as straight-line expense and not record assets or liabilities. For a lease with an initial term greater than 12 months, the Company recognizes a right-of-use (“ROU”) asset and lease liability on the Consolidated Balance Sheets. 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. We determine whether the lease is an operating or finance lease at inception based on the information and expectations for the lease at that time. Operating lease ROU assets are included in property, plant and equipment and the lease liabilities are included in other current liabilities and other liabilities on our Consolidated Balance Sheets. Finance lease ROU assets are included in finance lease right-of-use assets and the lease liabilities are included in finance lease obligations (current) and finance lease obligations (long-term) on our Consolidated Balance Sheets. 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease ROU assets also include any base rental or lease payments made and excludes lease incentives. The two components of operating lease expense, amortization and interest, are recognized on a straight-line basis over the lease term as a single expense element within selling, general and administrative expenses on the Consolidated Statements of Operations. Under the finance lease model, interest on the lease liability is recognized in interest expense and amortization of ROU assets is recorded on the Consolidated Statements of Operations based on the underlying use of the assets. 53 Impairment of Long-Lived Assets The Company reviews its long-lived assets, including property, plant and equipment, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If we are required to analyze recoverability based on a triggering event, undiscounted future cash flows over the estimated remaining life of the asset, or asset group, are projected. If these projected cash flows are less than the carrying amount, an impairment loss is recognized to the extent the fair value of the asset less any costs of disposition is less than the carrying amount of the asset. Judgments regarding the existence of impairment indicators are based on market and operational performance. Evaluating potential impairment also requires estimates of future operating results and cash flows. No impairment charge was recognized in any of the periods presented. Goodwill and Intangible Assets 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 , 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. We have two reporting units for which we test goodwill for impairment: Bus and Parts. In the evaluation of goodwill for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. If, under the quantitative assessment, the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, we would record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value, should such a circumstance arise. Fair value of the reporting units is estimated primarily using the income approach, which incorporates the use of discounted cash flow ("DCF") analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate and working capital changes. The cash flow forecasts are based on approved strategic operating plans and long-term forecasts. In the evaluation of indefinite lived assets for impairment, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary, or to perform a quantitative assessment by comparing the fair value of an asset to its carrying amount. The Company’s intangible asset with an indefinite useful life is the "Blue Bird" trade name. Under the qualitative assessment, an entity is not required to calculate the fair value of the asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. 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. Our intangible assets with a definite useful life are amortized over their estimated useful lives, 2 , 7 , or 20 years, using the straight-line method. The useful lives of our intangible assets are reassessed annually and they are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Debt Issue Costs Amounts paid directly to lenders or as an original issue discount and amounts classified as issuance costs are recorded as a reduction in the carrying value of the debt, for which the Company had deferred financing costs totaling $ 2.2 million and $ 3.1 million at October 3, 2020 and September 28, 2019 , respectively, incurred in connection with its debt facilities and related amendments. All deferred financing costs are amortized to interest expense. The effective interest method is used for debt discounts related to the term loan. The Company’s amortization of these costs was $ 0.9 million , $ 0.9 million and $ 0.8 million for the fiscal years ended 2020 , 2019 and 2018 , respectively, and is reflected as a component of interest expense on the Consolidated Statements of Operations. See Note 8 , Debt , for a discussion of the Company’s indebtedness. 54 Pensions The Company accounts for its pension benefit obligations using actuarial models. The measurement of plan obligations and assets was made at October 3, 2020 . Effective January 1, 2006, the benefit plan was frozen to all participants. No accrual of future benefits is earned or calculated beyond this date. Accordingly, our obligation estimate is based on benefits earned at that time discounted using an estimate of the single equivalent discount rate determined by matching the plan’s future expected cash flows to spot rates from a yield curve comprised of high quality corporate bond rates of various durations. The Company recognizes the funded status of its pension plan obligations on the Consolidated Balance Sheet and records in other comprehensive income (loss) certain gains and losses that arise during the period, but are deferred under pension accounting rules. Pension expense is recognized as a component of other expense, net on our Consolidated Statements of Operations. Product Warranty Costs The Company’s products are generally warranted against defects in material and workmanship for a period of one year to five years . A provision for estimated warranty costs is recorded at the time a unit is sold. The methodology to determine the warranty reserve calculates the average expected warranty claims using warranty claims by body type, by month, over the life of the bus, which is then multiplied by remaining months under warranty, by warranty type. Management believes the methodology provides an accurate reserve estimate. Actual claims incurred could differ from the original estimates, requiring future adjustments. The Bus segment also sells extended warranties related to its products. Revenue related to these contracts is recognized on a straight-line basis over the contract period and costs thereunder are expensed as incurred. All warranty expenses are recorded in the cost of goods sold line on the Consolidated Statements of Operations. The current methodology to determine short-term extended warranty income reserve is based on