Blue Bird Corp 10-Q

Item 2. 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 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 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 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. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. 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,” “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. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to: • the future financial performance of the Company; • negative changes in the market for Blue Bird products; • expansion plans and opportunities; • challenges or unexpected costs related to manufacturing; • future impacts from the novel coronavirus pandemic known as "COVID-19," and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which could include, among other effects: ◦ disruption in global financial and credit markets; ◦ supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic; ◦ negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations; ◦ negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions; ◦ financial difficulties of our customers impacted by the pandemic; ◦ reductions in market demand for our products due to the pandemic; and ◦ potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic. 18 These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. 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 (“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. The following information should be read in conjunction with the financial statements included in the Company’s 2020 Form 10-K, filed with the SEC on December 17, 2020. Available Information 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. 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. Executive Overview Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. 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 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. Blue Bird also sells directly to major fleet operators, the United States Government, state governments, and authorized dealers in a number of foreign countries. 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 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. 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. 19 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 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 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. 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 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 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. We will continue to actively monitor the situation and may need to take further actions required by federal, state or local authorities, or enact measures we determine are in the best interests of our employees, customers, suppliers and shareholders. For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2. "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 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. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. 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 six months ended April 3, 2021. Recent Accounting Pronouncements See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements. Factors Affecting Our Revenues Our revenues are driven primarily by the following factors: • Property tax revenues . Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate. • Student enrollment and delivery mechanisms for learning. Increases or decreases in the number of school bus riders have a direct impact on school district demand. Due to the COVID-19 pandemic and evolving protocols for social distancing and 20 public health concerns, the future form of educational delivery is uncertain, and increased remote learning could reasonably be expected to decrease the number of school bus riders. • Revenue mix . We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, 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. • Strength of the dealer network . We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district. • Pricing . Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions. • Buying patterns of major fleets . Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. 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. Sales during the third and fourth fiscal quarters were typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality has become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of results between fiscal periods. Factors Affecting Our Expenses and Other Items Our expenses and other line items on our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors: • Cost of goods sold . The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense, and overhead. Our cost of goods sold may vary from period to period due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities. • 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, along with 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. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel. • Interest expense . 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, 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 . We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken. • 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 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. 21 Key Non-GAAP Financial Measures We Use to Evaluate Our Performance 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. 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; (iii) discrete expenses related to major cost cutting initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. While certain of the charges that are added back in the Adjusted EBITDA calculation, such as transaction related costs and operational transformation and major product redesign initiatives, represent operating expenses that may be recorded in more than one annual period, the significant project or transaction giving rise to such expenses is not considered to be indicative of the Company’s normal operations. Accordingly, we believe that these, as well as the other credits and charges that comprise the amounts utilized in the determination of Adjusted EBITDA described above, should not be used in evaluating the Company’s ongoing annual operating performance. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA Margin are not measures of performance defined in accordance with GAAP. 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 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. 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 ongoing operating results. 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. 22 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. Our Segments 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 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. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit. 23 Consolidated Results of Operations for the Three Months Ended April 3, 2021 and April 4, 2020: Three Months Ended (in thousands of dollars) April 3, 2021 April 4, 2020 Net sales $ 164,698 $ 255,412 Cost of goods sold 146,205 231,243 Gross profit $ 18,493 $ 24,169 Operating expenses Selling, general and administrative expenses 17,361 19,858 Operating profit $ 1,132 $ 4,311 Interest expense (2,334) (5,658) Other income, net 422 180 Loss before income taxes $ (780) $ (1,167) Income tax benefit 483 817 Equity in net loss of non-consolidated affiliate (322) (289) Net loss $ (619) $ (639) Other financial data: Adjusted EBITDA $ 7,543 $ 12,272 Adjusted EBITDA margin 4.6 % 4.8 % The following provides the results of operations of Blue Bird’s two reportable segments: (in thousands of dollars) Three Months Ended Net Sales by Segment April 3, 2021 April 4, 2020 Bus $ 150,307 $ 238,697 Parts 14,391 16,715 Total $ 164,698 $ 255,412 Gross Profit by Segment Bus $ 13,084 $ 17,938 Parts 5,409 6,231 Total $ 18,493 $ 24,169 Net sales . 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 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 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 $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%. 24 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. This was partially offset by a decrease of $2.5 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic. Interest expense . 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. 25 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) Adjustments: 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) 4.6 % 4.8 % (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. 26 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 Net sales $ 295,132 $ 408,629 Cost of goods sold 262,171 363,160 Gross profit $ 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 4.5 % 5.0 % 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 Bus $ 268,141 $ 373,469 Parts 26,991 35,160 Total $ 295,132 $ 408,629 Gross Profit by Segment Bus $ 22,794 $ 32,805 Parts 10,167 12,664 Total $ 32,961 $ 45,469 Net sales . 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. 27 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 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. 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 . 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%. 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 $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. 28 The following table sets forth a reconciliation of net loss to adjusted EBITDA for the periods presented: Six Months Ended (in thousands of dollars) April 3, 2021 April 4, 2020 Net loss $ (2,233) $ (1,042) Adjustments: Interest expense, net (1) 4,434 7,747 Income tax benefit (1,004) (1,143) Depreciation, amortization, and disposals (2) 7,267 7,354 Operational transformation initiatives 208 2,879 Loss on debt modification 598 — Share-based compensation 1,595 2,297 Product redesign initiatives 1,267 2,092 Restructuring charges 494 — Costs directly attributed to the COVID-19 pandemic (3) 697 107 Other — 6 Adjusted EBITDA $ 13,323 $ 20,297 Adjusted EBITDA margin (percentage of net sales) 4.5 % 5.0 % (1) Includes $0.2 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 $0.4 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 costs incurred for third party cleaning services and personal protective equipment for our employees. 29 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 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. 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 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 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. A prolonged economic downturn resulting from the continuing pandemic would likely have a material adverse impact on our financial results. 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. 30 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 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. Seasonality 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 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. With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality and working capital trends have become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of working capital and liquidity results between fiscal periods. Cash Flows The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows: 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 Total cash used in operating activities (11,198) (48,209) Total cash used in investing activities (7,007) (14,101) Total cash (used in) provided by financing activities (7,580) 25,437 Change in cash and cash equivalents $ (25,785) $ (36,873) Cash and cash equivalents at end of period $ 18,722 $ 34,086 Total cash used in operating activities 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 $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 $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. 31 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: Six Months Ended (in thousands of dollars) April 3, 2021 April 4, 2020 Net cash used in operating activities $ (11,198) $ (48,209) Cash paid for fixed assets (7,007) (14,251) Free cash flow $ (18,205) $ (62,460) 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 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. 32 Item 3. Quantitative and Qualitative Disclosures About Mar ket Risk There have not been any material changes to our interest rate risks, commodity risks or currency risks previously disclosed in Part II, Item 7A of the Company’s 2020 Form 10-K.