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Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-12 · 166 added, 136 removed, 348 unchanged (46% 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 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").

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 nine months ended July 2, 2022 and July 3, 2021 and related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q ("Report").

Our actual results may not be indicative of future performance.

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• 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;

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◦ potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic.

• future impacts resulting from Russia's invasion of Ukraine, which include or could include, among other effects:

◦ disruption in global commodity and other markets;

◦ supply shortages and supplier financial risk, especially from suppliers providing inventory that is dependent on resources originating from either of these countries;

◦ negative impacts to manufacturing operations resulting from inventory cost volatility or the supply chain due to shutdowns or other disruptions in operations.

These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties.

Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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

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

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

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.

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

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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 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.

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

The nine month periods in fiscal 2022 and 2021 both included 39 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.

The pandemic triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions continued through the third 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 third 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.

Including these units, as applicable, the Company's backlog exceeded 4,200 and 6,200 units as of October 2, 2021 and July 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 partially applied to backlog orders

that were both intended to mitigate the impact of rising purchase costs on our operations and results.

These price increases were generally not realized in the first half of fiscal 2022 as sales recorded during such quarters related to the backlog of orders that existed prior, and therefore were not subject, to the price increases.

However, they began to have a positive impact on sales and gross profit in the third quarter of fiscal 2022 and management is expecting them to continue being reflected in the revenue that is realized in the fourth quarter of fiscal 2022 and continuing into fiscal 2023.

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,

we would take all appropriate measures to protect the health and safety of our employees, which could include a temporary halt in production.

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

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

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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 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.

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

Impact of Russia’s Invasion of Ukraine on Our Business

On February 24, 2022, Russian military forces launched a large-scale invasion of Ukraine.

While the Company has no assets or customers in either of these countries, this military conflict has had a significant negative impact on the Company’s operations, cash flows and results during the third quarter of fiscal 2022, primarily in an indirect manner since the Company does not sell to customers located in, or source goods directly from, either country.

Specifically, Ukraine has historically been a large exporter of ferroalloy materials used in the manufacture of steel and the disruption in the supply of these minerals resulted in a significant increase in the price of steel from $1,057 per ton the third week of February 2022 to as high as $1,492 per ton the third week of April 2022 before finally decreasing to an average of $1,078 per ton the last two weeks of June (source:

sheet prices published by the CRU Index every Wednesday that provide price benchmarking in North America for U.S.

Midwest Domestic Hot-Rolled Coil Steel).

While the Company has mitigated its direct exposure to steel prices by executing fixed price purchase contracts for the majority of the significant amount of steel used in the manufacture of school bus bodies, many suppliers from which the Company purchases components containing steel have increased the price that they charge the Company to acquire such inventory, primarily during the latter part of the third quarter of fiscal 2022.

These inventory cost increases impact gross profit when school buses are sold and cash flows when the related invoices are paid.

Additionally, Russia has historically been a large global exporter of oil and many countries have ceased buying Russian oil in protest of the invasion and to comply with sanctions imposed by the U.S.

and many European countries.

Accordingly, the disruption in the supply of oil has significantly impacted the price of goods refined from oil, such as diesel fuel, which increased from $4.055 per gallon the week ending February 21, 2022 to $5.783 per gallon the week ending June 27, 2022 (source:

U.S Energy Information Administration - Weekly U.S.

No 2 Diesel Retail Prices).

This increase has significantly impacted the Company both as a result of the price that suppliers charge the Company to acquire inventory (since diesel fuel impacts their cost of acquiring the inventory used in producing their goods) and the price that the Company pays for freight to deliver the inventory that it acquires.

Additionally, such increase was implemented with very little lag so that it impacted gross profit and cash flows more significantly during the third quarter of fiscal 2022 than did the rising cost of steel.

Finally, both countries have large quantities of other minerals that impact commodity costs, such as rubber and resin, among others, and the disruption caused by the ongoing military conflict has increased the cost and/or decreased the supply of components containing these materials, further impacting an already challenged global supply chain for automotive parts.

Russia’s invasion of Ukraine has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected our business.

Specifically, it has contributed to higher inventory purchase costs, including freight costs, that negatively impacted the gross profit recognized on sales during the latter part of the third quarter of fiscal 2022.

Because peace negotiations do not appear to be productive and because Russia has announced its intention to continue military operations in Ukraine in the immediate term, we currently believe that this matter 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 ongoing military conflict and its impact on the overall economy, both within the U.S.

and globally.

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

Additional Measures Implemented by Management in Response to the Current Environment

The Company has taken actions to control spending and secure adequate liquidity, including headcount rationalization, temporary salary reductions and furloughs, 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.

We will continue to actively monitor the situations 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.

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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 six months ended April 2, 2022.