twelve months of the remaining warranty value for each effective extended warranty at the balance sheet date. See Note 3 , Supplemental Financial Information , for further information. Research and Development Research and development costs are expensed as incurred and included in selling, general and administrative expenses on our Consolidated Statements of Operations. For the fiscal years ended 2020 , 2019 and 2018 , the Company expensed $ 6.4 million , $ 11.5 million and $ 8.5 million , respectively. Income Taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires an asset and liability approach to financial accounting and reporting for income taxes. Under this approach, deferred income taxes represent the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities. The Company evaluates its ability, based on the weight of evidence available, to realize future tax benefits from deferred tax assets and establishes a valuation allowance to reduce a deferred tax asset to a level which, more likely than not, will be realized in future years. The Company recognizes uncertain tax positions based on a cumulative probability assessment if it is more likely than not that the tax position will be sustained upon examination by an appropriate tax authority with full knowledge of all information. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Amounts recorded for uncertain tax positions are periodically assessed, including the evaluation of new facts and circumstances, to ensure sustainability of the positions. The Company records interest and penalties related to unrecognized tax benefits in income tax expense. Environmental Liabilities The Company records reserves for environmental liabilities on a discounted basis when environmental investigation and remediation obligations are probable and related costs are reasonably estimable. See Note 10 , Guarantees, Commitments and Contingencies , for further information. Segment Reporting Operating segments are components of an entity that engage in business activities with discrete financial information available that is regularly reviewed by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. The Company’s CODM is the Company’s President and Chief Executive Officer. As discussed further in Note 11 , Segment Information , the Company determined its operating and reportable segments to be Bus and Parts. The Bus segment includes the manufacturing and assembly of school buses to be sold to a variety of customers across the United States, Canada and in international markets. The Parts segment consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. 55 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 Adopted Accounting Standards ASU 2018-02 – In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) . This ASU provides guidance on a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the effect of the tax rate change resulting from the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act"). The amendments eliminate the stranded tax effects resulting from the Tax Act and improve the usefulness of information reported to financial statement users. This ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We adopted this ASU, in the first quarter of fiscal 2020, and did not elect to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. We use a specific identification approach to release the income tax effects in AOCI. ASU 2019-12 – In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes , which simplifies the process for calculating interim (intraperiod) income taxes and the accounting for deferred tax liabilities for foreign equity-method investments, among other simplifications. We early adopted this standard effective the first quarter of fiscal 2020 and the the impacts of adopting this standard were not material. Recently Issued Accounting Standards ASU 2020-04 – On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR, which is currently expected to occur on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. An entity may elect to apply the amendments prospectively from March 12, 2020 through December 31, 2022. Our debt and derivative agreements currently reference LIBOR. Contract language is expected to be incorporated into these agreements to address the transition to an alternative reference rate. We are currently evaluating the impact this ASU may have on our consolidated financial statements. 3. Supplemental Financial Information Accounts Receivable Accounts receivable, net, consisted of the following at the dates indicated: ( in thousands ) October 3, 2020 September 28, 2019 Accounts receivable $ 7,723 $ 10,637 Allowance for doubtful accounts ( 100 ) ( 100 ) Accounts receivable, net $ 7,623 $ 10,537 Product Warranties The following table reflects activity in accrued warranty cost (current and long-term portion combined) for the fiscal years presented: (in thousands) 2020 2019 2018 Balance at beginning of period $ 22,343 $ 22,646 $ 20,910 Add: current period accruals 8,980 10,869 11,454 Less: current period reductions of accrual ( 9,949 ) ( 11,172 ) ( 9,718 ) Balance at end of period $ 21,374 $ 22,343 $ 22,646 56 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 years to five years , for the fiscal years presented: (in thousands) 2020 2019 2018 Balance at beginning of period $ 24,045 $ 23,191 $ 19,295 Add: current period deferred income 7,298 9,238 10,854 Less: current period recognition of income ( 8,755 ) ( 8,384 ) ( 6,958 ) Balance at end of period $ 22,588 $ 24,045 $ 23,191 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 $ 8.5 million of the outstanding contract liability in fiscal 2021 , and the remaining balance thereafter. Self-Insurance The following table reflects the total accrued self-insurance liability, comprised of workers' compensation and health insurance related claims, at the dates indicated: (in thousands) October 3, 2020 September 28, 2019 Current portion $ 2,993 $ 2,933 Long-term portion 1,962 1,775 Total accrued self-insurance $ 4,955 $ 4,708 The current and long-term portions of the accrued self-insurance liability are included in accrued expenses and other liabilities, respectively, on the accompanying Consolidated Balance Sheets. Shipping and Handling Shipping and handling revenues recognized were $ 16.9 million , $ 19.4 million and $ 20.7 million for the fiscal years ended 2020 , 2019 and 2018 , respectively. The related cost of goods sold were $ 14.5 million , $ 17.0 million and $ 17.8 million for the fiscal years ended 2020 , 2019 and 2018 , respectively. Derivative Instruments We are charged variable rates of interest on our indebtedness outstanding under the Amended Credit Agreement (defined in Note 8 ) 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. During the fiscal year ended October 3, 2020 , the three-month LIBOR rate fell below the established floor, which required an immaterial cash payment to the counterparty. Additionally, $ 0.5 million was accrued as interest expense in the fourth quarter of fiscal 2020 when the three-month LIBOR rate again fell below the established floor and is expected to be paid in the first quarter of fiscal 2021. Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At October 3, 2020 , the fair value of the interest rate collar contract was $( 3.8 ) million and is included in "other current liabilities" on the 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. 57 4. Inventories The following table presents components of inventories at the dates indicated: (in thousands) October 3, 2020 September 28, 2019 Raw materials $ 43,272 $ 60,033 Work in process 8,989 16,663 Finished goods 4,262 2,134 Total inventories $ 56,523 $ 78,830 5. Property, Plant and Equipment Property, plant and equipment, net, consisted of the following at the dates indicated: (in thousands) October 3, 2020 September 28, 2019 Land $ 2,164 $ 2,164 Buildings 46,509 45,550 Machinery and equipment 100,112 97,460 Office furniture, equipment and other 2,184 2,182 Computer equipment and software 17,443 16,638 Construction in process 18,028 8,421 Property, plant and equipment, gross 186,440 172,415 Accumulated depreciation and amortization ( 88,925 ) ( 79,229 ) Operating lease right-of-use assets (1) 5,857 6,872 Property, plant and equipment, net $ 103,372 $ 100,058 (1) Further information is included in Note 10 , Guarantees, Commitments and Contingencies . Depreciation and amortization expense for property, plant and equipment was $ 10.1 million , $ 7.3 million , and $ 7.0 million for the fiscal years ended 2020 , 2019 , and 2018 , respectively. We capitalized $ 0.5 million of interest expense in the fiscal year ended 2020 related to the construction of plant manufacturing assets. 6. Goodwill The carrying amounts of goodwill by reporting unit are as follows at the dates indicated: (in thousands) Gross Goodwill Accumulated Impairments Net Goodwill October 3, 2020 Bus $ 15,139 $ — $ 15,139 Parts 3,686 — 3,686 Total $ 18,825 $ — $ 18,825 September 28, 2019 Bus $ 15,139 $ — $ 15,139 Parts 3,686 — 3,686 Total $ 18,825 $ — $ 18,825 In the fourth quarters of the fiscal years ended 2020 and 2019 , we performed our annual impairment assessment of goodwill which did not indicate that an impairment existed; therefore, no impairments of goodwill have been recorded. 58 7. Intangible Assets The gross carrying amounts and accumulated amortization of intangible assets are as follows at the dates indicated: October 3, 2020 September 28, 2019 (in thousands) Gross Carrying Amount Accumulated Amortization Total Gross Carrying Amount Accumulated Amortization Total Finite lived: Engineering designs $ 3,156 $ 2,556 $ 600 $ 3,156 $ 1,337 $ 1,819 Finite lived: Customer relationships 37,425 26,209 11,216 37,425 24,340 13,085 Total amortized intangible assets 40,581 28,765 11,816 40,581 25,677 14,904 Indefinite lived: Trade name 39,816 — 39,816 39,816 — 39,816 Total intangible assets $ 80,397 $ 28,765 $ 51,632 $ 80,397 $ 25,677 $ 54,720 Management considers the "Blue Bird" trade name to have an indefinite useful life and, accordingly, it is not subject to amortization. Management reached this conclusion principally due to the longevity of the Blue Bird name and because management considers renewal upon reaching the legal limit of the trademarks related to the trade name as perfunctory. The Company expects to maintain usage of the trade name on existing products and introduce new products in the future that will also display the trade name. During the fourth quarters of the fiscal years ended 2020 and 2019 , we performed our annual impairment assessment of our trade name, which did not indicate that an impairment existed; therefore, no impairment of our indefinite lived intangible has been recorded. Customer relationships are amortized on a straight-line basis over an estimated life of 20 years. Engineering designs are amortized on a straight-line basis over an estimated life of 2 or 7 years. Total amortization expense for intangible assets was $ 3.1 million , $ 2.9 million , and $ 2.0 million for the fiscal years ended 2020 , 2019 , and 2018 , respectively. Amortization expense for finite lived intangible assets for the next five years is expected to be as follows: (in thousands) Fiscal Years Ending Amortization Expense 2021 $ 2,189 2022 2,010 2023 2,010 2024 1,869 2025 1,869 Thereafter 1,869 Total amortization expense $ 11,816 8. Debt Original Credit Agreement On December 12, 2016, Blue Bird Body Company, a wholly-owned subsidiary of the Company (the "Borrower"), executed a $ 235.0 million five -year credit agreement with Bank of Montreal, which acts as the administrative agent and an issuing bank, Fifth Third Bank, as co-syndication agent and an issuing bank, and Regions Bank, as Co-Syndication Agent, together with other lenders (the "Credit Agreement"). The credit facility provided for under the Credit Agreement consisted of a term loan facility in an aggregate initial principal amount of $ 160.0 million (the “Term Loan Facility”) and a revolving credit facility with aggregate commitments of $ 75.0 million . The revolving credit facility includes a $ 15.0 million letter of credit sub-facility and a $ 5.0 million swing-line sub-facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, each a “Credit Facility” and collectively, the “Credit Facilities”). The obligations under the Credit Agreement and the related loan documents (including without limitation, the borrowings under the Credit Facilities and obligations in respect of certain cash management and hedging obligations owing to the agents, the lenders or their affiliates), are, in each case, secured by a lien on and security interest in substantially all of the assets of the Company and its subsidiaries including the Borrower, with certain exclusions as set forth in a collateral agreement entered into on the closing date. 59 First Amendment to the Credit Agreement On September 13, 2018, the Company entered into a first amendment of the December 12, 2016 Credit Agreement ("First Amended Credit Agreement"). The First Amended Credit Agreement provided for additional funding of $ 50.0 million and was funded in the first quarter of fiscal 2019. Substantially all of the proceeds were used to complete a tender offer to purchase shares of our common and preferred stock. The First Amended Credit Agreement also increased the revolving credit facility to $ 100.0 million from $ 75.0 million , a $ 25.0 million increase. The amendment extended the maturity date to September 13, 2023, five years from the effective date of the first amendment. The first amendment also amended the interest rate pricing matrix (as follows) as well as the principal payment schedule (as disclosed at the end of this footnote). In connection with the First 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 First Amended Credit Agreement using the effective interest