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Item 2. Management’s Discussion and Analysis

2021-05-12 compared with 2021-02-11 · 154 added, 75 removed, 257 unchanged (47% 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 months ended January 2, 2021 and January 4, 2020 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 Blue Bird Corporation ("Blue Bird" or the "Company") should be read in conjunction with the Company’s unaudited financial statements for the three and six months ended April 3, 2021 and April 4, 2020 and related notes appearing in Part I, Item 1 of this Quarterly Report of Form 10-Q ("Report").

Our actual results may not be indicative of future performance.

This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”.

Actual results may differ materially from those contained in any forward-looking statements.

Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments.

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

We refer to the fiscal year ended 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.

We refer to the fiscal year ending October 2, 2021 as "fiscal 2021" and fiscal year ended October 3, 2020 as “fiscal 2020." We refer to the quarter ended April 3, 2021 as the “second quarter of fiscal 2021” and we refer to the quarter ended April 4, 2020 as the “second quarter of fiscal 2020.”

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

The second quarters of fiscal 2021 and 2020 both included 13 weeks.

The six month periods in fiscal 2021 and 2020 included 26 and 27 weeks, respectively.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) of Blue Bird Corporation (“Blue Bird” or the “Company”) contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995.

This Report contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995.

Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company.

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As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020.

Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings.

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

Information on our website does not constitute part of this Quarterly Report on Form 10-Q.

Information on our website does not constitute part of this Report.

In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.

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As the only principal manufacturer of chassis and body production specifically designed for school bus applications, Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs.

In addition, Blue Bird is the market leader in alternative to diesel fuel applications with its propane-powered, gasoline-powered, compressed natural gas (“CNG”)-powered, and all-electric-powered school buses.

In addition, Blue Bird is the market leader in alternatives to diesel-powered applications with its propane-powered, gasoline-powered, compressed natural gas (“CNG”)-powered, and all-electric-powered school buses.

Blue Bird sells its buses and parts through an extensive network of United States and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and Type D school buses.

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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.

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 half 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.

We have continued to manufacture buses since April 2020 without further material disruption, although management decided to cease production for one week in March 2021 due to supply chain disruptions that resulted in a shortage of critical components.

This temporary closure of our manufacturing facility did not materially impact our operations for the second quarter of fiscal 2021 as we did not need to operate at full capacity to fill sales orders during the quarter.

However, such supply chain disruptions could continue in future periods and could materially impact our results if we are unable to produce during quarters having higher sales volumes.

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

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

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

We currently believe that it will continue to adversely impact our business for the remainder 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.

The continuing impacts from COVID-19 on the Company's operations in the first half 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.

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"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.

The Company has also taken actions to control spending and secure adequate liquidity, including 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.

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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 three months ended January 2, 2021.

Recent Accounting Pronouncements

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

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

Due to the COVID-19 pandemic and evolving protocols for social distancing and

public health concerns, the future form of educational delivery is uncertain, and increased remote learning could reasonably be expected to decrease the number of school bus riders.

• Revenue mix .

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

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

• Equity in net loss 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.

Key Non-GAAP Financial Measures We Use to Evaluate Our Performance

This filing includes the following non-GAAP financial measures:

“Adjusted EBITDA”;

“Adjusted EBITDA Margin”;

and “Free Cash Flow”.

This Report includes the following non-GAAP financial measures:

“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.

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

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

Consolidated Results of Operations for the Three Months Ended April 3, 2021 and April 4, 2020:

Three Months Ended

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

(in thousands of dollars) April 3, 2021 April 4, 2020

$ 164,698 $ 255,412

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Selling, general and administrative expenses 17,361 19,858

Operating (loss) profit $ (222) $ 805

Operating profit $ 1,132 $ 4,311

Interest expense (2,334) (5,658)

Interest income

Other income, net 422 180

Loss on debt modification (598) —

Loss before income taxes $ (780) $ (1,167)

Income tax benefit 483 817

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

Equity in net loss of non-consolidated affiliate (322) (289)

Net loss $ (619) $ (639)

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Net Sales by Segment

January 2, 2021 January 4, 2020

April 3, 2021 April 4, 2020

$ 150,307 $ 238,697

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$ 18,493 $ 24,169

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.