Recent Accounting Pronouncements

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Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.

Additionally, in certain cases, prices originally quoted with dealers and school districts may have become less favorable, or more unfavorable, to us given increasing inventory costs between the time the sales order was contractually agreed upon and the bus is built and delivered as a result of ongoing supply chain disruptions and general inflationary pressures.

• Buying patterns of major fleets .

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

As discussed previously above, supply chain disruptions resulting from the ongoing COVID-19 pandemic and, more recently, Russia's invasion of Ukraine, have significantly increased our inventory purchase costs, including freight costs incurred to expedite receipt of critical components, reflected in cost of goods sold during the latter half of fiscal 2021 and continuing into the third quarter of fiscal 2022.

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

Factors Affecting Our Expenses and Other Items

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

Interest expense also includes unrealized gains or

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

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

• Income taxes .

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

• Equity in net loss of non-consolidated affiliate .

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

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

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“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.

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) 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.

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

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

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

Three Months Ended

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

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

$ 206,083 $ 196,659

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Selling, general and administrative expenses 20,505 18,073

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

Operating profit $ 1,088 $ 8,086

Interest expense (3,908) (2,805)

Other income, net 735 426

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)

(Loss) income before income taxes $ (2,085) $ 5,707

Income tax expense (2,860) (1,892)

Equity in net (loss) income of non-consolidated affiliate (1,490) 517

Net (loss) income $ (6,435) $ 4,332

Other financial data:

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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

April 2, 2022 April 3, 2021

July 2, 2022 July 3, 2021

$ 186,631 $ 181,735

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$ 21,593 $ 26,159

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.

Net sales were $206.1 million for the third quarter of fiscal 2022, an increase of $9.4 million, or 4.8%, compared to $196.7 million for the third quarter of fiscal 2021.

The increase in net sales is primarily due to product and mix changes as well as pricing actions taken by management in response to increased inventory purchase costs.

During the first half of fiscal 2021, the COVID-19 pandemic caused many schools to shut down in-person learning, decreasing the demand for buses and related maintenance and replacement parts.

However, by the third quarter of fiscal 2021, many schools began signaling a return to in-person learning by the beginning of the 2021/2022 school year (i.e., August and September 2021), resulting in a significant increase in the demand for buses and a corresponding increase in our net sales during the quarter.

Although schools have generally continued to conduct in-person learning and demand for buses and related parts has remained strong as indicated by our sales backlog, significant supply chain disruptions began limiting the availability of certain critical components primarily beginning towards the end of the third quarter of fiscal 2021 and continuing through the first three quarters of fiscal 2022.

Accordingly, such shortages have limited the number of buses the Company could produce and deliver during this time period.

Bus sales increased $4.9 million, or 2.7%, reflecting a 20.4% increase in average sales price per unit, which was partially offset by a 14.7% decrease in units booked.

In the third quarter of fiscal 2022, 1,726 units were booked compared to 2,024 units booked for the same period in fiscal 2021.

The decrease in units sold was primarily due to constraints in the Company's ability to produce and deliver buses due to shortages of critical components.

The 20.4% increase in unit price for the third quarter of fiscal 2022 compared to the same period in fiscal 2021 reflects pricing actions taken by management as well as product and customer mix changes.

Parts sales increased $4.5 million, or 30.3%, for the third quarter of fiscal 2022 compared to the third 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 parts costs.

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.

Total cost of goods sold was $184.5 million for the third quarter of fiscal 2022, an increase of $14.0 million, or 8.2%, compared to $170.5 million for the third quarter of fiscal 2021.

As a percentage of net sales, total cost of goods sold increased from 86.7% to 89.5%.

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.

Bus segment cost of goods sold increased $11.7 million, or 7.3%, for the third quarter of fiscal 2022 compared to the same period in fiscal 2021.

The increase was primarily driven by increasing inventory costs as the average cost of goods sold per unit for the third quarter of fiscal 2022 was 25.8% higher compared to the third quarter of fiscal 2021 primarily due to increases in manufacturing costs attributable to a) increased raw materials costs resulting from ongoing inflationary pressures, b) supply chain disruptions that resulted in higher purchase costs for components and freight and c) increased manufacturing inefficiencies resulting from the shortage of certain critical components that required more off-line labor to produce buses.

This increase was partially offset by the 14.7% decrease in units booked.

The $2.3 million, or 24.4%, increase in parts segment cost of goods sold for the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021 largely aligned with the increase in sales noted above, with the slight variation due to product and channel mix.

Operating profit .

Operating profit was $1.1 million for the third quarter of fiscal 2022, a decrease of $7.0 million, compared to operating profit of $8.1 million for the third quarter of fiscal 2021.