method. The interest rate on 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: Level Total Net Leverage Ratio ABR Loans Eurodollar Loans I Less than 2.00x 0.75 % 1.75 % II Greater than or equal to 2.00x and less than 2.50x 1.00 % 2.00 % III Greater than or equal to 2.50x and less than 3.00x 1.25 % 2.25 % IV Greater than or equal to 3.00x and less than 3.25x 1.50 % 2.50 % V Greater than or equal to 3.25x and less than 3.50x 1.75 % 2.75 % VI Greater than 3.50x 2.00 % 3.00 % Second Amendment to the 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 % . We incurred $ 0.9 million in fees related to the amendment. The fees were capitalized to other assets on the Consolidated Balance Sheets and are amortized on a straight-line basis to interest expense until maturity of the agreement. Additional Disclosures Debt consisted of the following at the dates indicated: (in thousands) October 3, 2020 September 28, 2019 2023 term loan, net of deferred financing costs of $2,246 and $3,124, respectively $ 174,104 $ 183,126 Less: Current portion of long-term debt 9,900 9,900 Long-term debt, net of current portion $ 164,204 $ 173,226 Term loans are recognized on the 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 the unpaid principal balance to approximate 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 October 3, 2020 and September 28, 2019 , $ 176.4 million and $ 186.3 million , respectively, were outstanding on the term loans. At October 3, 2020 and September 28, 2019 , the stated interest rates on the term loans were 3.5 % and 4.4 % , respectively. At October 3, 2020 and September 28, 2019 , the weighted-average annual effective interest rates for the term loans were 4.1 % and 5.0 % , respectively, which included amortization of the deferred financing costs. 60 No borrowings were outstanding on the Revolving Credit Facility at October 3, 2020 ; however, there were $ 6.9 million of Letters of Credit outstanding on October 3, 2020 , providing the Company the ability to borrow $ 135.0 million on the revolving line of credit. Interest expense on all indebtedness for the fiscal years ended 2020 , 2019 and 2018 was $ 12.3 million , $ 12.9 million , and $ 6.7 million , respectively. The schedule of remaining principal maturities for total debt is as follows: (in thousands) Year Principal Payments 2021 $ 9,900 2022 14,850 2023 151,600 Total remaining principal payments $ 176,350 9. Income Taxes The components of income tax (expense) benefit were as follows for the fiscal years presented: (in thousands) 2020 2019 2018 Current tax provision: Federal $ ( 1,425 ) $ 156 $ 8,925 State ( 65 ) ( 985 ) ( 559 ) Foreign — ( 112 ) ( 91 ) Total current tax (provision) benefit $ ( 1,490 ) $ ( 941 ) $ 8,275 Deferred tax provision: Federal $ ( 715 ) $ ( 5,844 ) $ ( 6,816 ) State 686 ( 788 ) 1,161 Total deferred tax (provision) benefit ( 29 ) ( 6,632 ) ( 5,655 ) Income tax (expense) benefit $ ( 1,519 ) $ ( 7,573 ) $ 2,620 At October 3, 2020 , the Company had $ 8.0 million in state tax credit carryforwards and no federal tax credit carryforwards. The Company maintains a partial valuation allowance on the state tax credit carryforwards. Of this balance, the Company estimates approximately $ 3.6 million of state tax credit carryforwards will expire unused between 2029 and 2031. At October 3, 2020 , the Company had $ 11.3 million in state net operating loss ("NOL") carryforwards and no Federal NOL carryfowards. Of this balance, the Company estimates approximately $ 10.9 million of state NOL carryforwards will expire unused between 2028 and 2033. The effective tax rates for the fiscal years ended 2020 , 2019 and 2018 were 14.5 % , 25.6 % and ( 9.7 )% , respectively. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly changed U.S. tax law. The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. While the statutory rate was 21 % in 2018, the Company applied a transitional or blended U.S. statutory federal income tax rate of 24.5 % for the fiscal year ended 2018. The impact of the Tax Act decreased our benefit for income taxes by $ 2.1 million in 2018. The decrease was composed of $ 2.0 million related to the re-measurement of net deferred tax assets and liabilities and $ 0.1 million associated with the deemed repatriation tax. In 2018, we finalized our tax reform estimates under Staff Accounting Bulletin 118. 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. 61 The effective tax rate for the fiscal year ended 2019 significantly differed from the statutory federal income tax rate of 21 % , 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 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. A reconciliation between the reported income tax (expense) benefit and the amount computed by applying the statutory federal income tax rate is as follows: (in thousands) 2020 2019 2018 Federal tax expense at statutory rate $ ( 2,203 ) $ ( 6,223 ) $ ( 6,584 ) (Increase) reduction in income taxes resulting from: State taxes, net 1,508 ( 611 ) 1,501 Change in uncertain tax positions — — 7,606 Share-based compensation 188 ( 320 ) 735 Permanent items ( 33 ) ( 59 ) 366 Valuation allowance ( 977 ) ( 1,043 ) ( 783 ) Tax credits 390 470 470 Return to accrual true-ups ( 260 ) 115 1,699 Investor tax on non-consolidated affiliate income ( 185 ) 14 1,734 Tax rate adjustments — ( 32 ) ( 3,756 ) Other 53 116 ( 368 ) Income tax (expense) benefit $ ( 1,519 ) $ ( 7,573 ) $ 2,620 The Company’s liability arising from uncertain tax positions was recorded in other non-current liabilities on the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (in thousands) 2020 2019 2018 Balance, beginning of year $ — $ — $ 6,389 Lapses of applicable statute of limitations — — ( 6,389 ) Balance, end of year $ — $ — $ — The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no accrued interest and penalties at October 3, 2020 and September 28, 2019 . The Company is subject to taxation mostly in the United States and various state jurisdictions. At October 3, 2020 , tax years prior to 2015 are generally no longer subject to examination by federal and most state tax authorities. 