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Item 2. Management’s Discussion and Analysis

2022-02-09 compared with 2021-08-12 · 209 added, 237 removed, 183 unchanged (71% 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 Blue Bird Corporation ("Blue Bird" or the "Company") should be read in conjunction with the Company’s unaudited financial statements for the three and nine months ended July 3, 2021 and July 4, 2020 and related notes appearing in Part I, Item 1 of this Quarterly Report of Form 10-Q ("Report").

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited condensed consolidated financial statements for the three months ended January 1, 2022 and January 2, 2021 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.

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

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

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

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

The nine month periods in fiscal 2021 and 2020 included 39 and 40 weeks, respectively.

Special Note Regarding Forward-Looking Statements

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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 (“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.

Company’s 2021 Form 10-K, filed with the SEC on December 15, 2021.

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

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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 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 three quarters 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.

Management also decided to cease production for a full week in each of March and May 2021 due to supply chain disruptions that resulted in a shortage of critical components.

Additionally, management closely monitors the expected receipt of critical components on a daily basis and has had to cease part or all of production for shorter periods of time as a result of supply shortages.

These temporary closures of our manufacturing facility did not materially impact our operations during the first and second quarters of fiscal 2021 as we did not need to operate at full capacity to fill sales orders.

However, such supply chain disruptions did significantly impact our operations and results during the third quarter of fiscal 2021 as a result of higher freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fill sales orders.

Specifically, management estimates that the sale of over 500 units was deferred from the third quarter of fiscal 2021 into subsequent

quarters as a result of the shortage of critical components that prevented the Company from initiating or completing, as applicable, the production process for certain units that were otherwise scheduled to be delivered to customers during the quarter.

Including these units, the Company's backlog exceeded 3,900 units as of July 3, 2021 as demand for our products remains strong, with no sales orders canceled as a result of delays in our production process.

The Company has also experienced increased purchase costs for certain of its raw materials during the pandemic that have negatively impacted the gross profit it recognized on sales during the nine months ended July 3, 2021.

However, in July 2021, the Company announced two sales price increases that will apply to new sales orders and are intended to mitigate the impact of rising purchase costs on our operations and results.

In addition, Blue Bird is the market leader in alternative powered product offerings 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 U.S.

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 U.S.

Government, state governments, and authorized dealers in a number of foreign countries.

Throughout this Report, we refer to the fiscal year ending October 1, 2022 as "fiscal 2022," the fiscal year ended October 2, 2021 as "fiscal 2021" and the fiscal year ended October 3, 2020 as “fiscal 2020.” There will be or were 52 weeks in fiscal 2022 and fiscal 2021, respectively, and there were 53 weeks in fiscal 2020.

The first quarters of fiscal 2022 and fiscal 2021 both included 13 weeks.

Impact of COVID-19 on Our Business

Beginning in our second fiscal quarter of fiscal 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 through the first quarter of fiscal 2022 and may continue for an extended period of time.

Supply chain disruptions significantly impacted our operations and results during the latter half of fiscal 2021 and continuing into the first quarter of fiscal 2022 as a result of higher inventory purchase costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders.

Specifically, management estimates that the sale of over 2,000 units was deferred from the latter months of fiscal 2021 and the first quarter of fiscal 2022 into subsequent periods as a result of the shortage of critical components that prevented the Company from initiating or completing, as applicable, the production process for certain units that were otherwise scheduled to be delivered to customers during these periods.

Including these units, the Company's backlog exceeded 4,200 and 4,800 units as of October 2, 2021 and January 1, 2022, respectively, as demand for our products remains strong, with no sales orders canceled as a result of delays in our production process.

The Company's increased purchase costs for certain of its raw materials during the pandemic have negatively impacted the gross profit recognized on sales, including during the second half of fiscal 2021 and continuing through the three months ended January 1, 2022.

In response, the Company announced three sales price increases that apply to new sales orders and were intended to mitigate the impact of rising purchase costs on our operations and results.

However, these price increases were not realized in the first quarter of fiscal 2022 as sales recorded during the quarter related to the backlog of orders that existed prior, and therefore were not subject, to the price increases, which is expected to continue through, at a minimum, the second quarter of fiscal 2022.

In general, management believes that such supply chain disruptions will continue in future periods and will materially impact our results if we are unable to i) produce during quarters having higher sales volumes and/or ii) pass along rising costs to our customers.

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.

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 a 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 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.

We currently believe that it will continue to adversely impact our business throughout the second quarter of fiscal 2022 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 U.S.

