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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2022-02-09 · 161 added, 69 removed, 323 unchanged (42% of the section changed)

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

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited 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").

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 as of and for the three and six months ended April 2, 2022 and April 3, 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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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.

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

The six month periods in fiscal 2022 and 2021 both included 26 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.

The pandemic triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions continued through the second 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 second quarter of fiscal 2022.

We incurred higher inventory purchase costs, including freight costs incurred to expedite receipt of critical components, and experienced increased manufacturing inefficiencies due to the shortage of critical components that hindered our ability to efficiently complete the production of buses to fulfill sales orders.

Specifically, management estimates that the sale of over 2,000 units was deferred from fiscal 2021 into fiscal 2022 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 this period.

Including these units, as applicable, the Company's backlog exceeded 4,200 and 6,600 units as of October 2, 2021 and April 2, 2022, respectively, as demand for our products remains strong, with no sales orders canceled as a result of delays in our production process.

In response, the Company announced several 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 half of fiscal 2022 as sales recorded during the first half 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 third quarter of fiscal 2022.

In general, management believes that such supply chain disruptions will continue in future periods and could 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,

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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 throughout the second quarter of fiscal 2022 and perhaps beyond.

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

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

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

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

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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.

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

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The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 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 three months ended January 1, 2022.

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 remains 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 fluid and subject to change, and increased remote learning could reasonably be expected to decrease the number of school bus riders.

• Revenue mix .

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(ii) transaction related costs;

(iii) discrete expenses related to major cost cutting initiatives;

(iii) discrete expenses related to major cost cutting and/or operational transformation initiatives;

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

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

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

Consolidated Results of Operations for the Three Months Ended April 2, 2022 and April 3, 2021:

Three Months Ended

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

(in thousands of dollars) April 2, 2022 April 3, 2021

$ 207,659 $ 164,698

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

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

Operating (loss) profit $ (16,701) $ 1,132

Interest expense (2,491) (2,334)

Interest income — 1

Other income, net 744 422

Loss on debt modification (561) (598)

Loss before income taxes $ (18,448) $ (780)

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Adjusted EBITDA margin

(5.1) % 4.6 %

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

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Net Sales by Segment

January 1, 2022 January 2, 2021

April 2, 2022 April 3, 2021

$ 188,484 $ 150,307

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$ 207,659 $ 164,698

Gross Profit by Segment

Gross (Loss) Profit by Segment

$ (3,984) $ 13,084

$ 3,157 $ 18,493

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.

Net sales were $207.7 million for the second quarter of fiscal 2022, an increase of $43.0 million, or 26.1%, compared to $164.7 million for the second quarter of fiscal 2021.

The increase in net sales is primarily attributed to a 29.7% increase in bus sales volumes.

The COVID-19 pandemic caused schools to shut down in-person learning during the 2020-2021 school year, decreasing the demand for buses.

By the second quarter of fiscal 2022, most schools have returned to in-person learning and demand has increased.

The increase in demand has been partially offset by pandemic driven 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.

Additionally, with the return to in-person learning and increased number of school buses in operation, demand for parts has increased, which contributed to a $4.8 million increase in parts sales.

Bus sales increased $38.2 million, or 25.4%, reflecting an increase in units booked, which was partially offset by a lower average sales price per unit.

In the second quarter of fiscal 2022, 1,931 units were booked compared to 1,489 units booked for the same period in fiscal 2021.

The increase in bus revenue and volumes reflects the return to in-person learning and increased demand, partially offset by constraints in the Company's ability to produce and deliver buses due to COVID-19 driven shortages of critical components.

The 3.3% decrease in unit price for the second quarter of fiscal 2022 compared to the same period in fiscal 2021 mainly reflects product and customer mix changes.

Parts sales increased $4.8 million, or 33.2%, for the second quarter of fiscal 2022 compared to the second 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 $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 $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.

Total cost of goods sold was $204.5 million for the second quarter of fiscal 2022, an increase of $58.3 million, or 39.9%, compared to $146.2 million for the second quarter of fiscal 2021.

As a percentage of net sales, total cost of goods sold increased from 88.8% to 98.5%.

