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Item 2. Management’s Discussion and Analysis

2021-02-11 compared with 2020-08-13 · 156 added, 212 removed, 176 unchanged (68% of the section changed)

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

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited financial statements for the three and nine months ended July 4, 2020 and June 29, 2019 and related notes appearing in Part I, Item 1 of this Report.

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited financial statements for the three months ended January 2, 2021 and January 4, 2020 and related notes appearing in Part I, Item 1 of this Report.

Our actual results may not be indicative of future performance.

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Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.

We refer to the fiscal year ended September 28, 2019 as “fiscal 2019 ”.

We refer to the quarter ended July 4, 2020 as the “ third quarter of fiscal 2020 ” and we refer to the quarter ended June 29, 2019 as the “ third quarter of fiscal 2019 ”.

The third quarters of fiscal 2020 and 2019 both included 13 weeks.

The nine month periods in fiscal 2020 and 2019 included 40 and 39 weeks, respectively.

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

We refer to the quarter ended January 2, 2021 as the “first quarter of fiscal 2021” and we refer to the quarter ended January 4, 2020 as the “first quarter of fiscal 2020”.

The first quarters of fiscal 2021 and 2020 included 13 and 14 weeks, respectively.

Fiscal year 2021 consists of 52 weeks while fiscal year 2020 consisted of 53 weeks.

Special Note Regarding Forward-Looking Statements

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These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements.

Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology.

Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology.

Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends.

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Available Information

We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC.

We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC.

We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC.

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

Impact of COVID-19 on Our Business

During our third fiscal quarter of 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic.

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

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

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

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

COVID-19 Impact

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

The pandemic triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions continued throughout the second half of fiscal 2020 and into the first quarter of fiscal 2021, and may continue for an extended period of time.

In an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, address the reduced demand from our customers and be responsive and efficient with supply chain constraints, management took decisive actions including closing our manufacturing facilities for two weeks in April 2020 and implementing stringent safety protocols, including administering COVID-19 testing for all manufacturing and office employees and requesting office employees to work from home.

While we have continued to manufacture buses since April 2020 without further material disruption and have not experienced any pervasive COVID-19 illnesses to-date, if we were to experience some form of outbreak within our facilities, we would take all appropriate measures to protect the health and safety of our employees, which could include another temporary halt in production.

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

It will continue to adversely impact our business for the remainder of our fiscal year 2020 and perhaps beyond.

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

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

The full impacts from COVID-19 on the Company's financial results in fiscal year 2020 are uncertain as we continue to monitor and assess the level of future customer demand, the ability of school boards to make timely decisions, the ability of suppliers to resume and maintain operations, the ability of our employees to continue to work, and our ability to maintain continuous production for the remaining portion of our fiscal year.

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

See PART II, Item 1A.

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

The Company has taken actions to control spending and improve liquidity, including minor headcount rationalization and an increase in the revolving credit facility from $100.0 million to $141.9 million with a Second Amendment to the Credit Agreement.

We currently believe that it will continue to adversely impact our business for a significant portion of our fiscal 2021 and perhaps beyond.

Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic and its impact on the overall economy, both within the United States and globally.

Accordingly, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.

The continuing impacts from COVID-19 on the Company's operations in the first quarter of fiscal 2021 negatively affected our revenue and profit.

We continue to monitor and assess the level of future customer demand, the ability of school boards to make decisions regarding reinstating normal in-person learning in the foreseeable future, the ability of suppliers to resume and maintain operations, the ability of our employees to continue to work, and our ability to maintain continuous production as we plan for the remainder of fiscal 2021 and beyond.

A prolonged economic downturn could have a material adverse impact on our sales and financial results beyond fiscal 2021.

See PART I, Item 1.A.

"Risk Factors," of our 2020 Form 10-K, filed with the SEC on December 17, 2020, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

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

Further detail and discussion of this amendment can be found in the "Liquidity and Capital Resources" section of this Item 2.

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

Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential

longer-term impacts of business interruption from the pandemic.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Report.

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

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

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For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2.

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

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Report.

Critical Accounting Policies and Estimates, Recent Accounting Pronouncements

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

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

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The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference.

Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended July 4, 2020 , except as follows:

Amortization of Deferred Pension Losses

Historically, the Company has amortized deferred losses from our frozen defined benefit pension plan accounted for under ASC 715, Compensation - Retirement Benefits, over the expected remaining employment period of the participants who remained employed with the Company.

ASC 715 states that if all or almost all of a plan's participants are inactive, the average remaining life expectancy of the inactive participants shall be used to amortize the unrecognized net gain or loss instead of the average remaining service period of active plan participants.

In the first quarter of 2020, the ratio of active (employed) to inactive participants in our plan declined to less than 10%, a figure we believe meets the definition of almost all participants as inactive.

Accordingly, we have changed the amortization period from approximately seven years in 2019 to approximately 23 years in 2020.

Future years will be determined based on the participant data at that time .

Recent Accounting Pronouncements

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• Revenue mix .

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

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

We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses, and buses with higher option content) than other products.

The mix of products sold in any fiscal period can directly impact our revenues for the period.

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

• Seasonality.

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

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• Selling, general and administrative expenses .

Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing, information technology services, and other administrative matters and functions.

In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense.

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

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

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

• Income taxes .

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In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken.

Other income (expense), net .

• Other income, net.

This includes periodic pension expense as well as gains or losses on foreign currency, if any.

Other immaterial amounts not associated with operating expenses may also be included here.

Equity in net income of non-consolidated affiliate .

• Equity in net (loss) income of non-consolidated affiliate .

We include in this line item our 50% share of net income or loss from our investment in Micro Bird, our unconsolidated Canadian joint venture.

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This filing includes the following non-GAAP financial measures:

“Adjusted EBITDA”, “Adjusted EBITDA Margin”, and “Free Cash Flow.” Management views these metrics as a useful way to look at the performance of our operations between periods and to exclude decisions on capital investment and financing that might otherwise impact the review of profitability of the business based on present market conditions.

Adjusted EBITDA is defined as net income prior to interest income, interest expense including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities, income taxes, depreciation and amortization including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets, and disposals, as adjusted to add back certain charges that we may record each year,

such as stock-compensation expense, as well as non-recurring charges such as (i) significant product design changes;

“Adjusted EBITDA”;

“Adjusted EBITDA Margin”;

and “Free Cash Flow”.

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

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

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

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

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

income taxes;

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

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

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

(ii) transaction related costs;

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

We believe these expenses and non-recurring charges are not considered an indicator of ongoing company performance.

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

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

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

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The measures are used as a supplement to GAAP results in evaluating certain aspects of our business, as described below.

We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful to investors in evaluating our performance because the measures consider the performance of our operations, excluding decisions made with respect to capital investment, financing, and other non-recurring charges as outlined in the preceding paragraph.

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

Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income as an indicator of our performance or as alternatives to any other measure prescribed by GAAP as there are limitations to using such non-GAAP measures.

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

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

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

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

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

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

Adjusted EBITDA and Adjusted EBITDA Margin should not be considered as alternatives to net income or loss as an indicator of our performance or as alternatives to any other measure prescribed by GAAP as there are limitations to using such non-GAAP measures.

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

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

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

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

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

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

In limited circumstances in which proceeds from sales of fixed or intangible assets exceed purchases, free cash flow would exceed cash flow from operations.

However, since we do not anticipate being a net seller of fixed or intangible assets, we expect free cash flow to be less than operating cash flows.

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

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

Accordingly, Free Cash Flow will be less than operating cash flows.

We manage our business in two operating segments, which are also our reportable segments:

(i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties;

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

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

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

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

Consolidated Results of Operations for the Three Months Ended July 4, 2020 and June 29, 2019 :

Consolidated Results of Operations for the Three Months Ended January 2, 2021 and January 4, 2020:

Three Months Ended

(in thousands of dollars)

June 29, 2019

(in thousands of dollars) January 2, 2021 January 4, 2020

$ 130,434 $ 153,217

Cost of goods sold

115,966 131,917

Gross profit $ 14,468 $ 21,300

Operating expenses

Selling, general and administrative expenses 14,690 20,495

Operating profit

Operating (loss) profit $ (222) $ 805

Interest expense (1,930) (1,897)