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 three quarters 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.

The continuing impacts from COVID-19 on the Company's operations in the first quarter of fiscal 2022 negatively affected our gross profit, income and cash flows.

We continue to monitor and assess the level of future customer demand, the ability of school boards to make decisions regarding maintaining normal in-person learning in the foreseeable future, the ability of suppliers to resume and/or maintain operations and to provide parts and supplies in sufficient quantities to meet our production needs, the ability of our employees to continue to work, and our ability to maintain continuous production as we plan for and execute during the remainder of fiscal 2022 and beyond.

See PART I, Item 1.A.

"Risk Factors," of our 2021 Form 10-K, filed with the SEC on December 15, 2021, 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.

The Company has also taken actions to control spending and secure adequate liquidity, including headcount rationalization, changes to the minimum required financial covenants via execution of a fourth amendment to our Credit Agreement in November 2021, and raising $75.0 million of proceeds through the issuance and sale of an aggregate 4,687,500 shares of common stock at $16.00 per share in a private placement transaction on December 15, 2021.

Further detail and discussion of the fourth amendment and private placement transaction 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.

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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 may also pursue raising additional capital via an equity or debt offering.

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.

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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.

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

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

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

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The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2021 Form 10-K, filed with the SEC on December 15, 2021, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference.

Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended July 3, 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 remains 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.

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

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

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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.

Our products are sold to school districts throughout the United States and Canada.

Our products are sold to school districts throughout the U.S.

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.

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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, when coupled with its impact on supply chains, seasonality has become unpredictable.

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

With the COVID-19 pandemic impact on school systems and the uncertainty regarding (i) in-person schooling schedules and duration and (ii) the severity and duration of ongoing supply chain constraints, seasonality has become unpredictable.

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

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• 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.

The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper) including freight costs, 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, fluctuations in freight costs, 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.

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.

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

Interest expense also includes unrealized gains or losses from interest rate hedges, if any, 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.

Interest expense also includes unrealized gains or

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

• Income taxes .

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

• Other income, net.

This primarily includes periodic pension expense as well as other amounts not associated with our operating results.

• Equity in net income of non-consolidated affiliate .

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

• Other income/expense, net.

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

Other immaterial amounts not associated with operating expenses may also be included in this balance.

• 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 Holdings, Inc., our unconsolidated Canadian joint venture.

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.

The condensed consolidated financial statements included in this Report in Item 1.

"Financial Statements (Unaudited)." are prepared in conformity with U.S.

This Report also includes the following financial measures that are not prepared in accordance with U.S.

GAAP ("non-GAAP"):

“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 (a) Company's ongoing compliance with several financial covenant requirements, including being utilized in the denominator of the calculation of the Total Net Leverage Ratio ("TNLR"), as and when applicable, and (b) the interest rate that is charged on outstanding borrowings in accordance with a pricing grid that is based upon the TNLR.

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;

Adjusted EBITDA is defined as net income or loss 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 U.S.

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;

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 U.S.

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 share-based 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;

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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.

Adjusted EBITDA and Adjusted EBITDA Margin are not measures of performance defined in accordance with U.S.

The measures are used as a supplement to U.S.

GAAP results in evaluating certain aspects of our business, as described below.

We believe the non-GAAP measures offer additional financial metrics that, when coupled with the U.S.

GAAP results and the reconciliation to U.S.

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 U.S.

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 compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and U.S.

GAAP results, including providing a reconciliation to U.S.

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 U.S.

GAAP and it should not be relied upon to the exclusion of U.S.

GAAP financial measures.

Free Cash Flow reflects an additional way of evaluating our liquidity that, when viewed with our U.S.

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.

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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 Chief Executive Officer of the Company has been identified as the CODM.

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.

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

Consolidated Results of Operations for the Three Months Ended January 1, 2022 and January 2, 2021:

Three Months Ended

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

(in thousands of dollars) January 1, 2022 January 2, 2021

$ 129,223 $ 130,434

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Selling, general and administrative expenses 18,233 14,690

Operating profit $ 8,086 $ 3,289

Operating loss $ (2,036) $ (222)

Interest expense (3,082) (1,930)

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Other income, net 736 643

Income before income taxes $ 5,707 $ 1,091

Income tax expense (1,892) (765)

Equity in net income of non-consolidated affiliate 517 960

Net income $ 4,332 $ 1,286

Loss on debt modification (561) (598)

Loss before income taxes $ (4,943) $ (2,106)

Income tax benefit 1,762 521

Equity in net loss of non-consolidated affiliate (901) (29)

Net loss $ (4,082) $ (1,614)

Other financial data:

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Net Sales by Segment

July 3, 2021 July 4, 2020

January 1, 2022 January 2, 2021

$ 112,437 $ 117,834

16,786 12,600

$ 129,223 $ 130,434

Gross Profit by Segment

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$ 16,197 $ 14,468

Net sales were $196.7 million for the third quarter of fiscal 2021, an increase of $7.5 million, or 4.0%, compared to $189.2 million for the third quarter of fiscal 2020.

