Blue Bird Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition and results of operations of 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. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them. Special Note Regarding Forward-Looking Statements This Report contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to: • the future financial performance of the Company; • negative changes in the market for Blue Bird products; • expansion plans and opportunities; • challenges or unexpected costs related to manufacturing; • future impacts from the novel coronavirus pandemic known as "COVID-19," and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which could include, among other effects: ◦ disruption in global financial and credit markets; ◦ supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic; ◦ negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations; ◦ negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions; ◦ financial difficulties of our customers impacted by the pandemic; ◦ reductions in market demand for our products due to the pandemic; and ◦ potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic. These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 18 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. The following information should be read in conjunction with the financial statements included in the Company’s 2021 Form 10-K, filed with the SEC on December 15, 2021. Available Information We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Report. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Executive Overview Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications, Blue Bird is recognized as an industry leader for school bus innovation, safety, product quality/reliability/durability, efficiency, and lower operating costs. In addition, Blue Bird is the market leader in 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 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 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. 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 six months ended April 2, 2022. 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, 19 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 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. and globally. Accordingly, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. The continuing impacts from COVID-19 on the Company's operations in the first half of fiscal 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, 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. Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential longer-term impacts on our business from the pandemic. Our actions may include reducing hiring activities, limiting discretionary spending, limiting spending on capital investment projects or other steps necessary to preserve adequate liquidity. We 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 stockholders. For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Report. Critical Accounting Policies and Estimates, Recent Accounting Pronouncements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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. Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 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 six months ended April 2, 2022. Recent Accounting Pronouncements See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements. 20 Factors Affecting Our Revenues Our revenues are driven primarily by the following factors: • Property tax revenues . Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate. • Student enrollment and delivery mechanisms for learning. Increases or decreases in the number of school bus riders have a direct impact on school district demand. Due to the COVID-19 pandemic and evolving protocols for social distancing and 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 . 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. • Strength of the dealer network . We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district. • Pricing . Our products are sold to school districts throughout the U.S. and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions. • Buying patterns of major fleets . Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year. • Seasonality. Historically, our sales have been subject to seasonal variation based on the school calendar with the peak season during our third and fourth fiscal quarters. Sales during the third and fourth fiscal quarters 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. Factors Affecting Our Expenses and Other Items Our expenses and other line items on our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors: • Cost of goods sold . The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper) 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. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel. • Interest expense . Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt. Interest expense also includes unrealized gains or 21 losses from interest rate hedges, if any, and changes in the fair value of interest rate derivatives not designated in hedge accounting relationships, if any, as well as expenses related to debt guarantees, if any. • Income taxes . We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken. • Other income/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 The condensed consolidated financial statements included in this Report in Item 1. "Financial Statements (Unaudited)." are prepared in conformity with U.S. GAAP. 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 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 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; (ii) transaction related costs; (iii) discrete expenses related to major cost cutting and/or operational transformation initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. While certain of the charges that are added back in the Adjusted EBITDA calculation, such as transaction related costs and operational transformation and major product redesign initiatives, represent operating expenses that may be recorded in more than one annual period, the significant project or transaction giving rise to such expenses is not considered to be indicative of the Company’s normal operations. Accordingly, we believe that these, as well as the other credits and charges that comprise the amounts utilized in the determination of Adjusted EBITDA described above, should not be used in evaluating the Company’s ongoing annual operating performance. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA Margin are not measures of performance defined in accordance with U.S. GAAP. The measures are used as a supplement to U.S. 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 paragraphs. 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. 