Profitability was negatively impacted by a decrease of $4.6 million in gross profit as outlined in the revenue and cost of goods sold discussions, as well as an increase of $2.4 million in selling, general and administrative expenses, primarily due to an increase in professional services, largely relating to several cost cutting and operational transformation initiatives.

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.

Interest expense was $3.9 million for the third quarter of fiscal 2022, an increase of $1.1 million, or 39.3%, compared to $2.8 million for the third quarter of fiscal 2021.

The increase was primarily attributable to an increase in the stated term loan interest rate from 4.0% at July 3, 2021 to 7.9% at July 2, 2022 and increased borrowings outstanding during the third quarter of fiscal 2022 when compared with the same period in the previous year.

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.

We recorded income tax expense of $2.9 million for the third quarter of fiscal 2022, compared to income tax expense of $1.9 million for the same period in fiscal 2021.

The effective tax rate for the three months ended July 2, 2022 was (137.2)%, which differed from the statutory federal income tax rate of 21%.

In addition, the amount recorded represents income tax expense in a three month period in which the Company recorded loss before income taxes.

This unusual relationship exists as the amount recorded was necessary to adjust the income tax benefit for the nine months ended July 2, 2022 to reflect the Company's revised estimated annual income tax rate, including the effects of discrete period tax items.

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

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

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

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.

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

Adjusted EBITDA was $8.8 million, or 4.3% of net sales, for the third quarter of fiscal 2022, a decrease of $4.4 million, or 33.2%, compared to $13.2 million, or 6.7% of net sales, for the third quarter of fiscal 2021.

The decrease in Adjusted EBITDA primarily results from the $10.8 million decrease in net income, as a result of the factors discussed above.

This decrease was partially offset by a $4.1 million increase in operational transformation initiatives, $1.1 million increase in interest expense and $1.0 million increase in income tax expense as a result of the factors discussed above.

The following table sets forth a reconciliation of net (loss) income 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)

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

Net (loss) income $ (6,435) $ 4,332

Interest expense, net (1) 3,976 2,887

Income tax benefit (7,415) (483)

Income tax expense 2,860 1,892

Depreciation, amortization, and disposals (2) 3,642 2,851

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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

Consolidated Results of Operations for the Nine Months Ended July 2, 2022 and July 3, 2021:

Nine Months Ended

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

$ 542,965 $ 491,791

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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)

(Loss) income before income taxes $ (25,476) $ 2,821

Income tax benefit (expense) 6,317 (888)

Equity in net (loss) income of non-consolidated affiliate (3,505) 166

Net (loss) income $ (22,664) $ 2,099

Other financial data:

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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

(in thousands of dollars) Nine Months Ended

Net Sales by Segment July 2, 2022 July 3, 2021

$ 487,552 $ 449,876

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$ 40,947 $ 59,120

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.

Net sales were $543.0 million for the nine months ended July 2, 2022, an increase of $51.2 million, or 10.4%, compared to $491.8 million for the nine months ended July 3, 2021.

The increase in net sales is primarily due to product and mix changes as well as pricing actions taken by management in response to increased inventory purchase costs.

During the first half of fiscal 2021, the COVID-19 pandemic caused many schools to shut down in-person learning, decreasing the demand for buses and related maintenance and replacement parts.

Accordingly, such shortages have limited the number of buses the Company could produce and deliver during this time period.

Bus sales increased $37.7 million, or 8.4%, reflecting a 7.5% increase in average sales price per unit resulting from pricing actions taken by management as well as product and customer mix changes.

Units booked were consistent in both periods with 4,806 units booked in the nine months ended July 2, 2022 compared with 4,768 units booked during the same period in fiscal 2021.

Parts sales increased $13.5 million, or 32.2%, for the nine months ended July 2, 2022 compared to the nine months ended July 3, 2021.

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.

Total cost of goods sold was $502.0 million for the nine months ended July 2, 2022, an increase of $69.3 million, or 16.0%, compared to $432.7 million for the nine months ended July 3, 2021.

As a percentage of net sales, total cost of goods sold increased from 88.0% to 92.5%.

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.

Bus segment cost of goods sold increased $61.7 million, or 15.2%, for the nine months ended July 2, 2022 compared to the nine months ended July 3, 2021.

The increase was primarily driven by increasing inventory costs as the average cost of goods sold per unit for the nine months ended July 2, 2022 was 14.2% higher compared to the nine months ended July 3, 2021.

This increase was primarily due to increases in manufacturing costs attributable to a) increased raw materials costs resulting from ongoing inflationary pressures, b) supply chain disruptions that resulted in higher purchase costs for components and freight and c) increased manufacturing inefficiencies resulting from the shortage of certain critical components that required more off-line labor to produce buses.