The increase in net sales is primarily attributed to increased volumes in both bus and parts sales.

Bus sales increased $1.1 million, or 0.6%, reflecting an increase in units booked, which was partially offset by lower sales prices per unit.

In the third quarter of fiscal 2021, 2,024 units were booked compared to 1,948 units booked for the same period in fiscal 2020.

The increase is mainly attributed to more schools offering, or expecting to offer, in-person learning in 2021 compared to 2020, when most schools were conducting learning remotely due to the COVID-19 pandemic.

The 3.1% decrease in unit price for the third quarter of fiscal 2021 compared to the same period in fiscal 2020 mainly reflects product and customer mix changes.

Parts sales increased $6.3 million, or 73.8%, for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020.

This increase is primarily attributed to more schools offering in-person learning in 2021 compared to 2020, which increased school bus units in operation and thus increased bus repair and maintenance activities.

Net sales were $129.2 million for the first quarter of fiscal 2022, a decrease of $1.2 million, or 0.9%, compared to $130.4 million for the first quarter of fiscal 2021.

The slight decrease in net sales is attributed to the COVID-19 pandemic, which caused supply chain constraints that have limited the availability of certain critical components and thus, limited the number of buses the Company could produce and deliver.

Bus sales decreased $5.4 million, or 4.6%, reflecting a decrease in units booked, which was partially offset by higher sales prices per unit.

In the first quarter of fiscal 2022, 1,149 units were booked compared to 1,255 units booked for the same period in fiscal 2021.

The decrease in Bus revenue and volumes reflects the constraints in the Company's ability to produce and deliver busses due to COVID-19 driven shortages of critical components.

The 4.2% increase in unit price for the first quarter of fiscal 2022 compared to the same period in fiscal 2021 mainly reflects product and customer mix changes.

Parts sales increased $4.2 million, or 33.2%, for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021.

This increase is primarily attributed to (a) more schools offering in-person learning during the 2021/2022 school year when compared with the 2020/2021 school year, which increased school bus units in operation and thus increased bus repair and maintenance activities and (b) pricing actions taken by management to offset increases in purchased part costs.

Cost of goods sold .

Total cost of goods sold was $170.5 million for the third quarter of fiscal 2021, an increase of $2.4 million, or 1.4%, compared to $168.1 million for the third quarter of fiscal 2020.

Total cost of goods sold was $113.0 million for the first quarter of fiscal 2022, a decrease of $2.9 million, or 2.5%, compared to $116.0 million for the first quarter of fiscal 2021.

As a percentage of net sales, total cost of goods sold improved from 88.9% to 87.5%.

Bus segment cost of goods sold decreased $1.2 million, or 0.8%, for the third quarter of fiscal 2021 compared to the same period in fiscal 2020.

The average cost of goods sold per unit for the third quarter of fiscal 2021 was 4.5% lower compared to the third quarter of fiscal 2020 due to decreases in manufacturing costs from several COVID-19 related factors including improved absenteeism among our hourly workforce and manufacturing efficiencies.

The decreases in manufacturing costs per unit were partially offset by an increase in the volume of units produced and sold, driven by increased in-person learning in 2021 compared to 2020.

The $3.7 million, or 65.3%, increase in parts segment cost of goods sold for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 largely aligned with the increase in sales volume noted above, with slight variation due to product and channel mix.

Operating profit .

Operating profit was $8.1 million for the third quarter of fiscal 2021, an increase of $4.8 million, compared to operating profit of $3.3 million for the third quarter of fiscal 2020.

Profitability was positively impacted by an increase of $5.1 million in gross profit as outlined in the revenue and cost of goods sold discussion.

This was partially offset by an increase of $0.3 million in selling, general and administrative expenses.

Bus segment cost of goods sold decreased $5.3 million, or 4.9%, for the first quarter of fiscal 2022 compared to the same period in fiscal 2021.

The decrease is primarily volume driven, largely aligning with the decrease in revenue.

The decrease due to volume was partially offset by price increases.