22 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 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. We define Free Cash Flow as total cash provided by/used in operating activities as adjusted for net cash paid for the acquisition of fixed assets and intangible assets. We use Free Cash Flow, and ratios based on Free Cash Flow, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flow since purchases of fixed assets and intangible assets are a necessary component of ongoing operations. Accordingly, Free Cash Flow will be less than operating cash flows. Our Segments We manage our business in two operating segments, which are also our reportable segments: (i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties; and (ii) the Parts segment, which includes the sale of replacement bus parts. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit. 23 Consolidated Results of Operations for the Three Months Ended April 2, 2022 and April 3, 2021: Three Months Ended (in thousands of dollars) April 2, 2022 April 3, 2021 Net sales $ 207,659 $ 164,698 Cost of goods sold 204,502 146,205 Gross profit $ 3,157 $ 18,493 Operating expenses Selling, general and administrative expenses 19,858 17,361 Operating (loss) profit $ (16,701) $ 1,132 Interest expense (2,491) (2,334) Other income, net 744 422 Loss before income taxes $ (18,448) $ (780) Income tax benefit 7,415 483 Equity in net loss of non-consolidated affiliate (1,114) (322) Net loss $ (12,147) $ (619) Other financial data: Adjusted EBITDA $ (10,690) $ 7,543 Adjusted EBITDA margin (5.1) % 4.6 % The following provides the results of operations of Blue Bird’s two reportable segments: (in thousands of dollars) Three Months Ended Net Sales by Segment April 2, 2022 April 3, 2021 Bus $ 188,484 $ 150,307 Parts 19,175 14,391 Total $ 207,659 $ 164,698 Gross (Loss) Profit by Segment Bus $ (3,984) $ 13,084 Parts 7,141 5,409 Total $ 3,157 $ 18,493 Net sales . 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. 24 Cost of goods sold . 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 $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 $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 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 $(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. 25 The following table sets forth a reconciliation of net loss to adjusted EBITDA for the periods presented: Three Months Ended (in thousands of dollars) April 2, 2022 April 3, 2021 Net loss $ (12,147) $ (619) Adjustments: Interest expense, net (1) 2,563 2,422 Income tax benefit (7,415) (483) Depreciation, amortization, and disposals (2) 3,622 3,591 Operational transformation initiatives 1,585 153 Share-based compensation 813 871 Product redesign initiatives 281 1,081 Costs directly attributed to the COVID-19 pandemic (3) 8 527 Adjusted EBITDA $ (10,690) $ 7,543 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. (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 in response to the COVID-19 pandemic. 26 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 Net sales $ 336,882 $ 295,132 Cost of goods sold 317,528 262,171 Gross profit $ 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 Bus $ 300,921 $ 268,141 Parts 35,961 26,991 Total $ 336,882 $ 295,132 Gross Profit by Segment Bus $ 5,658 $ 22,794 Parts 13,696 10,167 Total $ 19,354 $ 32,961 Net sales . 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. 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 $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. 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. 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 27 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. 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 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. 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 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 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 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. 28 The following table sets forth a reconciliation of net loss to adjusted EBITDA for the periods presented: Six Months Ended (in thousands of dollars) April 2, 2022 April 3, 2021 Net loss $ (16,229) $ (2,233) Adjustments: 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. 29 Liquidity and Capital Resources The Company’s primary sources of liquidity are cash generated from its operations, available cash and cash equivalents and borrowings under its credit facility. At April 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. 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 30 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, 2022 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” 31 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 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 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. 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 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 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. We cannot assure our investors that we would be successful in amending or refinancing the existing debt. An amendment or refinancing of our existing debt could lead to higher interest rates and possible up-front expenses not included in our historical financial statements. On 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. Seasonality 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 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 due to planned shutdowns and a significant source of cash generation in the fourth fiscal quarter. 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 and working capital trends have become unpredictable. Seasonality and variations from historical seasonality have impacted the comparison of working capital and liquidity results between fiscal periods. 32 Cash Flows The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows: Six Months Ended (in thousands of dollars) April 2, 2022 April 3, 2021 Cash and cash equivalents at beginning of period $ 11,709 $ 44,507 Total cash used in operating activities (11,410) (11,198) Total cash used in investing activities (3,478) (7,007) Total cash provided by (used in) financing activities 18,046 (7,580) Change in cash and cash equivalents $ 3,158 $ (25,785) Cash and cash equivalents at end of period $ 14,867 $ 18,722 Total cash used in operating activities 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 $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 $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 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: Six Months Ended (in thousands of dollars) April 2, 2022 April 3, 2021 Net cash used in operating activities $ (11,410) $ (11,198) Cash paid for fixed assets (3,478) (7,007) Free Cash Flow $ (14,888) $ (18,205) 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 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. 33 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. Item 3. Quantitative and Qualitative Disclosures About Mar ket Risk. 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.