Net sales were $164.7 million for the second quarter of fiscal 2021, a decrease of $90.7 million, or 35.5%, compared to $255.4 million for the second quarter of fiscal 2020.

The decrease in net sales is attributed to the COVID-19 pandemic which caused an increase in remote learning arrangements.

Bus sales decreased $88.4 million, or 37.0%, reflecting a decrease in units booked, which was partially offset by higher sales prices per unit.

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.

In the second quarter of fiscal 2021, 1,489 units were booked compared to 2,594 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 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 9.7% increase in unit price for the second quarter of fiscal 2021 compared to the same period in fiscal 2020 mainly results from pricing actions taken by management to partially offset increases in commodity costs, as well as product and customer mix changes.

Parts sales decreased $2.3 million, or 13.9%, for the second quarter of fiscal 2021 compared to the second 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 $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 $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.

Total cost of goods sold was $146.2 million for the second quarter of fiscal 2021, a decrease of $85.0 million, or 36.8%, compared to $231.2 million for the second quarter of fiscal 2020.

As a percentage of net sales, total cost of goods sold improved from 90.5% to 88.8%.

Bus segment cost of goods sold decreased $83.5 million, or 37.8%, for the second 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 second quarter of fiscal 2021 was 8.3% higher compared to the second 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 $1.5 million, or 14.3%, decrease in parts segment cost of goods sold for the second quarter of fiscal 2021 compared to the second quarter of fiscal 2020 aligned with the decrease in sales volume noted above.

Operating profit .

Operating profit was $1.1 million for the second quarter of fiscal 2021, a decrease of $3.2 million, compared to operating profit of $4.3 million for the second quarter of fiscal 2020.

Profitability was negatively impacted by a decrease of $5.7 million in gross profit as outlined in the revenue and cost of goods sold discussion.

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Interest expense .

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

Interest expense was $2.3 million for the second quarter of fiscal 2021, a decrease of $3.3 million, or 58.7%, compared to $5.7 million for the second quarter of fiscal 2020.

The decrease was primarily attributable to a $2.6 million net increase in the fair value of the interest rate collar (a liability balance) recorded in interest expense in the second quarter of fiscal 2020 with the corresponding activity recorded in the second quarter of fiscal 2021 netting to an immaterial amount.

The remainder of the decrease primarily results from lower outstanding debt balances during the second quarter of fiscal 2021 when compared with the second quarter of fiscal 2020.

Income taxes .

We recorded an income tax benefit of $0.5 million for the second quarter of fiscal 2021, compared to an income tax benefit of $0.8 million for the same period in fiscal 2020.

The effective tax rate for the three month period ended April 3, 2021 was 61.9%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, including impacts from state taxes.

The effective tax rate for the three month period ended April 4, 2020 was 70.0%, which differed from the statutory federal tax rate of 21%.

The difference is mainly due to 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.

Adjusted EBITDA .

Adjusted EBITDA was $7.5 million, or 4.6% of net sales, for the second quarter of fiscal 2021, a decrease of $4.7 million, or 38.5%, compared to $12.3 million, or 4.8% of net sales, for the second quarter of fiscal 2020.

The decrease in Adjusted EBITDA primarily results from a decrease of $5.7 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 loss to adjusted EBITDA for the periods presented:

Three Months Ended

(in thousands of dollars) April 3, 2021 April 4, 2020

Net loss $ (619) $ (639)

Interest expense, net (1) 2,422 5,754

Income tax benefit (483) (817)

Depreciation, amortization, and disposals (2) 3,591 3,816

Operational transformation initiatives 153 1,765

Share-based compensation 871 1,204

Product redesign initiatives 1,081 1,082

Costs directly attributed to the COVID-19 pandemic (3) 527 107

Adjusted EBITDA

$ 7,543 $ 12,272

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 represents costs incurred for third party cleaning services and personal protective equipment for our employees.