Other income (expense), net

Income before income taxes

Income tax expense

Equity in net income of non-consolidated affiliate

Interest income

Other income, net 643 194

Loss on debt modification (598) —

Loss before income taxes $ (2,106) $ (898)

Income tax benefit 521 326

Equity in net (loss) income of non-consolidated affiliate (29) 169

Net loss $ (1,614) $ (403)

Other financial data:

Adjusted EBITDA

$ 5,780 $ 8,025

Adjusted EBITDA margin

The following provides the results of operations of Blue Bird’s two reportable segments:

(in thousands of dollars)

Three Months Ended

(in thousands of dollars) Three Months Ended

Net Sales by Segment

June 29, 2019

January 2, 2021 January 4, 2020

$ 117,834 $ 134,772

12,600 18,445

$ 130,434 $ 153,217

Gross Profit by Segment

Net sales were $189.2 million for the third quarter of fiscal 2020 , a decrease of $119.6 million , or 38.7% , compared to $308.8 million for the third quarter of fiscal 2019 .

The decrease in net sales is attributed to the COVID-19 pandemic which caused the unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of how schooling will be administered in the fall of 2020 and beyond.

$ 9,710 $ 14,867

$ 14,468 $ 21,300

Net sales were $130.4 million for the first quarter of fiscal 2021, a decrease of $22.8 million, or 14.9%, compared to $153.2 million for the first quarter of fiscal 2020.

The decrease in net sales is attributed to the COVID-19 pandemic which caused an abrupt increase in remote learning arrangements as school districts remain unsure of how schooling will be administered in the fall of 2021 and beyond.

Bus sales decreased $16.9 million, or 12.6%, reflecting a decrease in units booked, which was partially offset by higher sales prices per unit.

Bus volumes reflect the timing of orders.

In the third quarter of fiscal 2020 , 1,948 units were booked compared to 3,420 units booked for the same period in fiscal 2019 .

In the first quarter of fiscal 2021, 1,255 units were booked compared to 1,460 units booked for the same period in fiscal 2020.

The decrease is mainly attributed to lower orders due to the uncertainties caused by the COVID-19 pandemic.

The 8.5% increase in unit price for the third quarter of fiscal 2020 compared to the same period in fiscal 2019 mainly reflects pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales decreased $8.0 million , or 48.3% , for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 , as we had lower sales volume, mainly from lower school bus units in operation due to early school closures caused by the COVID-19 pandemic.

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

The 1.7% increase in unit price for the first quarter of fiscal 2021 compared to the same period in fiscal 2020 mainly results from product and customer mix changes.

Parts sales decreased $5.8 million, or 31.7%, for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020, as we had lower sales volume, mainly from lower school bus units in operation which reduced bus repair and maintenance activities.

The lower units in operation results from school schedule changes and increased remote learning arrangements caused by the COVID-19 pandemic.

Cost of goods sold .

Total cost of goods sold was $168.1 million for the third quarter of fiscal 2020 , a decrease of $98.9 million , or 37.0% , compared to $267.0 million for the third quarter of fiscal 2019 .

Total cost of goods sold was $116.0 million for the first quarter of fiscal 2021, a decrease of $16.0 million, or 12.1%, compared to $131.9 million for the first quarter of fiscal 2020.

As a percentage of net sales, total cost of goods sold increased from 86.1% to 88.9%.

Bus segment cost of goods sold decreased $93.7 million , or 36.6% , for the third quarter of fiscal 2020 compared to the same period in fiscal 2019 , which aligned with the decrease in sales volume noted above.

The average cost of goods sold per unit for the third quarter of fiscal 2020 was 11.4% higher compared to the third quarter of fiscal 2019 due to increases in manufacturing costs from several COVID-19 related factors including absenteeism amongst our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $5.2 million , or 48.4% , decrease in parts segment cost of goods sold for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 aligned with the decrease in sales volume noted above.

Operating profit .

Operating profit was $3.3 million for the third quarter of fiscal 2020 , a decrease of $17.5 million , compared to operating profit of $20.8 million for the third quarter of fiscal 2019 .