The $7.7 million, or 29.5%, increase in parts segment cost of goods sold for the nine months ended July 2, 2022 compared to the nine months ended July 3, 2021 largely aligned with the increase in sales 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.

Operating loss was $17.6 million for the nine months ended July 2, 2022, a decrease of $26.6 million compared to operating profit of $9.0 million for the nine months ended July 3, 2021.

Profitability was negatively impacted by a decrease of $18.2 million in gross profit as outlined in the revenue and cost of goods sold discussions, as well as an increase of $8.5 million in selling, general and administrative expenses, primarily due to a $5.3 million increase in professional services, largely relating to several cost cutting and operational transformation initiatives, and a $3.5 million increase in payroll, largely resulting 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 three quarters 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.

Interest expense was $9.5 million for the nine months ended July 2, 2022, an increase of $2.4 million, or 34.1%, compared to $7.1 million for the nine months ended July 3, 2021.

The increase was primarily attributable to an increase in the stated term loan interest rate from 4.0% at July 3, 2021 to 7.9% at July 2, 2022, as well as increased revolving credit facility borrowings outstanding during the nine months ended July 2, 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%.

Income tax benefit was $6.3 million for the nine months ended July 2, 2022, compared to income tax expense of $0.9 million for the same period in fiscal 2021.

The effective tax rate for the nine months ended July 2, 2022 was 24.8% 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.

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

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

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

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)

Adjusted EBITDA was $1.7 million, or 0.3% of net sales, for the nine months ended July 2, 2022, a decrease of $24.8 million, or 93.6%, compared to $26.5 million, or 5.4% of net sales, for the nine months ended July 3, 2021.

The decrease in Adjusted EBITDA is primarily the result of a $24.8 million decrease in net income, as a result of the factors discussed above.

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

Nine Months Ended

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

Net (loss) income $ (22,664) $ 2,099

Interest expense, net (1) 9,696 7,321

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

Income tax (benefit) expense (6,317) 888

Depreciation, amortization, and disposals (2) 10,787 10,118

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Adjusted EBITDA margin (percentage of net sales) 0.3 % 5.4 %

(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.

(1) Includes $0.2 million and $0.3 million for the fiscal periods ended July 2, 2022 and July 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 $0.6 million for both of the fiscal periods ended July 2, 2022 and July 3, 2021, 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.

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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.

At July 2, 2022, the Company had $26.5 million of available cash (net of outstanding checks) and $33.7 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 April 2, 2022, the Borrower and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

At July 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.

The continuing adverse impacts from the COVID-19 pandemic, when coupled with the more recent impacts resulting from Russia's invasion of Ukraine, materially impacted our results in the nine months ended July 2, 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 and military conflict in Ukraine preclude 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.

The pandemic and a prolonged military conflict in Ukraine 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;

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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.

With the COVID-19 pandemic impact on school systems and the historical 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.

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

Nine Months Ended

(in thousands of dollars) July 2, 2022 July 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 $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.

Cash flows used in operating activities totaled $54.5 million for the nine months ended July 2, 2022, an increase of $40.2 million from the $14.2 million of cash flows used in operating activities during the nine months ended July 3, 2021.

The increase in cash used was primarily due to the $24.8 million decrease in net income and a $14.5 million increase in inventory purchases.

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.

Cash flows used in investing activities totaled $4.7 million for the nine months ended July 2, 2022, as compared to $9.4 million for the nine months ended July 3, 2021.

The $4.7 million decrease was primarily 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.

Cash flows provided by financing activities totaled $74.0 million for the nine months ended July 2, 2022, as compared to $9.6 million of cash flows used in financing activities for the nine months ended July 3, 2021.

The $83.6 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 during the first nine months of fiscal 2022 with no similar activity in the corresponding period of the previous year, as well as $15.0 million of revolving credit facility borrowings during this same period.

These cash inflows were partially offset by a $3.7 million increase in principal payments of senior term loan borrowings, $1.0 million increase in cash paid for repurchases of common stock in connection with employee stock award exercises, and $1.6 million decrease in cash received from employee stock option exercises during the first nine months of fiscal 2022 when compared with the same period in fiscal 2021.

Free cash flow

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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

Nine Months Ended

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

Net cash used in operating activities $ (54,451) $ (14,238)

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$ (59,199) $ (24,542)

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 .

Free Cash Flow for the nine months ended July 2, 2022 was $34.7 million lower than the nine months ended July 3, 2021, due to a $40.2 million increase in cash used in operating activities, partially offset by a decrease of $5.6 million in cash paid for fixed assets.

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.

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.

We had outstanding letters of credit totaling $6.3 million at July 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 July 2, 2022 that relates to a guarantee of indebtedness for a term loan obtained by one of our dealers with a remaining maturity up to 0.5 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