Consolidated Results of Operations for the Six Months Ended April 3, 2021 and April 4, 2020:

Six Months Ended

(in thousands of dollars) April 3, 2021 April 4, 2020

$ 295,132 $ 408,629

Cost of goods sold

262,171 363,160

$ 32,961 $ 45,469

Operating expenses

Selling, general and administrative expenses

32,051 40,353

Operating profit $ 910 $ 5,116

Interest expense (4,264) (7,555)

Interest income 1 —

Other income, net 1,065 374

Loss on debt extinguishment (598) —

Loss before income taxes $ (2,886) $ (2,065)

Income tax benefit 1,004 1,143

Equity in net loss of non-consolidated affiliate (351) (120)

Net loss $ (2,233) $ (1,042)

Other financial data:

Adjusted EBITDA

$ 13,323 $ 20,297

Adjusted EBITDA margin

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

(in thousands of dollars) Six Months Ended

Net Sales by Segment April 3, 2021 April 4, 2020

$ 268,141 $ 373,469

26,991 35,160

Total $ 295,132 $ 408,629

Gross Profit by Segment

$ 22,794 $ 32,805

10,167 12,664

$ 32,961 $ 45,469

Net sales were $295.1 million for the six months ended April 3, 2021, a decrease of $113.5 million, or 27.8%, compared to $408.6 million for the six months ended April 4, 2020.

The decrease in net sales is attributed to the COVID-19 pandemic which caused an increase in remote learning arrangements.

Bus sales decreased $105.3 million, or 28.2%, reflecting a decrease in units booked and higher sales prices per unit.

In the six months ended April 3, 2021, 2,744 units were booked compared to 4,054 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 average net sales price per unit for the six months ended April 3, 2021 was 6.1% higher than the price per unit for the six months ended April 4, 2020.

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

Parts sales decreased $8.2 million, or 23.2%, for the six months ended April 3, 2021 compared to the six months ended April 4, 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 $262.2 million for the six months ended April 3, 2021, a decrease of $101.0 million, or 27.8%, compared to $363.2 million for the six months ended April 4, 2020.

As a percentage of net sales, total cost of goods sold improved from 88.9% to 88.8%.

Bus segment cost of goods sold decreased $95.3 million, or 28.0%, for the six months ended April 3, 2021 compared to the six months ended April 4, 2020, which aligned with the decrease in sales volume noted above.

The average cost of goods sold per unit for the six months ended April 3, 2021 was 6.4% higher compared to the six months ended April 4, 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 $5.7 million, or 25.2%, decrease in parts segment cost of goods sold for the six months ended April 3, 2021 compared to the six months ended April 4, 2020 aligns with the decrease in sales volume noted above.

Operating profit .

Operating profit was $0.9 million for the six months ended April 3, 2021, a decrease of $4.2 million compared to an operating profit of $5.1 million for the six months ended April 4, 2020.

Profitability was negatively impacted by a decrease of $12.5 million in gross profit as outlined in the revenue and cost of goods sold discussion.

This was partially offset by a decrease of $8.3 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.

Interest expense .

Interest expense was $4.3 million for the six months ended April 3, 2021, a decrease of $3.3 million, or 43.6%, compared to $7.6 million for the six months ended April 4, 2020.

The decrease was primarily attributable to a $2.6 million net increase in the fair value of the interest rate collar (a liability balance) recorded in interest expense in the six months ended April 4, 2020 with the corresponding activity recorded in the six months ended April 3, 2021 netting to an immaterial amount.

The remainder of the decrease primarily results from lower outstanding debt balances during the six months ended April 3, 2021 when compared with the the six months ended April 4, 2020 .

Loss on debt modification .

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

Loss on debt modification was $(0.6) million for the six months ended April 3, 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.

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Income taxes .

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.

Income tax benefit was $1.0 million for the six months ended April 3, 2021, compared to income tax benefit of $1.1 million for the same period in fiscal 2020.

The effective tax rate for the six months ended April 3, 2021 was 34.8%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, including impacts from state taxes.

The effective tax rate for the six months ended April 4, 2020 was 55.4%, which differed from the statutory federal tax rate of 21%.

Adjusted EBITDA .

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.

Adjusted EBITDA was $13.3 million, or 4.5% of net sales, for the six months ended April 3, 2021, a decrease of $7.0 million, or 34.4%, compared to $20.3 million, or 5.0% of net sales, for the six months ended April 4, 2020.

The decrease in Adjusted EBITDA is primarily the result of a decrease of $12.5 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 loss to adjusted EBITDA for the periods presented:

Three Months Ended

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

Six Months Ended

(in thousands of dollars) April 3, 2021 April 4, 2020

Net loss $ (2,233) $ (1,042)

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Operational transformation initiatives 208 2,879

Loss on debt modification 598 —

Share-based compensation 1,595 2,297

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Costs directly attributed to the COVID-19 pandemic (3) 697 107

Loss on debt modification 598 —

Adjusted EBITDA $ 13,323 $ 20,297

$ 5,780 $ 8,025

Adjusted EBITDA margin (percentage of net sales) 4.5 % 5.0 %

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(2) Includes $0.4 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 represents costs incurred for third party cleaning services and personal protective equipment for our employees.

(3) Primarily 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 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.

At April 3, 2021, the Company had $18.7 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.

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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.

At April 3, 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.

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 adverse impacts from the COVID-19 pandemic materially impacted our results in the first half of fiscal 2021, 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.

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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;

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

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.

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

Three Months Ended

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

Six Months Ended

(in thousands of dollars) April 3, 2021 April 4, 2020

Cash and cash equivalents at beginning of period $ 44,507 $ 70,959

$ 44,507 $ 70,959

Total cash used in operating activities (11,198) (48,209)

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Change in cash and cash equivalents $ (25,785) $ (36,873)

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

Cash and cash equivalents at end of period $ 18,722 $ 34,086

$ 23,916 $ 7,700

Total cash used in operating activities

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.

Cash flows used in operating activities totaled $11.2 million for the six months ended April 3, 2021, as compared to $48.2 million of cash flows used in operating activities for the six months ended April 4, 2020.

The $37.0 million decrease in cash used was primarily attributed to a positive $37.1 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 $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.

Cash flows used in investing activities totaled $7.0 million for the six months ended April 3, 2021, as compared to $14.1 million of cash flows used in investing activities for the six months ended April 4, 2020.

The $7.1 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.

Cash flows used in financing activities totaled $7.6 million for the six months ended April 3, 2021, as compared to $25.4 million of cash flows provided by financing activities for the six months ended April 4, 2020.

The $33.0 million decrease between fiscal periods was primarily attributed to a $30.0 million decrease in cash borrowings under the revolving credit facility and $2.5 million in cash payments for fees and other costs relating to the execution of the third amendment to the Credit Agreement during the first quarter of fiscal 2021.

Free cash flow

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:

Three Months Ended

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

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:

Six Months Ended

(in thousands of dollars) April 3, 2021 April 4, 2020

Net cash used in operating activities $ (11,198) $ (48,209)

2 unchanged sentences

$ (18,205) $ (62,460)

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.

Free cash flow for the six months ended April 3, 2021 was $44.3 million higher than the six months ended April 4, 2020, due to a $37.0 million decrease in cash used in operating activities and a decrease of $7.2 million in cash paid for fixed assets.

Off-Balance Sheet Arrangements

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.

We had outstanding letters of credit totaling $6.9 million at April 3, 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 April 3, 2021 which relates to a guarantee of indebtedness for a term loan issued by a Company dealer with a remaining maturity up to 1.8 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