Bus segment cost of goods sold decreased $11.8 million, or 9.8%, for the first quarter of fiscal 2021 compared to the same period in fiscal 2020, which aligned with the decrease in sales volume noted above.

The average cost of goods sold per unit for the first quarter of fiscal 2021 was 4.9% higher compared to the first quarter of fiscal 2020 due to increases in manufacturing costs from several COVID-19 related factors including absenteeism among our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $4.2 million, or 34.7%, decrease in parts segment cost of goods sold for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 aligned with the decrease in sales volume noted above.

Operating (loss) profit .

Operating loss was $0.2 million for the first quarter of fiscal 2021, a decrease of $1.0 million, compared to operating profit of $0.8 million for the first quarter of fiscal 2020.

Profitability was negatively impacted by a decrease of $6.8 million in gross profit as outlined in the revenue and cost of goods sold discussion.

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Interest expense .

Interest expense was $2.4 million for the third quarter of fiscal 2020 , a decrease of $1.0 million , or 28.6% , compared to $3.4 million for the third quarter of fiscal 2019 .

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

Interest expense for the first quarter of fiscal 2021 remained relatively flat compared to the first quarter of fiscal 2020.

Loss on debt modification .

Loss on debt modification was $0.6 million for the first quarter of fiscal 2021.

The amount is related to the execution of the third amendment to the Credit Agreement on December 4, 2020 for which we paid $2.5 million in lender fees and other issuance costs.

Of the fees and issuance costs, only $2.0 million could be capitalized with the remainder, $0.5 million, expensed in the period incurred.

In addition, $0.1 million in previously capitalized lender fees and other issuance costs capitalized in prior periods were expensed during the first quarter of fiscal 2021 in conjunction with executing the third amendment.

Income taxes .

We recorded income tax expense of $0.8 million for the third quarter of fiscal 2020 , compared to income tax expense of $3.2 million for the same period in fiscal 2019 .

The effective tax rate for the three-month period ended July 4, 2020 was 70.1% , which differed from the statutory federal income tax rate of 21% .

The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.

The effective tax rate for the three-month period ended June 29, 2019 was 19.1% , which differed from the statutory federal tax rate of 21% .

The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

We recorded an income tax benefit of $0.5 million for the first quarter of fiscal 2021, compared to an income tax benefit of $0.3 million for the same period in fiscal 2020.

The effective tax rate for the three-month period ended January 2, 2021 was 24.7%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to impacts from state taxes.

The effective tax rate for the three-month period ended January 4, 2020 was 36.3%, which differed from the statutory federal tax rate of 21%.

The difference is mainly due to normal tax rate items, such as federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

Adjusted EBITDA .

Adjusted EBITDA was $12.5 million , or 6.6% of net sales, for the third quarter of fiscal 2020 , a decrease of $16.6 million , or 57.0% , compared to $29.0 million , or 9.4% of net sales, for the third quarter of fiscal 2019 .

The decrease in Adjusted EBITDA is primarily result of a decrease of $20.7 million in gross profit, mainly from lower sales volumes due to the COVID-19 pandemic as well as higher manufacturing costs.

Adjusted EBITDA was $5.8 million, or 4.4% of net sales, for the first quarter of fiscal 2021, a decrease of $2.2 million, or 28.0%, compared to $8.0 million, or 5.2% of net sales, for the first quarter of fiscal 2020.

The decrease in Adjusted EBITDA primarily results from a decrease of $6.8 million in gross profit, mainly from lower sales volumes due to the COVID-19 pandemic as well as higher manufacturing costs.

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

The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:

The following table sets forth a reconciliation of net loss to adjusted EBITDA for the periods presented:

Three Months Ended

(in thousands of dollars)

June 29, 2019

Interest expense, net (1)

Income tax expense

Depreciation, amortization, and disposals (2)

Operational transformation initiatives

Share-based compensation

Product redesign initiatives

Restructuring charges

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

Adjusted EBITDA

Adjusted EBITDA margin (percentage of net sales)

(1) Includes $0.1 million for both fiscal periods, representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

(2) Includes $0.2 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.