The average cost of goods sold per unit for the first quarter of fiscal 2022 was 3.8% higher compared to the first quarter of fiscal 2021 due to increases in manufacturing costs from several COVID-19 related factors including supply chain disruptions that resulted in higher purchase costs for components and freight, as well as created manufacturing inefficiencies.

The $2.4 million, or 30.5%, increase in parts segment cost of goods sold for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 largely aligned with the increase in sales volume noted above, with slight variation due to product and channel mix.

Operating loss .

Operating loss was $2.0 million for the first quarter of fiscal 2022, an increase of $1.8 million, compared to operating loss of $0.2 million for the first quarter of fiscal 2021.

Profitability was positively impacted by an increase of $1.7 million in gross profit as outlined in the revenue and cost of goods sold discussions that was more than offset by an increase of $3.5 million in selling, general and administrative expenses, primarily due to (a) an increase in share-based compensation expense as a result of the accelerated vesting of all outstanding stock awards for two of the Company's former executives in connection with their retirements and (b) merit increases for all Company employees to partially or fully mitigate the impact of increasing inflation, both during the first quarter of fiscal 2022.

Additionally, selling, general and administrative expenses during the first quarter of fiscal 2021 benefited from actions taken by management to reduce labor costs and certain discretionary spending during the early months of the pandemic with no similar actions taken to reduce labor costs during the first quarter of fiscal 2022 given the competitiveness of the overall labor market primarily resulting from continuing labor shortages.

Interest expense .

Interest expense was $2.8 million for the third quarter of fiscal 2021, an increase of $0.4 million, or 16.6%, compared to $2.4 million for the third quarter of fiscal 2020.

The increase was primarily attributable an increase in the stated term loan interest rate from 2.8% at July 4, 2020 to 4% at July 3, 2021.

Interest expense was $3.1 million for the first quarter of fiscal 2022, an increase of $1.2 million, or 59.7%, compared to $1.9 million for the first quarter of fiscal 2021.

The increase was primarily attributable to an increase in the stated term loan interest rate from 4.0% at January 2, 2021 to 6.0% at January 1, 2022 as well as increased revolving credit facility borrowings outstanding during most of the first quarter of fiscal 2022 when compared with the same period in the previous year.

Income taxes .

We recorded income tax expense of $1.9 million for the third quarter of fiscal 2021, compared to income tax expense of $0.8 million for the same period in fiscal 2020.

The effective tax rate for the three month period ended July 3, 2021 was 33.2%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments.

The effective tax rate was also impacted by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties, that was partially offset by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments.

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

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

We recorded income tax benefit of $1.8 million for the first quarter of fiscal 2022, compared to income tax benefit of $0.5 million for the same period in fiscal 2021.

The effective tax rate for the three months ended January 1, 2022 was 35.6%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), which was partially offset by discrete period tax expense resulting from net non-deductible compensation expenses and other tax adjustments.

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

The difference is mainly due to normal tax rate items, such as the impact from state taxes.

Adjusted EBITDA .

Adjusted EBITDA was $13.2 million, or 6.7% of net sales, for the third quarter of fiscal 2021, an increase of $0.7 million, or 5.4%, compared to $12.5 million, or 6.6% of net sales, for the third quarter of fiscal 2020.

The increase in Adjusted EBITDA primarily results from an increase of $5.1 million in gross profit, as outlined in the revenue and cost of goods sold discussion.

This was largely offset by lower adjustments for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, particularly in depreciation, amortization, and disposals, and share-based compensation.

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

Adjusted EBITDA was $3.6 million, or 2.8% of net sales, for the first quarter of fiscal 2022, a decrease of $2.2 million, or 37.7%, compared to $5.8 million, or 4.4% of net sales, for the first quarter of fiscal 2021.

The decrease in Adjusted EBITDA primarily results from the $2.5 million increase in net loss as a result of the factors discussed above as well as a $0.9 million increase in equity in net loss of non-consolidated affiliate, which was also significantly impacted by supply chain disruptions during the first quarter of fiscal 2022.

This increase in net loss was partially offset by a $0.3 million net increase in the items comprising the adjustments within the Adjusted EBITDA calculation, the most significant of which (interest expense, income tax benefit and share-based compensation) are discussed above.