62 The following table sets forth the sources of and differences between the financial accounting and tax bases of the Company’s assets and liabilities which give rise to the net deferred tax assets at the dates indicated: (in thousands) October 3, 2020 September 28, 2019 Deferred tax liabilities Property, plant and equipment $ ( 11,029 ) $ ( 12,944 ) Other intangible assets ( 11,807 ) ( 12,054 ) Investor tax on non-consolidated affiliate income ( 668 ) ( 495 ) Other assets ( 135 ) ( 93 ) Total deferred tax liabilities $ ( 23,639 ) $ ( 25,586 ) Deferred tax assets NOL carryforward $ 600 $ 601 Accrued expenses 8,419 7,923 Compensation 11,416 12,415 Inventories 1,017 1,023 Unearned income 3,444 3,669 Tax credits 6,307 5,863 Total deferred tax assets $ 31,203 $ 31,494 Less: valuation allowance ( 3,453 ) ( 2,476 ) Deferred tax assets less valuation allowance $ 27,750 $ 29,018 Net deferred tax assets $ 4,111 $ 3,432 10. Guarantees, Commitments and Contingencies Litigation At October 3, 2020 , 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 impact 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. Our environmental liability using a discount rate of 8.8 % , included in current accrued expenses and other long-term liabilities on the Consolidated Balance Sheets, was $ 0.2 million and $ 0.4 million at October 3, 2020 and September 28, 2019 , respectively. The estimated aggregate undiscounted amount that will be incurred over the next seven years is $ 0.6 million . At October 3, 2020 , the estimated payments for each of the next five years are $0.1 million per year and the aggregate amount thereafter is $0.2 million . Future expenditures may exceed the amounts accrued and estimated. Guarantees In the ordinary course of business, we may provide guarantees for certain transactions entered into by our dealers. At October 3, 2020 , we had a $ 3.0 million guarantee outstanding 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. At October 3, 2020 , $ 0.3 million was included in other current liabilities on our Consolidated Balance Sheets for the estimated fair value of the guarantee. 63 Lease Commitments We have operating and finance leases for office space, warehouse space, or a combination of both. Our leases have remaining lease terms ranging from 4 years, 2 months to 7.2 years with the option to extend leases for up to 5.0 years . The components of lease costs included on the Consolidated Statements of Operations are as follows: (in thousands) Fiscal Years Ended Lease cost Classification 2020 2019 Operating leases Selling, general and administrative expenses $ 1,440 $ 1,898 Finance leases Amortization of lease assets Cost of goods sold 1,168 133 Interest on lease liabilities Interest expense 238 17 Short-term leases (1) Cost of goods sold or selling, general and administrative expenses 1,390 1,356 Total lease cost $ 4,236 $ 3,404 (1) Short-term lease cost includes both leases and rentals with initial terms of one year or less. Classification depends on the purpose of the underlying lease. Total rent expense was $ 2.0 million for the fiscal year 2018 . The following table summarizes the lease amounts included on the Consolidated Balance Sheets as follows: (in thousands) Balance Sheet Location October 3, 2020 September 28, 2019 Assets Operating Property, plant and equipment $ 5,857 $ 6,872 Finance (1) Finance lease right-of-use 6,983 4,638 Total lease assets $ 12,840 $ 11,510 Liabilities Current Operating Other current liabilities $ 1,060 $ 1,187 Finance Finance lease obligations 1,280 716 Long-term Operating Other liabilities 6,651 7,658 Finance Finance lease obligations 5,879 3,921 Total lease liabilities $ 14,870 $ 13,482 (1) Net of accumulated amortization of $ 1.3 million and $ 0.1 million , respectively. The operating leases recorded do not assume renewal based on our analysis of those leases and their contractual terms. One of our finance leases assumes renewal based on our expectations with regard to the lease and the contractual terms. 64 Lease liability maturities are presented in the following table: (in thousands) October 3, 2020 Fiscal Years Ended Operating Finance Total 2021 $ 1,388 $ 1,530 $ 2,918 2022 1,404 1,530 2,934 2023 1,427 1,530 2,957 2024 1,444 1,530 2,974 2025 1,456 1,755 3,211 Thereafter 1,780 — 1,780 Total future minimum lease payments 8,899 7,875 16,774 Less: imputed interest 1,188 716 1,904 Total lease liabilities $ 7,711 $ 7,159 $ 14,870 Lease terms and discount rates are presented in the following table: October 3, 2020 Operating Finance Weighted average remaining lease term 6.3 years 4.7 years Weighted average discount rate 4.5 % 3.8 % Supplemental cash flow information is presented in the following table: Fiscal Years Ended (in thousands) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows - operating leases $ 1,711 $ 1,758 Operating cash flows - finance leases 238 17 Financing cash flows - finance leases 945 133 Right-of-use assets exchanged for lease liabilities Operating leases $ — $ 8,040 Finance leases 3,496 4,770 Purchase Commitments In the ordinary course of business, the Company enters into short-term contractual purchase orders for manufacturing inventory and capital assets. The amount of these commitments is expected to be as follows: (in thousands) Fiscal Years Ended Amount 2021 $ 82,325 2022 159 Total purchase commitments $ 82,484 11. Segment Information We manage our business in two operating segments: (i) the Bus segment, which includes the manufacture 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: 65 Net sales (in thousands) 2020 2019 2018 Bus (1) $ 822,616 $ 952,242 $ 962,769 Parts (1) 56,605 66,632 62,207 Segment net sales $ 879,221 $ 1,018,874 $ 1,024,976 (1) Parts segment revenue includes $ 4.1 million , $ 3.5 million , and $ 2.4 million for the fiscal years ended 2020 , 2019 and 2018 , respectively, related to inter-segment sales of parts that was eliminated by the Bus segment upon consolidation. Gross profit (in thousands) 2020 2019 2018 Bus $ 76,059 $ 110,015 $ 100,002 Parts 20,141 23,459 21,986 Segment gross profit $ 96,200 $ 133,474 $ 121,988 The following table is a reconciliation of segment gross profit to consolidated income before income taxes for the fiscal years presented: (in thousands) 2020 2019 2018 Segment gross profit $ 96,200 $ 133,474 $ 121,988 Adjustments: Selling, general and administrative expenses ( 74,206 ) ( 89,642 ) ( 86,911 ) Interest expense ( 12,252 ) ( 12,879 ) ( 6,661 ) Interest income 11 9 70 Other income (expense), net 738 ( 1,331 ) ( 1,613 ) Income before income taxes $ 10,491 $ 29,631 $ 26,873 Sales are attributable to geographic areas based on customer location and were as follows for the fiscal years presented: (in thousands) 2020 2019 2018 United States $ 795,207 $ 929,523 911,558 Canada 79,442 80,056 106,762 Rest of world 4,572 9,295 6,656 Total net sales $ 879,221 $ 1,018,874 1,024,976 12. Revenue The following table disaggregates revenue by product category for the periods presented: Fiscal Years Ended (in thousands) 2020 2019 2018 Diesel buses $ 397,567 $ 476,909 $ 588,863 Alternative fuel buses (1) 381,555 426,508 344,021 Other (2) 45,191 50,906 31,900 Parts 54,908 64,551 60,192 Net sales $ 879,221 $ 1,018,874 $ 1,024,976 (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, surcharges, chassis, and bus shell sales. 13. Stockholders’ Deficit Repurchase of Convertible Preferred Stock On November 13, 2018, the Company converted all remaining outstanding shares of its Series A Convertible Cumulative Preferred Stock, and issued 799,615 shares of Common Stock. There were no dividends paid with the conversion. Tender Offer On October 15, 2018, the Company received $ 50.0 million in funding from the Amended Credit Agreement (refer to Note 8 , Debt , for more information). In conjunction with the debt funding, we conducted a tender offer and accepted for purchase: (i) 1,782,568 shares of our Common Stock at a price of $ 28.00 per share, which we held as Treasury Stock; and (ii) 364 shares of our Series A Convertible Cumulative Preferred Stock at a price of $ 241.69 per share, The total aggregate cost was approximately $ 50.3 million , which includes fees and expenses related to the tender offer. 14. Earnings Per Share The following table presents the basic and diluted earnings per share computation for the fiscal years presented: (in thousands except share data) 2020 2019 2018 Numerator: Net income $ 12,185 $ 24,300 $ 30,820 Less: preferred stock dividends — — 1,896 Net income available to common stockholders $ 12,185 $ 24,300 $ 28,924 Basic earnings per share (1): Weighted average common shares outstanding 26,850,999 26,455,436 25,259,595 Basic earnings per share $ 0.45 $ 0.92 $ 1.15 Diluted earnings per share: Weighted average common shares outstanding 26,850,999 26,455,436 25,259,595 Weighted average dilutive securities, convertible preferred stock — 98,984 2,294,205 Weighted average dilutive securities, restricted stock 188,791 180,032 50,891 Weighted average dilutive securities, warrants — 179,105 737,183 Weighted average dilutive securities, stock options 46,765 130,257 274,988 Weighted average shares and dilutive potential common shares 27,086,555 27,043,814 28,616,862 Diluted earnings per share $ 0.45 $ 0.90 $ 1.08 (1) Potentially dilutive securities representing 0.4 million and 0.2 million shares of common stock were excluded from the computation of diluted earnings per share for the fiscal years ended October 3, 2020 and September 28, 2019, respectively, as their effect would have been anti-dilutive. 15. Share-Based Compensation In fiscal 2015, we adopted the Omnibus Equity Incentive Plan and in fiscal 2020 amended and restated the 2015 Omnibus Equity Incentive Plan (the "Plan"). The Plan is administered by the Compensation Committee of our Board of Directors and the Committee may grant awards for the issuance up to an aggregate of 5,200,000 shares of common stock in the form of non-qualified stock options, incentive stock options, stock appreciation rights (collectively, “SARs” and each individually a “SAR”), restricted stock, restricted stock units, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards. The exercise price of a share subject to a stock option may not be less than 100% of the fair market value of a share of the Company's common stock with respect to the grant date of such stock option. No portion of the options shall vest and become exercisable after the date on which the optionee’s service with the Company and its subsidiaries terminates. The vesting of all unvested shares of common stock subject to an option will automatically be accelerated in connection with a “Change in Control,” as defined in the Plan. 66 New shares of the Company's common stock are issued upon stock option exercises, or at the time of vesting for restricted stock. We have granted performance awards as part our overall compensation plans. The vesting of these awards is primarily based upon the attainment of certain performance metrics established under our annual management incentive plan, with the Compensation Committee of the Board of Directors maintaining final discretion over vesting amounts. Stock-based payments to employees, including grants of stock options, restricted stock awards ("RSA") and restricted stock units ("RSU"), are recognized in the financial statements based on their fair value. The fair value of each stock option award on the grant date is estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock price volatility, weighted-average risk-free interest rate and weighted average expected term of the options. The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility because we do not have a sufficient trading history as a stand-alone public company. Because we do not have sufficient history with respect to stock option activity and post-vesting cancellations, the expected term assumption is based on the simplified method under GAAP, which is based on the vesting period and contractual term for each vesting tranche of awards. The mid-point between the vesting date and the expiration date is used as the expected term under this method. The risk-free interest rate used in the Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a cash dividend on common shares. Restricted stock units and restricted stock awards are valued based on the intrinsic value of the difference between the exercise price, if any, of the award and the fair market value of our common stock on the grant date. We expense any award with graded-vesting features using a straight-line attribution method. Restricted Stock Awards The following table summarizes the Company's RSA and RSU activity for the fiscal year presented: 2020 Restricted Stock Activity Number of Shares Weighted-Average Grant Date Fair Value Balance, beginning of year 184,097 $ 17.30 Granted 216,944 18.93 Vested ( 183,962 ) 17.30 Forfeited ( 45,609 ) 20.02 Balance, end of year 171,470 18.64 The weighted-average grant date fair value of restricted stock awards granted in the fiscal years ended 2019 and 2018 was $ 17.30 and $ 18.59 , respectively. Compensation expense for restricted stock awards, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations, was $ 2.7 million , $ 2.6 million , and $ 1.6 million for the fiscal years ended 2020 , 2019 , and 2018 , respectively, with associated tax benefits of $ 0.7 million , $ 0.7 million , and $ 0.4 million , respectively. At October 3, 2020 , unrecognized compensation cost related to restricted stock awards totaled $ 1.1 million and is expected to be recognized over a weighted-average period of one year . 67 Stock Option Awards The following table summarizes the Company's stock option activity for the fiscal year presented: 2020 Number of Options Weighted Average Exercise Price per Share ($) Outstanding options, beginning of year 719,983 $ 14.45 Granted 385,215 18.77 Exercised (1) ( 405,064 ) 12.95 Forfeited ( 155,352 ) 18.48 Outstanding options, end of year (2) 532,298 $ 17.62 Fully vested and exercisable options, end of year (3) 316,859 $ 16.69 (1) Stock options exercised during the fiscal year had an aggregate intrinsic value totaling $ 4.3 million . (2) Stock options outstanding at the end of the fiscal year had no intrinsic value. (3) Fully vested and exercisable options at fiscal year-end had no intrinsic value. The total aggregate intrinsic value of stock options exercised during the fiscal years ended 2019 and 2018 was $ 0.1 million and $ 4.2 million , respectively. Compensation expense for stock option awards, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations, was $ 1.4 million , $ 1.5 million , and $ 0.9 million for the fiscal years ended 2020 , 2019 , and 2018 , respectively, with associated tax benefits of $ 0.4 million , $ 0.4 million , and $ 0.2 million , respectively. At October 3, 2020 , unrecognized compensation cost related to stock option awards totaled $ 0.7 million and is expected to be recognized over a weighted-average period of one year, two months . The fair value of each option award at grant date was estimated using the Black-Scholes option-pricing model with the following assumptions made and resulting grant-date fair values during the fiscal years presented: 2020 2019 2018 Expected volatility 32.0 % 31 % 29.2 % Expected dividend yield 0 % 0 % 0 % Risk-free interest rate 1.61 % 2.75 % 2.16 % Expected term (in years) 4.5 - 6.0 4.5 - 5.5 5.0 - 5.5 Weighted-average grant-date fair value $ 6.91 $ 5.58 $ 6.15 16. Benefit Plans Defined Benefit Pension Plan The Company has a defined benefit pension plan (the “Defined Benefit Plan”) covering U.S. hourly and salaried personnel. On May 13, 2002, the Defined Benefit Plan was amended to freeze new participation as of May 15, 2002, and therefore, any new employees who started on or after May 15, 2002 were not permitted to participate in the Defined Benefit Plan. Effective January 1, 2006, the benefit plan was frozen to all participants. No accrual of future benefits is calculated beyond this date. The Company contributed $ 0.5 million and $ 0.0 million to the Defined Benefit Plan during the fiscal years ended October 3, 2020 and September 28, 2019 , respectively. For the fiscal years ended October 3, 2020 and September 28, 2019 , benefits paid were $ 8.2 million and $ 7.3 million , respectively. The projected benefit obligation (“PBO”) for the Defined Benefit Plan was $ 169.7 million and $ 163.6 million at October 3, 2020 and September 28, 2019 , respectively. 68 The reconciliation of the beginning and ending balances of the PBO for the Defined Benefit Plan for the fiscal years indicated is presented in the following table: Benefit Obligation (in thousands) 2020 2019 Projected benefit obligation balance, beginning of year $ 163,572 $ 144,484 Interest cost 4,947 6,047 Assumption changes (1) 9,750 21,805 Actuarial gain ( 315 ) ( 1,423 ) Benefits paid ( 8,213 ) ( 7,341 ) Projected benefit obligations balance, end of year $ 169,741 $ 163,572 (1) The assumption changes referenced in the table above result from (i) changes in the utilized discount rate to value Blue Bird’s future obligations, and (ii) updates to the mortality table projections used in the calculation of the benefit obligations. Plan Assets: The summary and reconciliation of the beginning and ending balances of the fair value of the Defined Benefit Plan assets are as follows: Plan Assets (in thousands) 2020 2019 Fair value of plan assets, beginning of year $ 118,048 $ 123,471 Actual return on plan assets 12,147 1,918 Employer contribution 500 — Benefits paid ( 8,213 ) ( 7,341 ) Fair value of plan assets, end of year $ 122,482 $ 118,048 Funded Status: The following table reconciles the benefit obligations, plan assets, funded status and net liability information of the Defined Benefit Plan at the dates indicated. The net pension liability is reflected in long-term liabilities on the Consolidated Balance Sheets. Funded Status (in thousands) October 3, 2020 September 28, 2019 Benefit obligation $ 169,741 $ 163,572 Fair value of plan assets 122,482 118,048 Funded status ( 47,259 ) ( 45,524 ) Net pension liability recognized $ ( 47,259 ) $ ( 45,524 ) Fair Value of Plan Assets: The Company determines the fair value of its financial instruments in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Fair value represents the price to hypothetically sell an asset or transfer a liability in an orderly manner in the principal market for that asset or liability. This topic provides a hierarchy that gives highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities. This topic requires that financial assets and liabilities are classified into one of the following three categories: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability Level 3 Unobservable inputs for the asset or liability The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's valuation process. 69 The Defined Benefit Plan assets are comprised of various investment funds, which are valued based upon their quoted market prices. The invested pension plan assets of the Defined Benefit Plan are all Level 2 assets under ASC 820, Fair Value Measurements (“ASC 820”). During the fiscal years ended 2020 and 2019 , there were no transfers between levels. There are no sources of significant concentration risk in the invested assets at October 3, 2020 , the measurement date. The following table sets forth, by level within the fair value hierarchy, a summary of the Defined Benefit Plan’s investments measured at fair value: (in thousands) Level 1 Level 2 Level 3 Total October 3, 2020 Assets: Equity securities $ — $ 60,016 $ — $ 60,016 Debt securities — 62,466 — 62,466 Total assets at fair value $ — $ 122,482 $ — $ 122,482 September 28, 2019 Assets: Equity securities $ — $ 79,627 $ — $ 79,627 Debt securities — 38,421 — 38,421 Total assets at fair value $ — $ 118,048 $ — $ 118,048 The following table represents net periodic benefit cost and changes in plan assets and benefit obligations recognized in other comprehensive income, before tax effect, for the fiscal years presented: (in thousands) 2020 2019 2018 Interest cost $ 4,947 $ 6,047 $ 5,428 Expected return on plan assets ( 7,384 ) ( 7,619 ) ( 7,105 ) Amortization of net loss 1,720 2,758 3,521 Net periodic benefit cost $ ( 717 ) $ 1,186 $ 1,844 Net loss (gain) $ 4,671 $ 26,083 $ ( 3,787 ) Amortization of net loss ( 1,720 ) ( 2,758 ) ( 3,521 ) Total loss (gain) recognized in other comprehensive income $ 2,951 $ 23,325 $ ( 7,308 ) Total loss (gain) recognized in net periodic pension benefit cost and other comprehensive income $ 2,234 $ 24,511 $ ( 5,464 ) The estimated net loss for the Defined Benefit Plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $ 1.9 million . The unrecognized gain or loss is amortized as follows: the total unrecognized gain or loss, less the larger of 10% of the liability or 10% of the assets, is divided by the average future working lifetime of active plan participants. The following actuarial assumptions were used to determine the benefit obligations at the dates indicated: Weighted-average assumptions used to determine benefit obligations: October 3, 2020 September 28, 2019 Discount rate 2.55 % 3.10 % Rate of compensation increase N/A N/A Weighted-average assumptions used to determine net periodic benefit cost: October 3, 2020 September 28, 2019 Discount rate 3.10 % 4.30 % Expected long-term return on plan assets 6.37 % 6.37 % Rate of compensation increase N/A N/A The benchmark for the discount rates is an estimate of the single equivalent discount rate determined by matching the Defined Benefit Plan’s future expected cash flows to spot rates from a yield curve comprised of high quality corporate bond rates of various durations. 