Consolidated Results of Operations for the Nine Months Ended July 4, 2020 and June 29, 2019 :

Nine Months Ended

(in thousands of dollars)

June 29, 2019

Cost of goods sold

Operating expenses

Selling, general and administrative expenses

Operating profit

Interest expense

Interest income

Other income (expense), net

(Loss) income before income taxes

Income tax benefit (expense)

Equity in net income of non-consolidated affiliate

Other financial data:

Adjusted EBITDA

Adjusted EBITDA margin

The following provides the results of operations of Blue Bird’s two reportable segments:

(in thousands of dollars)

Nine Months Ended

Net Sales by Segment

June 29, 2019

Gross Profit by Segment

Net sales were $597.8 million for the nine months ended July 4, 2020 , a decrease of $77.5 million , or 11.5% , compared to $675.3 million for the nine months ended June 29, 2019 .

The decrease in net sales is attributed to the COVID-19 pandemic during our second and third fiscal quarters which caused an unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of how schooling will be administered in the fall of 2020 and beyond.

Bus sales decreased $72.4 million , or 11.6% , reflecting a decrease in units booked and higher sales prices per unit.

In the nine months ended July 4, 2020 , 6,002 units were booked compared to 7,291 units booked for the same period in fiscal 2019 .

The decrease is mainly attributed to lower orders due to the uncertainties caused by the COVID-19 pandemic.

The average net sales price per unit for the nine months ended July 4, 2020 was 7.4% higher than the price per unit for the nine months ended June 29, 2019 .

The increase in unit price mainly reflects pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales decreased $5.2 million , or 10.5% , for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 , as we had lower sales volume, mainly from lower school bus units in operation due to early school closures caused by the COVID-19 pandemic.

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

Cost of goods sold .

Total cost of goods sold was $531.3 million for the nine months ended July 4, 2020 , a decrease of $57.2 million , or 9.7% , compared to $588.5 million for the nine months ended June 29, 2019 .

As a percentage of net sales, total cost of goods sold increased from 87.1% to 88.9% .

Bus segment cost of goods sold decreased $53.6 million , or 9.6% , for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 .

The average cost of goods sold per unit for the nine months ended July 4, 2020 was 9.8% higher compared to the nine months ended June 29, 2019 due to increases in manufacturing costs in our third fiscal quarter from several COVID-19 related factors including absenteeism amongst our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $3.6 million , or 11.4% , decrease in parts segment cost of goods sold for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 aligns with the decrease in sales volume noted above.

Operating profit .

Operating profit was $8.4 million for the nine months ended July 4, 2020 , a decrease of $17.2 million compared to an operating profit of $25.6 million for the nine months ended June 29, 2019 .

Profitability was negatively impacted by a decrease of $20.3 million in gross profit, which was partially offset by a decrease of $3.1 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.

Interest expense .

Interest expense was $10.0 million for the nine months ended July 4, 2020 , a decrease of $0.3 million , or 2.7% , compared to $10.2 million for the nine months ended June 29, 2019 .

Lower interest expense from lower borrowing rates in the nine months ended July 4, 2020 compared to the prior period were offset by the impact of an increase of $1.9 million in mark to market charges due to changes in the fair value of our interest rate hedge.

Income taxes .

Income tax benefit was $0.4 million for the nine months ended July 4, 2020 , compared to income tax expense of $2.8 million for the same period in fiscal 2019 .

The effective tax rate for the nine -month period ended July 4, 2020 was 38.8% , which differed from the 2019 statutory federal income tax rate of 21% .

The difference is mainly due to a net discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.

The effective tax rate for the nine -month period ended June 29, 2019 was 19.7% and differed from the transitional 2018 statutory federal income tax rate of 21% .

The difference is mainly due to normal tax rate benefit items, primarily federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

Adjusted EBITDA .

Adjusted EBITDA was $32.8 million or 5.5% of net sales for the nine months ended July 4, 2020 , a decrease of $15.7 million , or 32.4% , compared to $48.5 million or 7.2% of net sales for the nine months ended June 29, 2019 .

The decrease in Adjusted EBITDA is primarily the result of a decrease of $20.3 million in gross profit, mainly from lower sales volumes due the COVID-19 pandemic as well as higher manufacturing costs.