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

Three Months Ended

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

Net income $ 4,332 $ 1,286

(in thousands of dollars) January 1, 2022 January 2, 2021

Net loss $ (4,082) $ (1,614)

Interest expense, net (1) 3,157 2,012

Income tax expense 1,892 765

Income tax benefit (1,762) (521)

Depreciation, amortization, and disposals (2) 3,523 3,676

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Product redesign initiatives 253 186

Restructuring charges — 364

Restructuring and other charges 246 494

Costs directly attributed to the COVID-19 pandemic (3) 29 170

Loss on debt modification 561 598

Adjusted EBITDA

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(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 Nine Months Ended July 3, 2021 and July 4, 2020:

Nine Months Ended

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

$ 491,791 $ 597,810

Cost of goods sold

432,671 531,259

$ 59,120 $ 66,551

Operating expenses

Selling, general and administrative expenses

50,124 58,146

Operating profit $ 8,996 $ 8,405

Interest expense (7,069) (9,961)

Interest income 1 27

Other income, net 1,491 555

Loss on debt extinguishment (598) —

Income (loss) before income taxes $ 2,821 $ (974)

Income tax (expense) benefit (888) 378

Equity in net income of non-consolidated affiliate 166 840

Net income $ 2,099 $ 244

Other financial data:

Adjusted EBITDA

$ 26,484 $ 32,778

Adjusted EBITDA margin

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

(in thousands of dollars) Nine Months Ended

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

$ 449,876 $ 554,061

41,915 43,749

Total $ 491,791 $ 597,810

Gross Profit by Segment

$ 43,265 $ 50,884

15,855 15,667

$ 59,120 $ 66,551

Net sales were $491.8 million for the nine months ended July 3, 2021, a decrease of $106.0 million, or 17.7%, compared to $597.8 million for the nine months ended July 4, 2020.

The decrease in net sales is attributed to the COVID-19 pandemic which caused an increase in remote learning arrangements during the majority of the 2020/2021 school year, which significantly impacted our operations as a result of the reduced demand for new school buses and parts.

Bus sales decreased $104.2 million, or 18.8%, primarily due to a decrease in units booked and partially offset by higher sales prices per unit.

In the nine months ended July 3, 2021, 4,768 units were booked compared to 6,002 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 and production limitations caused by supply chain shortages.

The average net sales price per unit for the nine months ended July 3, 2021 was 2.2% higher than the price per unit for the nine months ended July 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 $1.8 million, or 4.2%, for the nine months ended July 3, 2021 compared to the nine months ended July 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 $432.7 million for the nine months ended July 3, 2021, a decrease of $98.6 million, or 18.6%, compared to $531.3 million for the nine months ended July 4, 2020.

As a percentage of net sales, total cost of goods sold improved from 88.9% to 88.0%.

Bus segment cost of goods sold decreased $96.6 million, or 19.2%, for the nine months ended July 3, 2021 compared to the nine months ended July 4, 2020, which aligned with the decrease in sales volume noted above.

The average cost of goods sold per unit for the nine months ended July 3, 2021 was 1.7% higher compared to the nine months ended July 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 $2.0 million, or 7.2%, decrease in parts segment cost of goods sold for the nine months ended July 3, 2021 compared to the nine months ended July 4, 2020 largely aligned with the decrease in sales volume noted above, with slight variation due to product and channel mix.

Operating profit .

Operating profit was $9.0 million for the nine months ended July 3, 2021, an increase of $0.6 million compared to an operating profit of $8.4 million for the nine months ended July 4, 2020.

Profitability was negatively impacted by a decrease of $7.4 million in gross profit as outlined in the revenue and cost of goods sold discussion.

This was offset by a decrease of $8.0 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.

Interest expense .

Interest expense was $7.1 million for the nine months ended July 3, 2021, a decrease of $2.9 million, or 29.0%, compared to $10.0 million for the nine months ended July 4, 2020.

The decrease was primarily attributable to a $3.0 million net increase in the fair value of the interest rate collar (a liability balance) recorded in interest expense in the nine months ended July 4, 2020 with the corresponding activity recorded in the nine months ended July 3, 2021 netting to an immaterial amount.

Loss on debt modification .

Loss on debt modification was $(0.6) million for the nine months ended July 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 expense was $0.9 million for the nine months ended July 3, 2021, compared to income tax benefit of $0.4 million for the same period in fiscal 2020.

The increase is primarily due to reporting pre-tax income of $2.8 million for the nine months ended July 3, 2021, compared to pre-tax loss of $(1.0) million for the same period in fiscal 2020.

The effective tax rate for the nine months ended July 3, 2021 was 31.5%, which differed from the statutory federal income tax rate of 21%.

The difference is mainly due to normal tax rate items, including impacts from state taxes, net non-deductible compensation expenses and other tax adjustments.

The effective tax rate was also impacted by discrete period tax benefits resulting from share-based compensation expenses and prior year tax return adjustments that were partially offset by discrete period tax expense resulting from recording a liability for UTPs, including accrued interest and penalties.

The effective tax rate for the nine months ended July 4, 2020 was 38.8%, 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 $26.5 million, or 5.4% of net sales, for the nine months ended July 3, 2021, a decrease of $6.3 million, or 19.2%, compared to $32.8 million, or 5.5% of net sales, for the nine months ended July 4, 2020.

The decrease in Adjusted EBITDA is primarily the result of a decrease of $7.4 million in gross profit, mainly from lower sales volumes due the COVID-19 pandemic and higher manufacturing costs, as well as reductions in certain adjustment balances such as operational transformation initiatives and share-based compensation expense.

These decreases were partially offset by lower adjusted selling, general and administrative expenses due to actions taken to control spending during the pandemic.

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

Nine Months Ended

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

Net income $ 2,099 $ 244

Interest expense, net (1) 7,321 10,213

Income tax expense (benefit) 888 (378)

Depreciation, amortization, and disposals (2) 10,118 11,215

Operational transformation initiatives 222 3,218

Loss on debt modification 598 —

Share-based compensation 1,923 4,105

Product redesign initiatives 1,908 3,163

Restructuring charges 494 364

Costs directly attributed to the COVID-19 pandemic (3) 913 628

Adjusted EBITDA $ 26,484 $ 32,778

Adjusted EBITDA margin (percentage of net sales) 5.4 % 5.5 %

(1) Includes $0.3 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 $0.6 million and $0.5 million for the nine months ended July 3, 2021 and July 4, 2020, respectively, 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.

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

Liquidity and Capital Resources

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

At July 3, 2021, the Company had $11.2 million of available cash (net of outstanding checks) and $93.1 million of additional borrowings available under the revolving line of credit portion of its credit facility.

At January 1, 2022, the Company had $4.1 million of available cash (net of outstanding checks) and $88.7 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 semi-monthly 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 July 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.

Fourth Amendment to the Credit Agreement

On November 24, 2021, the Company executed a fourth amendment to the Credit Agreement, dated as of December 12, 2016;

as amended by the first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement"), the second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement"), and the third amendment to the Credit Agreement, dated as of December 4, 2020 (the "Third Amended Credit Agreement");

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

The Fourth Amended Credit Agreement, among other things, provides for certain temporary amendments to the Credit Agreement from the third amendment effective date through and including (a) April 1, 2023 (the “Amended Limited Availability Period”) or (b) the first date on which Blue Bird Body Company, a wholly-owned subsidiary of the Company (the "Borrower"), elects to terminate the Amended Limited Availability Period, in each case, subject to (x) the absence of a default or event of default and (y) pro forma compliance with the financial covenant performance covenants under the Fourth Amended Credit Agreement.

With respect to the financial performance covenants, during the Amended Limited Availability Period for the fiscal quarters ending January 1, 2022 through October 1, 2022, the TNLR requirement is not applicable, although it continues to impact the interest rate that is charged on outstanding borrowings as discussed below.

Instead, the minimum consolidated EBITDA that the Company is required to maintain during the Amended Limited Availability Period was updated to include fiscal 2022 as set forth in the table below (in millions):

Period Minimum Consolidated EBITDA

Fiscal quarter ending January 1, 2022 $14.5

Fiscal quarter ending April 2, 2022 $(4.5)

Fiscal quarter ending July 2, 2022 $(6.8)

Fiscal quarter ending October 1, 2022 $20.0

However, in the event that Borrower elects to terminate the Amended Limited Availability Period in fiscal 2022, the maximum TNLR permitted is 3.50x.

The minimum liquidity (in the form of undrawn availability under the revolving credit facility and unrestricted cash and cash equivalents) that the Company must maintain during the Amended Limited Availability Period was amended as set forth in the table below (in millions):

Period Minimum Liquidity

Fourth amendment effective date through January 1, 2022 $10.0

January 2, 2022 through April 2, 2022 $5.0

April 3, 2022 through July 2, 2022 $15.0

Thereafter $20.0

Additionally, a new financial performance covenant was added in the Fourth Amended Credit Agreement, requiring that school bus units manufactured by the Company (“Units”) not fall below the pre-set thresholds set forth in the table below on a three month trailing basis (“Units Covenant”).

The Units Covenant is triggered only if the Company’s liquidity for the most-recently ended fiscal month is less than $50 million during the Amended Limited Availability Period:

Period Minimum Units Manufactured

Three month period ending November 27, 2021 1,128

Three month period ending January 1, 2022 776

Three month period ending January 29, 2022 748

Three month period ending February 26, 2022 727

Three month period ending April 2, 2022 763

Three month period ending April 30, 2022 1,111

Three month period ending May 28, 2022 1,525

Three month period ending July 2, 2022 2,053

Three month period ending July30, 2022 2,072

Three month period ending August 27, 2022 2,199

Three month period ending October 1, 2021 2,306

If the Units during any three fiscal month period set forth above is less than the minimum required by the Units Covenant, Borrower may elect to carry forward up to 50% of certain applicable excess Units to satisfy the Units Covenant requirement.

However, Borrower may not make such election in two consecutive three fiscal month periods.

The pricing grid in the Fourth Amended Credit Agreement, which is based on the TNLR, is determined in accordance with the amended pricing matrix set forth below:

Level Total Net Leverage Ratio ABR Loans Eurodollar Loans

I Less than 2.00x 0.75% 1.75%

II Greater than or equal to 2.00x and less than 2.50x 1.00% 2.00%

III Greater than or equal to 2.50x and less than 3.00x 1.25% 2.25%

IV Greater than or equal to 3.00x and less than 3.25x 1.50% 2.50%

V Greater than or equal to 3.25x and less than 3.50x 1.75% 2.75%

VI Greater than or equal to 3.50x and less than 4.50x 2.00% 3.00%

VII Greater than or equal to 4.50x and less than 5.00x 3.25% 4.25%

VIII Greater than 5.00x 4.25% 5.25%

During the Amended Limited Availability Period, the applicable rate for outstanding revolving loans is the sum of the rate determined by the administrative agent in accordance with the pricing grid set forth above, plus 0.50%.

Additional allowances were made in the Fourth Amended Credit Agreement for the Company to issue or incur up to $100.0 million of qualified equity interests issued by the Company, unsecured subordinated indebtedness or unsecured convertible indebtedness (collectively, “Junior Capital”).

Upon the issuance or incurrence of any Junior Capital, the Company is required to prepay the outstanding revolving loans (with no permanent reduction in the revolving commitments) in an amount equal to the lesser of (a) 100% of the net proceeds from such Junior Capital and (b) the aggregate of revolving exposures then outstanding.

Prior to the initial issuance or incurrence of any Junior Capital, any issuance, amendment, renewal, or extension of credit during the Amended Limited Availability Period may not cause the aggregate outstanding Revolving Credit Facility principal to exceed $110.0 million (“Availability Cap”).

Following the issuance and sale of $75.0 million of common stock in a private placement transaction on December 15, 2021 (see further discussion below), the Availability Cap was permanently reduced to $100.0 million.

For the duration of the Amended Limited Availability Period, the Fourth Amended Credit Agreement sets forth additional monthly reporting requirements in connection with the manufactured school bus units required by the financial performance covenants, when applicable.

Detailed descriptions of the Credit Agreement as well as the First, Second, and Third Amended Credit Agreements 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 2, 2021, filed with the SEC on December 15, 2021.

At January 1, 2022, the Borrower 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 three quarters 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 adverse impacts from the COVID-19 pandemic materially impacted our results in the first quarter of fiscal 2022, primarily resulting from significant supply chain disruptions that constrained our abilities to produce buses to fulfill sales orders.

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.

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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 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.

Our primary financial covenants are (i) for fiscal 2022, minimum consolidated EBITDA, which is an adjusted EBITDA metric that could differ from Adjusted EBITDA appearing in the Company’s periodic filings on Form 10-K or Form 10-Q as the adjustments to the calculations are not uniform, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending;

(ii) for fiscal 2022 and through April 1, 2023, minimum liquidity at the end of each fiscal month;

(iii) when applicable during fiscal 2022, minimum school bus units manufactured calculated on a three month trailing basis at the end of each fiscal month;

and (iv) beginning in fiscal 2023 and thereafter, TNLR, 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.

1 unchanged sentence

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

On December 15, 2021, we issued and sold through a private placement transaction an aggregate 4,687,500 shares of our common stock at $16.00 per share.

The approximate $74.8 million of net proceeds that we received from this transaction were used to repay outstanding revolving loans as required by the terms of the Fourth Amended Credit Agreement.

See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for additional information regarding this transaction.

To increase our liquidity in future periods, we may pursue raising additional capital via an equity or debt offering as we filed a Registration Statement on Form S-3 with the SEC in November 2021 that was declared effective in December 2021.

However, we cannot assure our investors that we would be successful in raising this additional capital, which could also lead to increased expense and larger up-front fees when compared with our historical financial statements.

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

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.

This has resulted in our third and fourth fiscal quarters representing our two busiest quarters from a sales and production perspective, 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.

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

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

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

Nine Months Ended

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

Three Months Ended

(in thousands of dollars) January 1, 2022 January 2, 2021

Cash and cash equivalents at beginning of period $ 11,709 $ 44,507

1 unchanged sentence

Total cash used in investing activities (1,570) (3,317)

Total cash (used in) provided by financing activities (9,643) 36,458

Total cash provided by (used in) financing activities 27,007 (5,777)

Change in cash and cash equivalents $ (7,640) $ (20,591)

1 unchanged sentence

Total cash used in operating activities

Cash flows used in operating activities totaled $14.2 million for the nine months ended July 3, 2021, as compared to $78.3 million for the nine months ended July 4, 2020.

The $64.1 million decrease in cash used was primarily attributed to a positive $66.0 million difference (source of cash) from the impacts of changes in working capital and accrued expenses between fiscal periods.

Cash flows used in operating activities totaled $33.1 million for the three months ended January 1, 2022, as compared to $11.5 million for the three months ended January 2, 2021.

The $21.6 million increase in cash used was primarily attributed to a $2.5 million increase in net loss coupled with a $19.5 million net difference (use of cash) from the impacts of changes in working capital, other assets and accrued expenses between fiscal periods.

Total cash used in investing activities

Cash flows used in investing activities totaled $9.4 million for the nine months ended July 3, 2021, as compared to $16.6 million for the nine months ended July 4, 2020.

The $7.2 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 $9.6 million for the nine months ended July 3, 2021, as compared to $36.5 million of cash flows provided by financing activities for the nine months ended July 4, 2020.

The $46.1 million decrease between fiscal periods was primarily attributed to a $45.0 million decrease in cash borrowings under the revolving credit facility and a $1.5 million increase in cash paid for debt costs.

Cash flows used in investing activities totaled $1.6 million for the three months ended January 1, 2022, as compared to $3.3 million for the three months ended January 2, 2021.

The $1.7 million decrease was due to a reduction in spending on fixed assets.

Total cash provided by (used in) financing activities

Cash flows provided by financing activities totaled $27.0 million for the three months ended January 1, 2022, as compared to $5.8 million of cash flows used in financing activities for the three months ended January 2, 2021.

The $32.8 million increase between fiscal periods was primarily attributed to $75.0 million of proceeds received from the issuance and sale of common stock in a private placement transaction that was partially offset by the repayment of $40.0 million of revolving credit facility borrowings, both during the first quarter of fiscal 2022 with no similar activity in the corresponding period of the previous year.

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:

Nine Months Ended

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

Management believes the non-GAAP measurement of Free Cash Flow, defined as net cash used in operating activities less cash paid for fixed assets and acquired intangible 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 Financial Measures We Use to Evaluate Our Performance” for further discussion.

The following table sets forth the calculation of Free Cash Flow for the periods presented:

Three Months Ended

(in thousands of dollars) January 1, 2022 January 2, 2021

Net cash used in operating activities $ (33,077) $ (11,497)

2 unchanged sentences

$ (34,647) $ (14,814)

Free cash flow for the nine months ended July 3, 2021 was $70.5 million higher than the nine months ended July 4, 2020, due to a $64.1 million decrease in cash used in operating activities and a decrease of $6.4 million in cash paid for fixed assets.

Free Cash Flow for the three months ended January 1, 2022 was $19.8 million lower than the three months ended January 2, 2021, due to a $21.6 million increase in cash used in operating activities that was partially offset by a decrease of $1.7 million in cash paid for fixed assets.

Off-Balance Sheet Arrangements

We had outstanding letters of credit totaling $6.9 million at July 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 July 3, 2021 which relates to a guarantee of indebtedness for a term loan issued by a Company dealer with a remaining maturity up to 1.5 years.

We had outstanding letters of credit totaling $6.3 million at January 1, 2022, 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 1, 2022 which relates to a guarantee of indebtedness for a term loan obtained by one of our dealers with a remaining maturity up to 1.0 year.

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.

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.

There have not been any material changes to our interest rate, commodity or currency risks previously disclosed in Part II, Item 7A of the Company’s 2021 Form 10-K.

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