70 The Defined Benefit Plan asset allocations at the dates indicated, the measurement date, are as follows: October 3, 2020 September 28, 2019 Equity securities 49 % 67 % Debt securities 51 % 33 % Total securities 100 % 100 % There was no Company common stock included in equity securities. Assets of the Defined Benefit Plan are invested primarily in common stock funds. Assets are valued using quoted prices in active markets. The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the PBO. In estimating that rate, appropriate consideration is given to the returns being earned by the plan assets in the fund and rates of return expected to be available for reinvestment and a building block method. The expected rate of return on each asset class is broken down into three components: (1) inflation, (2) the real risk-free rate of return (i.e., the long term estimate of future returns on default free U.S. government securities), and (3) the risk premium for each asset class (i.e., the expected return in excess of the risk-free rate). The investment strategy for pension plan assets is to limit risk through asset allocation, diversification, selection and timing. Assets are managed on a total return basis, with dividends and interest reinvested in the account. The Company expects to contribute $ 5.8 million to its Defined Benefit Plan in fiscal year 2021 in accordance with required IRS minimums. The following benefit payments are expected to be paid out of the Company's pension assets to the plan participants in the fiscal years indicated: (in thousands) Expected Payments 2021 $ 8,026 2022 8,198 2023 8,373 2024 8,562 2025 8,746 2026 - 2030 44,296 Total expected future benefit payments $ 86,201 Defined Contribution Plan The Company offers a defined contribution 401(k) plan covering substantially all U.S. employees and a defined contribution plan for Canadian employees. During the fiscal years ended 2020 , 2019 and 2018 , the Company offered a 50 % match on the first 6 % of the employee’s contributions. The plans also provide for an additional discretionary match depending on Company performance. Compensation expense related to defined contribution plans totaled $ 2.2 million , $ 2.2 million and $ 1.9 million for the fiscal years ended 2020 , 2019 , and 2018 , respectively. Health Benefits The Company provides and is predominantly self-insured for medical, dental, and accident and sickness benefits. A liability related to this obligation is recorded on the Company’s Consolidated Balance Sheets as accrued expenses. Total expense related to this plan recorded for the fiscal years ended 2020 , 2019 , and 2018 , was $ 14.9 million , $ 12.1 million , and $ 14.3 million , respectively. Employee Compensation Plans The Management Incentive Plan (the “MIP”) compensates certain key salaried management employees and is derived from "Adjusted EBITDA" (earnings before interest, taxes, depreciation, and amortization, as adjusted) and "free cash flow" metrics. MIP bonus liabilities of $ 0.0 million and $ 4.8 million are included in accrued expenses on the Consolidated Balance Sheets at October 3, 2020 and September 28, 2019 , respectively. 71 17. Equity Investment in Affiliate On October 14, 2009, Blue Bird and Girardin MiniBus JV Inc. entered into a joint venture, Micro Bird Holdings, Inc. (“Micro Bird”), to combine the complementary expertise of the two separate manufacturers. Blue Bird Micro Bird by Girardin Type A buses are produced in Drummondville, Quebec by Micro Bird. The Company holds a 50 % equity interest in Micro Bird, utilizing the equity method of accounting as the Company does not have control to direct the activities that most significantly impact Micro Bird’s financial performance based on the shared powers of the venture partners. The carrying amount of the equity method investment is adjusted for the Company’s proportionate share of net earnings or losses and any dividends received. At October 3, 2020 and September 28, 2019 , the carrying value of the Company's investment was $ 14.3 million and $ 11.1 million , respectively. During fiscal years ended 2019 and 2018 , Micro Bird paid dividends to all common stockholders, and the Company received $ 2.3 million , and $ 1.8 million , respectively, gross of any required withholding taxes. The dividends reduced the carrying value of our investment and are presented as cash inflows in the operating section of our Consolidated Statements of Cash Flows. In recognizing the Company’s 50 % portion of Micro Bird net income, the Company recorded $ 3.2 million , $ 2.2 million , and $ 1.3 million in equity in net income of non-consolidated affiliate for the fiscal years ended 2020 , 2019 , and 2018 , respectively. Micro Bird's summarized balance sheet information at its September 30 year end is as follows: Balance Sheet (in thousands) 2020 2019 Current assets $ 33,094 $ 29,917 Non-current assets 4,243 3,765 Total assets 37,337 33,682 Current liabilities 22,797 24,826 Non-current liabilities 345 349 Total liabilities 23,142 25,175 Net assets $ 14,195 $ 8,507 Micro Bird's summarized financial results for its three fiscal years ended September 30 are as follows: Income Statement (in thousands) 2020 2019 2018 Revenues $ 113,179 $ 154,244 $ 116,866 Gross profit 14,895 15,031 11,806 Operating income 7,404 7,037 4,194 Net income 5,787 5,167 2,636 72 18. Accumulated Other Comprehensive Loss The following table provides information on changes in accumulated other comprehensive loss (“AOCL”) for the periods presented: (in thousands) Defined Benefit Pension Plan Total AOCL Balance, September 30, 2017 $ ( 43,875 ) $ ( 43,875 ) Other comprehensive income, gross 3,787 3,787 Amounts reclassified and included in earnings 3,521 3,521 Total before taxes 7,308 7,308 Income taxes ( 1,860 ) ( 1,860 ) Balance, September 29, 2018 $ ( 38,427 ) $ ( 38,427 ) Other comprehensive loss, gross ( 26,083 ) ( 26,083 ) Amounts reclassified and included in earnings 2,758 2,758 Total before taxes ( 23,325 ) ( 23,325 ) Income taxes 5,598 5,598 Balance, September 28, 2019 $ ( 56,154 ) $ ( 56,154 ) Other comprehensive loss, gross ( 4,671 ) ( 4,671 ) Amounts reclassified and included in earnings 1,720 1,720 Total before taxes ( 2,951 ) ( 2,951 ) Income taxes 708 708 Balance, October 3, 2020 $ ( 58,397 ) $ ( 58,397 ) 19. Subsequent Events Third Amendment to the 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"). 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. 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 Borrower is required to 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, there are additional monthly reporting requirements and requirements relating to subordination agreements and intercreditor arrangements for certain other indebtedness and liens subject to administrative agent approval. 73 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.