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

The following table sets forth a reconciliation of net income to adjusted EBITDA for the periods presented:

Nine Months Ended

(in thousands of dollars)

June 29, 2019

(in thousands of dollars) January 2, 2021 January 4, 2020

Net loss $ (1,614) $ (403)

Interest expense, net (1) 2,012 1,993

Income tax (benefit) expense

Income tax benefit (521) (326)

Depreciation, amortization, and disposals (2) 3,676 3,538

Operational transformation initiatives 55 1,114

Foreign currency hedges

Share-based compensation 724 1,093

2 unchanged sentences

Costs directly attributed to the COVID-19 pandemic (3) 170 —

Loss on debt modification 598 —

Adjusted EBITDA

$ 5,780 $ 8,025

Adjusted EBITDA margin (percentage of net sales)

1 unchanged sentence

(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.

(3) Primarily represents costs incurred for third party cleaning services and personal protective equipment for our employees.

Liquidity and Capital Resources

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

At July 4, 2020 , the Company had $12.5 million of available cash (net of outstanding checks) and $90.0 million of additional borrowings available under the revolving line of credit portion of its secured credit facility.

At January 2, 2021, the Company had $23.9 million of available cash (net of outstanding checks) and $97.3 million of additional borrowings available under the revolving line of credit portion of its credit facility.

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

On May 7, 2020, the Company entered into a Second Amendment which amended the Credit Agreement, dated as of December 12, 2016 (the “Credit Agreement”, as amended by that certain First Amendment to Credit Agreement, dated as of September 13, 2018 (the “First Amendment”), and as further amended by the Second Amendment, the “Amended Credit Agreement”).

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

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

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

Detailed descriptions of the Company’s original Credit Agreement dated December 12, 2016 and its Amended Credit Agreement dated September 13, 2018 are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2019 , filed with the Securities and Exchange Commission on December 12, 2019 .

At July 4, 2020 , the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

Third Amendment to the Credit Agreement

On December 4, 2020, the Company executed the third amendment to the Credit Agreement, dated as of December 12, 2016;

as amended by that certain first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement") and second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement');

and as further amended by the third amendment (the "Third Amended Credit Agreement" and collectively, the "Amended Credit Agreement").

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

and (b) the absence of a default or event of default.

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 on or around December 31, 2020 and the fiscal quarter ending on or around 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.

Detailed descriptions of the Credit Agreement, First Amended Credit Agreement and Second Amended Credit Agreement are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2020, filed with the SEC on December 17, 2020.

At January 2, 2021, the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

Short-Term and Long-Term Liquidity Requirements

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

During our third quarter of fiscal 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic.

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

The continuing adverse impacts from the COVID-19 pandemic materially impacted our first quarter of fiscal 2021 results, causing lower customer orders for both buses and parts, supply disruptions, and higher rates of absenteeism among our hourly production workforce.

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

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

See PART II, Item 1A.

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

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

Our primary financial covenant is our Total Net Leverage Ratio.

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

We may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure.

See PART I, Item 1.A.

"Risk Factors," of our 2020 Form 10-K, filed with the SEC on December 17, 2020, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

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

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

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

If we are not able to comply with such covenants, we may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure.

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

An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses not included in our historical financial statements.

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

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

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

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

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

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

The delayed contribution payments are due on January 1, 2021.

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

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

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

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

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

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

2 unchanged sentences

The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows:

Nine Months Ended

(in thousands of dollars)

June 29, 2019

Three Months Ended

(in thousands of dollars) January 2, 2021 January 4, 2020

Cash and cash equivalents at beginning of period

$ 44,507 $ 70,959

Total cash used in operating activities (11,497) (85,988)

Total cash used in investing activities (3,317) (9,137)

Total cash provided by financing activities

Total cash (used in) provided by financing activities (5,777) 31,866

Change in cash and cash equivalents

$ (20,591) $ (63,259)

Cash and cash equivalents at end of period

$ 23,916 $ 7,700

Total cash used in operating activities

Cash flows used in operating activities totaled $78.3 million for the nine months ended July 4, 2020 , as compared to $19.1 million of cash flows used in operating activities for the nine months ended June 29, 2019 .