Bus segment cost of goods sold increased $55.2 million, or 40.3%, for the second quarter of fiscal 2022 compared to the same period in fiscal 2021.

The increase is primarily volume driven, which also factored into the increase in revenue discussed above, but was also significantly impacted by a $1.4 million asset impairment charge recorded during the second quarter of fiscal 2022 as well as several COVID-19 related factors.

Specifically, the average cost of goods sold per unit for the second quarter of fiscal 2022 was 8.1% higher compared to the second quarter of fiscal 2021 primarily due to increases in manufacturing costs attributable to both a) supply chain disruptions that resulted in higher purchase costs for components and freight and b) increased manufacturing inefficiencies resulting from the shortage of certain critical components that required more off-line labor to produce buses.

The $3.1 million, or 34.0%, increase in parts segment cost of goods sold for the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 largely aligned with the increase in sales volume noted above, with the slight variation due to product and channel mix.

Operating (loss) profit .

Operating loss was $16.7 million for the second quarter of fiscal 2022, a decrease of $17.8 million, compared to operating profit of $1.1 million for the second quarter of fiscal 2021.

Profitability was negatively impacted by a decrease of $15.3 million in gross profit as outlined in the revenue and cost of goods sold discussions, as well as an increase of $2.5 million in selling, general and administrative expenses, primarily due to a $1.2 million increase in professional services primarily relating to several cost cutting and operational transformation initiatives, a $0.7 million increase in research and development costs, and a $0.7 million increase in payroll.

The increase in payroll costs resulted from merit increases for all Company employees that were effective at the beginning of fiscal 2022 and were intended to partially mitigate the impact of increasing inflation.

Additionally, selling, general and administrative expenses during the second 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 second quarter of fiscal 2022 given the competitiveness of the overall labor market primarily resulting from continuing labor shortages.

Interest expense .

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.

Interest expense was $2.5 million for the second quarter of fiscal 2022, an increase of $0.2 million, or 6.7%, compared to $2.3 million for the second quarter of fiscal 2021.

The increase was primarily attributable to an increase in the stated term loan interest rate from 3.8% at April 3, 2021 to 6.1% at April 2, 2022, partially offset by decreased borrowings outstanding.

Income taxes .

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%.

We recorded income tax benefit of $7.4 million for the second 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 April 2, 2022 was 40.2%, 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 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.

The effective tax rate for the three months ended April 3, 2021 was 61.9%, 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, including impacts from state taxes.

Adjusted EBITDA .

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.

Adjusted EBITDA was $(10.7) million, or (5.1)% of net sales, for the second quarter of fiscal 2022, a decrease of $18.2 million, or 241.7%, compared to $7.5 million, or 4.6% of net sales, for the second quarter of fiscal 2021.

The decrease in Adjusted EBITDA primarily results from the $11.5 million increase in net loss and $6.9 million increase in income tax benefit, both as a result of the factors 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) January 1, 2022 January 2, 2021

(in thousands of dollars) April 2, 2022 April 3, 2021

Net loss $ (12,147) $ (619)

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Product redesign initiatives 281 1,081

Restructuring and other charges 246 494

Costs directly attributed to the COVID-19 pandemic (3) 8 527

Loss on debt modification 561 598

Adjusted EBITDA

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Adjusted EBITDA margin (percentage of net sales)

(5.1) % 4.6 %

(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.

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

Consolidated Results of Operations for the Six Months Ended April 2, 2022 and April 3, 2021:

Six Months Ended

(in thousands of dollars) April 2, 2022 April 3, 2021

$ 336,882 $ 295,132

Cost of goods sold

317,528 262,171

$ 19,354 $ 32,961

Operating expenses

Selling, general and administrative expenses

38,091 32,051

Operating (loss) profit $ (18,737) $ 910

Interest expense (5,573) (4,264)

Interest income — 1

Other income, net 1,480 1,065

Loss on debt modification (561) (598)

Loss before income taxes $ (23,391) $ (2,886)

Income tax benefit 9,177 1,004

Equity in net loss of non-consolidated affiliate (2,015) (351)

Net loss $ (16,229) $ (2,233)

Other financial data:

Adjusted EBITDA

$ (7,091) $ 13,323

Adjusted EBITDA margin

(2.1) % 4.5 %

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 2, 2022 April 3, 2021

$ 300,921 $ 268,141

35,961 26,991

Total $ 336,882 $ 295,132

Gross Profit by Segment

$ 5,658 $ 22,794

13,696 10,167

$ 19,354 $ 32,961

Net sales were $336.9 million for the six months ended April 2, 2022, an increase of $41.8 million, or 14.1%, compared to $295.1 million for the six months ended April 3, 2021.

The increase in net sales is primarily attributed to a 12.2% increase in bus sales volumes.

The COVID-19 pandemic caused schools to shut down in-person learning during the 2020-2021 school year, decreasing the demand for buses.

By fiscal 2022, most schools have returned to in-person learning and demand has increased.

Additionally, with the return to in-person learning and increased number of school buses in operation, demand for parts has increased, which contributed to a $9.0 million increase in parts sales.

Bus sales increased $32.8 million, or 12.2%, reflecting an increase in units booked as the average sales prices per unit was consistent in both periods.

In the six months ended April 2, 2022, 3,080 units were booked compared to 2,744 units booked for the same period in fiscal 2021.

Parts sales increased $9.0 million, or 33.2%, for the six months ended April 2, 2022 compared to the six months ended April 3, 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 $317.5 million for the six months ended April 2, 2022, an increase of $55.4 million, or 21.1%, compared to $262.2 million for the six months ended April 3, 2021.

As a percentage of net sales, total cost of goods sold increased from 88.8% to 94.3%.

Bus segment cost of goods sold increased $49.9 million, or 20.3%, for the six months ended April 2, 2022 compared to the six months ended April 3, 2021.

Specifically, the average cost of goods sold per unit for the six months ended April 2, 2022 was 7.2% higher compared to the six months ended April 3, 2021 primarily due to increases in manufacturing costs attributable to both a) supply chain disruptions that resulted in higher purchase costs for components and freight and b) increased manufacturing inefficiencies resulting from the shortage of certain critical components that required more off-line labor to produce buses.

The $5.4 million, or 32.3%, increase in parts segment cost of goods sold for the six months ended April 2, 2022 compared to the six months ended April 3, 2021 largely aligned with the increase in sales volume noted above, with the slight variation due to product and channel mix.

Operating (loss) profit .

Operating loss was $18.7 million for the six months ended April 2, 2022, a decrease of $19.6 million compared to operating profit of $0.9 million for the six months ended April 3, 2021.

Profitability was negatively impacted by a decrease of $13.6 million in gross profit as outlined in the revenue and cost of goods sold discussions, as well as an increase of $6.0 million in selling, general and administrative expenses, primarily due to a $3.2 million increase in payroll, $1.4 million increase in professional services primarily relating to several cost cutting and operational transformation initiatives, and a $0.8 million increase in research and development costs.

Additionally, selling, general and administrative expenses during the first half 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 half of fiscal 2022 given the competitiveness of the overall labor market primarily resulting from continuing labor shortages.

Interest expense .

Interest expense was $5.6 million for the six months ended April 2, 2022, an increase of $1.3 million, or 30.7%, compared to $4.3 million for the six months ended April 3, 2021.

The increase was primarily attributable to an increase in the stated term loan interest rate from 3.8% at April 3, 2021 to 6.1% at April 2, 2022, as well as increased revolving credit facility borrowings outstanding during the first half of fiscal 2022 when compared with the same period in the previous year.

Income taxes .

Income tax benefit was $9.2 million for the six months ended April 2, 2022, compared to income tax benefit of $1.0 million for the same period in fiscal 2021.

The effective tax rate for the six months ended April 2, 2022 was 39.2% and differed from the statutory federal tax rate of 21%.

The effective tax rate for the six months ended April 3, 2021 was 34.8% and 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.

Adjusted EBITDA .

Adjusted EBITDA was $(7.1) million, or (2.1)% of net sales, for the six months ended April 2, 2022, a decrease of $20.4 million, or 153.2%, compared to $13.3 million, or 4.5% of net sales, for the six months ended April 3, 2021.

The decrease in Adjusted EBITDA is primarily the result of a $14.0 million increase in net loss and $8.2 million increase in income tax benefit, both as a result of the factors discussed above.

The decrease was partially offset by a $1.3 million increase in interest expense as a result of the factors discussed above and a $0.9 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 in the first quarter of fiscal 2022.

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 2, 2022 April 3, 2021

Net loss $ (16,229) $ (2,233)

Interest expense, net (1) 5,720 4,434

Income tax benefit (9,177) (1,004)

Depreciation, amortization, and disposals (2) 7,145 7,267

Operational transformation initiatives 1,586 208

Loss on debt modification 561 598

Share-based compensation 2,486 1,595

Product redesign initiatives 534 1,267

Restructuring and other charges 246 494

Costs directly attributed to the COVID-19 pandemic (3) 37 697

Adjusted EBITDA $ (7,091) $ 13,323

Adjusted EBITDA margin (percentage of net sales) (2.1) % 4.5 %

(1) Includes $0.1 million and $0.2 million for the fiscal periods ended April 2, 2022 and April 3, 2021, respectively, 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.

Liquidity and Capital Resources

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

At January 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.

At April 2, 2022, the Company had $14.9 million of available cash (net of outstanding checks) and $93.7 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.

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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.

At April 2, 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 quarter of fiscal 2022, primarily resulting from significant supply chain disruptions that constrained our abilities to produce buses to fulfill sales orders.

The continuing adverse impacts from the COVID-19 pandemic materially impacted our results in the first half of fiscal 2022, primarily resulting from significant supply chain disruptions that a) constrained our abilities to produce buses to fulfill sales orders and b) increased our manufacturing costs as a result of i) higher purchase costs for components and freight and ii) increased manufacturing inefficiencies due to the shortage of certain critical components that required more off-line labor to produce buses.

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

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

Three Months Ended

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

Six Months Ended

(in thousands of dollars) April 2, 2022 April 3, 2021

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

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Total cash used in operating activities

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.

Cash flows used in operating activities totaled $11.4 million for the six months ended April 2, 2022, consistent with the $11.2 million of cash flows used in operating activities during the six months ended April 3, 2021.

Total cash used in investing activities

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.

Cash flows used in investing activities totaled $3.5 million for the six months ended April 2, 2022, as compared to $7.0 million for the six months ended April 3, 2021.

The $3.5 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.

Cash flows provided by financing activities totaled $18.0 million for the six months ended April 2, 2022, as compared to $7.6 million of cash flows used in financing activities for the six months ended April 3, 2021.

The $25.6 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 $45.0 million of revolving credit facility borrowings, both during the first half of fiscal 2022 with no similar activity in the corresponding period of the previous year.

Additionally, there was a $2.5 million increase in principal payments of senior term loan borrowings, a $1.0 million increase in cash paid for repurchases of common stock in connection with employee stock award exercises, and a $0.8 million decrease in cash received from employee stock option exercises during the first half of fiscal 2022 when compared with the same period in fiscal 2021.

Free cash flow

Management believes the non-GAAP measurement of Free Cash Flow, defined as net cash used in operating activities less cash paid for fixed assets 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.

Management believes the non-GAAP measurement of Free Cash Flow, defined as net cash used in operating activities plus 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

Six Months Ended

(in thousands of dollars) April 2, 2022 April 3, 2021

Net cash used in operating activities $ (11,410) $ (11,198)

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$ (14,888) $ (18,205)

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.

Free Cash Flow for the six months ended April 2, 2022 was $3.3 million higher than the six months ended April 3, 2021, due to a decrease of $3.5 million in cash paid for fixed assets that was partially offset by a $0.2 million increase in cash used in operating activities .

Off-Balance Sheet Arrangements

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.

We had outstanding letters of credit totaling $6.3 million at April 2, 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 April 2, 2022 which relates to a guarantee of indebtedness for a term loan obtained by one of our dealers with a remaining maturity up to 0.8 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.

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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