The $59.2 million increase in cash used was primarily attributed to a $12.5 million reduction in net income and a negative $50.3 million difference (use of cash) in the impacts of changes in accrued expenses and working capital period over period.

The changes were partially offset by increased non-cash components of net income in the nine months ended July 4, 2020 compared to the prior period.

Cash flows used in operating activities totaled $11.5 million for the three months ended January 2, 2021, as compared to $86.0 million of cash flows used in operating activities for the three months ended January 4, 2020.

The $74.5 million decrease in cash used was primarily attributed to a positive $74.9 million difference (source of cash) from the impacts of changes in working capital and accrued expenses between fiscal periods.

Total cash used in investing activities

Cash flows used in investing activities totaled $16.6 million for the nine months ended July 4, 2020 , as compared to $30.2 million of cash flows used in investing activities for the nine months ended June 29, 2019 .

The $13.6 million decrease was due to a reduction of spending on manufacturing assets as the new paint facility was completed in fiscal 2019, and the delay of certain projects due to the COVID-19 pandemic.

Total cash provided by financing activities

Cash flows provided by financing activities totaled $36.5 million for the nine months ended July 4, 2020 , as compared to $18.1 million of cash flows provided by financing activities for the nine months ended June 29, 2019 .

The $18.4 million increase was primarily attributed to a $20.0 million increase in borrowings under the revolving credit facility and a $2.7 million increase in cash proceeds from warrant exercises.

The increases were partially offset by $0.9 million in fees paid for the Second Amendment to the Credit Agreement, $0.9 million in finance lease payments, as well as an increase of $2.9 million in cash paid for employee taxes on vested restricted shares and stock option exercises.

Cash flows used in investing activities totaled $3.3 million for the three months ended January 2, 2021, as compared to $9.1 million of cash flows used in investing activities for the three months ended January 4, 2020.

The $5.8 million decrease was due to a reduction of spending on manufacturing assets and a delay of certain projects due to the COVID-19 pandemic.

Total cash (used in) provided by financing activities

Cash flows used in financing activities totaled $5.8 million for the three months ended January 2, 2021, as compared to $31.9 million of cash flows provided by financing activities for the three months ended January 4, 2020.

The $37.6 million decrease between fiscal periods was primarily attributed to a $35.0 million decrease in cash borrowings under the revolving credit facility and a $2.5 million cash payment for fees and other costs relating to the execution of the third amendment to the Credit Agreement.

Free cash flow

Management believes the non-GAAP measurement of free cash flow, defined as net cash used in operating activities less cash paid for fixed assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business.

Management believes the non-GAAP measurement of free cash flow, defined as net cash used in operating activities plus cash paid for fixed assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business.

See “Key Non-GAAP Measures We Use to Evaluate Our Performance”.

The following table sets forth the calculation of free cash flow for the periods presented:

Nine Months Ended

(in thousands of dollars)

June 29, 2019

Three Months Ended

(in thousands of dollars) January 2, 2021 January 4, 2020

Net cash used in operating activities $ (11,497) $ (85,988)

1 unchanged sentence

Free cash flow

Free cash flow for the nine months ended July 4, 2020 was $45.8 million lower than the nine months ended June 29, 2019 , primarily due to a $59.2 million increase in cash used in operating activities , partially offset by a decrease of $13.4 million in cash paid for fixed assets.

$ (14,814) $ (95,275)

Free cash flow for the three months ended January 2, 2021 was $80.5 million higher than the three months ended January 4, 2020, due to a $74.5 million decrease in cash used in operating activities and a decrease of $6.0 million in cash paid for fixed assets.

Off-Balance Sheet Arrangements

We had outstanding letters of credit totaling $6.9 million at July 4, 2020 , the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had a $3.0 million guarantee outstanding at July 4, 2020 which relates to a guarantee of indebtedness for a term loan with a remaining maturity up to 2.5 years .

We had outstanding letters of credit totaling $6.9 million at January 2, 2021, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had a $3.0 million guarantee outstanding at January 2, 2021 which relates to a guarantee of indebtedness for a term loan issued by a Company dealer with a remaining maturity up to 2.0 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.

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis