What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-08 compared with 2022-08-10 · 185 added, 268 removed, 246 unchanged (65% 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 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").

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 months ended December 31, 2022 and January 1, 2022 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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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.

As the only principal manufacturer of chassis and body production specifically designed for school bus applications in the United States of America ("U.S."), 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.

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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 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 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 6,200 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.

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 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.

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.

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 three quarters of fiscal 2022 negatively affected our gross profit, income and cash flows.

Government, state governments, and authorized dealers in certain limited foreign countries.

Throughout this Report, we refer to the fiscal year ending September 30, 2023 as "fiscal 2023," the fiscal year ended October 1, 2022 as "fiscal 2022" and the fiscal year ended October 2, 2021 as “fiscal 2021.” There will be or were 52 weeks in fiscal 2023, fiscal 2022 and fiscal 2021.

The first quarters of fiscal 2023 and fiscal 2022 both included 13 weeks.

Impacts of COVID-19 and Subsequent Supply Chain Constraints on Our Business

Beginning in our second quarter of the fiscal year that ended October 3, 2020 ("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 into the early months of calendar year 2021.

Countermeasures taken to address the COVID-19 pandemic included virtual and hybrid schooling in many jurisdictions throughout the U.S.

The uncertainty of when and how schools would open materially affected demand within the Type C and Type D school bus industry in the second half of the Company's fiscal 2020.

While demand for school buses remained suppressed during the first half of fiscal 2021 as a result of the continuing impact of the COVID-19 pandemic, it strengthened substantially during the second half of the fiscal year as COVID-19 vaccines were administered and many jurisdictions began preparing for a return to in-person learning environments for the new school year that began in mid-August to early September 2021.

However, during the second half of fiscal 2021, the Company, and automotive industry as a whole, began experiencing significant supply chain constraints resulting from, among others, labor shortages due to the ‘great resignation;’ the lack of maintenance on, and acquisition of, capital assets during the extended COVID-19 global lockdowns;

significant increased demand for consumer products containing certain materials required for the production of vehicles, such as microchips, as consumers spent stimulus and other funds on items for their homes;

These supply chain disruptions have had a significant adverse impact our operations and results due to higher purchasing costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders primarily during the latter half of fiscal 2021 and most of fiscal 2022.

Specifically, management estimates that the sale of approximately 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 the year.

Including these units, the Company's backlog exceeded 4,200 units as of October 2, 2021.

Although there were pockets of COVID-19 outbreaks in the U.S.

throughout fiscal 2022, most school systems maintained partial or full in-person learning environments for the entirety of the school year.

Accordingly, new bus orders during fiscal 2022 remained extremely robust, primarily due to pent-up demand resulting from the cumulative effect of the COVID-19 pandemic when many school systems conducted virtual learning (i.e., approximately January 2020 through June 2021).

This strong demand, when coupled with an already challenged global supply chain for automotive parts that continued from fiscal 2021 but that was further impacted, including continuing escalating inventory purchase costs, by additional stress resulting from Russia’s invasion of Ukraine in February 2022 (see further discussion below) and several complete shutdowns in China as a result of widespread COVID-19 outbreaks, resulted in the Company’s order backlog continuing to grow during fiscal 2022, exceeding 5,000 units as of October 1, 2022 (only minimal sales orders were canceled during the fiscal year as a result of continued delays in our production process).

Shortages of key components during the second half of fiscal 2021 and most of fiscal 2022 hindered the Company's ability to complete the production of buses to fulfill sales orders, which had a significant, adverse impact on the Company's revenues during these periods.

The Company has also experienced significant increased purchase costs for many of its raw materials as a result of supply chain disruptions over these same periods and continuing into the first quarter of fiscal 2023 that have negatively impacted the gross profit it recognized on sales.

In response, beginning in July 2021 and continuing throughout fiscal 2022, the Company announced a number of 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.

Additionally, during fiscal 2022, the Company began including price escalation provisions when bidding on contracts so that it can consider economic fluctuations between the bid date and the contract date to determine whether increased costs should be passed along to customers.

Most of 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.

While they began to impact sales and gross profit in the latter half of fiscal 2022, such impact did not offset the significant continued increase in the Company's production costs, resulting in further deterioration of the Company's gross profit during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023 as it produced and sold the oldest units included in the backlog as of the end of fiscal 2022.

However, they are expected to have a positive impact on sales and gross profit during the remainder of fiscal 2023 as the Company fulfills sales orders (i) from the backlog existing as of the end of fiscal 2022 and (ii) that are taken during fiscal 2023, both of which contained, or will contain, most or all of the cumulative sales prices increases that have been announced since July 2021.

New bus orders during the first quarter of fiscal 2023 remained extremely robust, primarily due to a combination of (i) pent-up demand resulting from the cumulative effect of the COVID-19 pandemic when many school systems conducted virtual learning and (ii) the challenged global supply chain for automotive parts that hindered the school bus industry's ability to produce and sell buses during the latter half of fiscal 2021 and most of fiscal 2022.

Accordingly, the Company's backlog remained in excess of 5,000 units as of December 31, 2022 despite it selling almost 2,000 units during the first quarter of fiscal 2023 that were included in the backlog that existed as of October 1, 2022.

In general, management believes that supply chain disruptions could 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 another temporary halt in production.

The COVID-19 pandemic and subsequent supply chain constraints have resulted, and could to continue to result, in significant economic disruption and have adversely affected our business.

They could continue to adversely impact our business for the remainder of fiscal 2023 and perhaps beyond.

Significant uncertainty exists concerning the magnitude of the impact and duration of any future COVID-19 outbreaks and their potential impact on the overall economy, both within the U.S and globally.

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

The impacts from the COVID-19 pandemic and subsequent supply chain constraints on the Company's business and operations during the second half of fiscal 2020 and continuing through the first quarter of fiscal 2023 negatively affected our revenues, 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 2023 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.

"Risk Factors," of our 2022 Form 10-K, filed with the SEC on December 12, 2022, for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic and subsequent supply chain constraints.

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:

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 fiscal 2022 and continuing into the first quarter of fiscal 2023, primarily in an indirect manner since the Company does not sell to customers located in, or source goods directly from, either country.

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.

While the Company has generally mitigated its direct exposure to steel prices by executing fixed price purchase contracts (generally purchased one quarter in advance) 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 increased the price that they charge the Company to acquire such inventory, primarily on a lagged basis, during the latter half of fiscal 2022 and continuing into the first quarter of fiscal 2023.

These inventory costs 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 as high as $5.810 per gallon the week ending June 20, 2022, before decreasing slightly throughout the remainder of our fiscal 2022 to $4.889 per gallon the week ending September 26, 2022 and fluctuating within a range from $5.341 and $4.537 per gallon during our first quarter of fiscal 2023 (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.

These increases have 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 increases are generally implemented with very little lag so that they impact the purchase cost of inventory and cash flows on an almost real-time basis.

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.

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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 and Russia's invasion of Ukraine.

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 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.

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

Critical Accounting Policies and Estimates, Recent Accounting Pronouncements

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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 2022 Form 10-K, filed with the SEC on December 12, 2022, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference.

Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended July 2, 2022.

Recent Accounting Pronouncements

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Increases or decreases in the number of school bus riders have a direct impact on school district demand.

Due to the COVID-19 pandemic and evolving protocols for social distancing and public health concerns, the future form of educational delivery remains fluid and subject to change, and increased remote learning could reasonably be expected to decrease the number of school bus riders.

Evolving protocols for public health concerns and/or continued technological advancements could shift the future form of educational delivery away from in-person learning on a more permanent basis, with increased remote learning reasonably expected to decrease the number of school bus riders.

• Revenue mix .

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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.

With the COVID-19 pandemic impacting the demand for Company products and the impact of the subsequent supply chain constraints hindering the Company's ability to produce and sell buses, seasonality has become unpredictable.

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.

As discussed previously above, supply chain disruptions developing subsequent to the 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, all of fiscal 2022 and continuing into the first quarter of fiscal 2023.

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.

However, they are expected to have a positive impact on sales and gross profit during the remainder of fiscal 2023 as the Company fulfills sales orders (i) from the

backlog existing as of the end of fiscal 2022 and (ii) that are taken during fiscal 2023, both of which contained, or will contain, most or all of the cumulative sales prices increases that have been announced since July 2021.

Factors Affecting Our Expenses and Other Items

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

• Other income/expense, net.

• Other expense/income, 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) income of non-consolidated affiliate .

• Equity in net income or 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.

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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) 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 (defined below) that could differ from Adjusted EBITDA discussed above as the adjustments to the calculations are not uniform, is used to determine the Company's ongoing compliance with several financial covenant requirements, including being utilized in the denominator of the calculation of the Total Net Leverage Ratio ("TNLR"), as and when applicable, which is also utilized in determining the interest rate we pay on borrowings under our Amended Credit Agreement (defined below).

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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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.

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.

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

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

Consolidated Results of Operations for the Three Months Ended December 31, 2022 and January 1, 2022:

Three Months Ended

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

(in thousands of dollars) December 31, 2022 January 1, 2022

$ 235,732 $ 129,223

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Selling, general and administrative expenses 16,832 18,233

Operating profit $ 1,088 $ 8,086

Operating loss $ (9,375) $ (2,036)

Interest expense (4,196) (3,082)

Other income, net 735 426

(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 (expense) income, net (236) 736

Loss on debt modification (537) (561)

Loss before income taxes $ (14,344) $ (4,943)

Income tax benefit 2,981 1,762

Equity in net income (loss) of non-consolidated affiliate 69 (901)

Net loss $ (11,294) $ (4,082)

Other financial data:

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Adjusted EBITDA margin

(1.8) % 2.8 %

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

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Net Sales by Segment

July 2, 2022 July 3, 2021

December 31, 2022 January 1, 2022

$ 213,249 $ 112,437

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$ 7,457 $ 16,197

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.

Net sales were $235.7 million for the first quarter of fiscal 2023, an increase of $106.5 million, or 82.4%, compared to $129.2 million for the first quarter of fiscal 2022.

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

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 throughout fiscal 2022.

However, by the end of the first quarter of fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production relative to the first quarter of fiscal 2022.

Bus sales increased $100.8 million, or 89.7%, reflecting a 70.3% increase in units booked and a 11.4% increase in average sales price per unit.

In the first quarter of fiscal 2023, 1,957 units were booked compared to 1,149 units booked for the same period in fiscal 2022.

The increase in units sold was primarily due to constraints in the Company's ability to produce and deliver buses due to shortages of critical components in the first quarter of fiscal 2022.

The 11.4% increase in unit price for the first quarter of fiscal 2023 compared to the same period in fiscal 2022 reflects pricing actions taken by management as well as product and customer mix changes.

Parts sales increased $5.7 million, or 33.9%, for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

This increase is primarily attributed to pricing actions taken by management to offset increases in purchased parts costs and increased inventory availability as supply chain constraints began to improve slightly during the first quarter of fiscal 2023 relative to the first quarter of fiscal 2022.

Cost of goods sold .

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.

Total cost of goods sold was $228.3 million for the first quarter of fiscal 2023, an increase of $115.2 million, or 102.0%, compared to $113.0 million for the first quarter of fiscal 2022.

As a percentage of net sales, total cost of goods sold increased from 87.5% to 96.8%.

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.

Bus segment cost of goods sold increased $114.2 million, or 111.1%, for the first quarter of fiscal 2023 compared to the same period in fiscal 2022.

The increase was primarily driven by the 70.3% increase in units booked, in the first quarter of fiscal 2023 compared to the same period in fiscal 2022.

Also contributing was increased inventory costs, as the average cost of goods sold per unit for the first quarter of fiscal 2023 was 23.9% higher compared to the first quarter of fiscal 2022, primarily due to increases in manufacturing costs attributable to a) increased raw materials costs resulting from ongoing inflationary pressures and b) ongoing supply chain disruptions that resulted in higher purchase costs for components and freight.

The $1.1 million, or 10.4%, increase in parts segment cost of goods sold for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to the increase in sales volume noted above, increased purchased parts costs, driven by ongoing inflationary pressures and supply chain disruptions, as well as slight variations due to product and channel mix.

Operating loss .

Operating loss was $9.4 million for the first quarter of fiscal 2023, an increase of $7.3 million, compared to operating loss of $2.0 million for the first quarter of fiscal 2022.

Profitability was negatively impacted by a decrease of $8.7 million in gross profit as outlined in the revenue and cost of goods sold discussions.

Specifically, the ongoing increases in manufacturing costs, when coupled with the fact that the Company produced and sold the oldest units in the backlog existing at the end of fiscal 2022, many of which had pricing from as early as fiscal 2021, resulted in the bus segment reporting gross loss of $3.7 million during the first quarter of fiscal 2023.

The decrease in total gross profit was partially offset by a decrease of $1.4 million in selling, general and administrative expenses, primarily due to a decrease 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 during the first quarter of fiscal 2022, without comparable expense in the first quarter fiscal 2023.

Additionally, selling, general and administrative expenses during the first quarter of fiscal 2023 benefited from actions taken by management to reduce labor costs and certain discretionary spending to mitigate the significant adverse impact of ongoing supply chain constraints on the Company's operations and results.

Interest expense .

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.

Interest expense was $4.2 million for the first quarter of fiscal 2023, an increase of $1.1 million, or 36.1%, compared to $3.1 million for the first quarter of fiscal 2022.

The increase was primarily attributable to an increase in the stated term loan interest rate from 6.0% at January 1, 2022 to 10.5% at December 31, 2022.

Income 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.

We recorded income tax benefit of $3.0 million and $1.8 million for the first quarters of fiscal 2023 and fiscal 2022, respectively.

The effective tax rate for the three months ended December 31, 2022 was 20.8%, which aligned with the statutory federal income tax rate of 21% and is comprised of normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), with discrete period items having a nominal impact on the effective rate during the quarter.

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

The difference was 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.

Adjusted EBITDA .

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:

Adjusted EBITDA was $(4.2) million, or (1.8)% of net sales, for the first quarter of fiscal 2023, a decrease of $7.8 million, or 217.9%, compared to $3.6 million, or 2.8% of net sales, for the first quarter of fiscal 2022.

The decrease in Adjusted EBITDA primarily results from the $7.2 million increase in net loss, as a result of the factors discussed above.

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

Three Months Ended

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

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

(in thousands of dollars) December 31, 2022 January 1, 2022

Net loss $ (11,294) $ (4,082)

Interest expense, net (1) 4,289 3,157

Income tax expense 2,860 1,892

Income tax benefit (2,981) (1,762)

Depreciation, amortization, and disposals (2) 3,815 3,523

2 unchanged sentences

Product redesign initiatives — 253

Restructuring and other charges — 246

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

Adjusted EBITDA

$ 8,792 $ 13,161

Adjusted EBITDA margin (percentage of net sales)

(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.

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

Cost of goods sold

502,018 432,671

$ 40,947 $ 59,120

Operating expenses

Selling, general and administrative expenses

58,596 50,124

Operating (loss) profit $ (17,649) $ 8,996

Interest expense (9,481) (7,069)

Interest income — 1

Other income, net 2,215 1,491

Loss on debt modification 537 561

(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:

Adjusted EBITDA

$ (4,245) $ 3,599

Adjusted EBITDA margin

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

(in thousands of dollars) Nine Months Ended

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

$ 487,552 $ 449,876

55,413 41,915

Total $ 542,965 $ 491,791

Gross Profit by Segment

$ 19,290 $ 43,265

21,657 15,855

$ 40,947 $ 59,120

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.

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 $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 $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 $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 $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 $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 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 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 $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) expense (6,317) 888

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

Operational transformation initiatives 5,651 222

Loss on debt modification 561 598

Share-based compensation 3,153 1,923

Product redesign initiatives 549 1,908

Restructuring and other charges 246 494

Costs directly attributed to the COVID-19 pandemic (3) 39 913

Adjusted EBITDA $ 1,701 $ 26,484

Adjusted EBITDA margin (percentage of net sales)

(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.

(1.8) % 2.8 %

(1) Includes $0.1 million for both fiscal periods, representing interest expense on operating 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 and $0.2 million for the three months ended December 31, 2022 and January 1, 2022, respectively, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

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

Liquidity and Capital Resources

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

At July 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.

At December 31, 2022, the Company had $5.7 million of available cash (net of outstanding checks) and $78.7 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):

Sixth Amendment to the Credit Agreement

On November 21, 2022, BBBC (as "Borrower") executed a sixth amendment to the Credit Agreement, dated as of December 12, 2016 ("Credit Agreement");

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"), the third amendment to the Credit Agreement, dated as of December 4, 2020 (the "Third Amended Credit Agreement");

the fourth amendment to the Credit Agreement, dated as of November 24, 2021 (the "Fourth Amended Credit Agreement:);

the fifth amendment and limited waiver to the Credit Agreement, dated as of September 2, 2022 (the "Fifth Amended Credit Agreement");

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

The Sixth Amended Credit Agreement, among other things, extends the maturity date for both the term loan and revolving credit facilities from September 13, 2023 to December 31, 2024.

The total revolving credit facility commitment is reduced to an aggregate principal amount of $90.0 million, of which $80.0 million is available for Borrower to draw, with the remaining $10.0 million subject to written approval from the lenders, which, once obtained, will be irrevocable.

There was no change in the term loan facility commitment;

however, the Sixth Amended Credit Agreement requires principal repayments approximating $5.0 million on a quarterly basis through September 30, 2024, with the remaining balance due upon maturity.

There were $151.6 million of term loan borrowings outstanding on the sixth amendment effective date.

The Sixth Amended Credit Agreement also provides for temporary amendments to certain financial performance covenants during the period from the third amendment effective date, December 4, 2020, through and including April 1, 2023 (the “Amended Limited Availability Period:), which will terminate on the date on which the Company’s TNLR, defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, for the two fiscal quarters most recently ended is each less than 4.00x and no default or event of default has occurred and is continuing.

However, the Amended Limited Availability Period can re-occur upon a default or event of default or if the TNLR for the immediately preceding fiscal quarter is equal to or greater than 4.00x.

The minimum consolidated EBITDA that the Company is required to maintain during the Amended Limited Availability Period is updated 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 1, 2023 $50.0

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):

Fiscal quarter ending September 30, 2023 $60.0

For purposes of complying with the above minimum consolidated EBITDA covenant, the Company’s consolidated EBITDA for the (i) two fiscal quarter period ending July 1, 2023 is multiplied by 2 and (ii) three fiscal quarter period ending September 30, 2023 is multiplied by 4/3.

The minimum liquidity (in the form of undrawn availability under the revolving credit facility and unrestricted cash and cash equivalents) that the Company is required to maintain at the end of each fiscal month during the Amended Limited Availability Period is amended as set forth in the table below (in millions):

Period Minimum Liquidity

Fourth amendment effective date through January 1, 2022 $10.0

January 2, 2022 through April 2, 2022 $5.0

April 3, 2022 through July 2, 2022 $15.0

Thereafter $20.0

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

Sixth amendment effective date through December 30, 2023 $30.0

Additionally, the financial performance covenant requiring that school bus units manufactured by the Company (“Units”) not fall below certain pre-set thresholds on a three month trailing basis (“Units Covenant”) is amended for Units to be calculated at the end of each applicable fiscal month on a cumulative basis, with the minimum cumulative threshold that the Company is required to maintain during the Amended Limited Availability Period amended as set forth in the table below.

The Units Covenant is triggered only if the Company’s liquidity for the most-recently ended fiscal month is less than $50.0 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

Period from October 2, 2022 and ending October 29, 2022 450

Period from October 2, 2022 and ending November 26, 2022 900

Period from October 2, 2022 and ending December 31, 2022 1,400

Period from October 2, 2022 and ending January 28, 2023 1,900

Period from October 2, 2022 and ending February 25, 2023 2,400

Period from October 2, 2022 and ending April 1, 2023 3,000

The Company is not required to comply with a maximum TNLR financial maintenance covenant for any fiscal quarters from the sixth amendment effective date through September 30, 2023, with the maximum threshold amended thereafter as follows :

Period Maximum Total

Net Leverage Ratio

Fiscal Quarter ending December 30, 2023 through the fiscal quarter ending March 30, 2024 4.00:1.00

Fiscal quarter ending June 29, 2024 and thereafter 3.50:1.00

The pricing grid in the Amended Credit Agreement, which is based on the TNLR, is applicable to both term loan and revolving borrowings and is determined in accordance with the amended pricing matrix set forth below:

Level Total Net Leverage Ratio ABR Loans SOFR Loans

I Less than 2.00x 0.75% 1.75%

5 unchanged sentences

VII Greater than or equal to 4.00x and less than 4.50x 2.75% 3.75%

VIII Greater than 5.00x 4.25% 5.25%

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

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

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

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

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

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

Detailed descriptions of the Credit Agreement as well as the First, Second, and Third Amended Credit Agreements are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”

contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2021, filed with the SEC on December 15, 2021.

At July 2, 2022, the Borrower and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

VIII Greater than or equal to 4.50x and less than 5.00x 3.75% 4.75%

IX Greater than 5.00x 4.75% 5.75%

Further, the pricing margins for levels VII though IX above are each increased (x) by 0.25% if the aggregate revolving borrowings are equal to or greater than $50.0 million and less than or equal to $80.0 million and (y) by 0.50% if the aggregate revolving borrowings are greater than $80.0 million.

On the sixth amendment effective date, the interest rate was set at SOFR plus 5.75% and will be adjusted, as applicable, for future fiscal quarter in accordance with the amended pricing grid set forth above.

Finally, the Company is required to deliver to the administrative agent, on a quarterly basis, a projected consolidated balance sheet and consolidated statements of projected operations and cash flows containing the next four fiscal quarters.

Detailed descriptions of the Credit Agreement as well as the First, Second, Third, Fourth, and Fifth Amended Credit Agreements are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 1, 2022, filed with the SEC on December 12, 2022.

At December 31, 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, 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.

The adverse impacts from ongoing supply chain disruptions, which were further exacerbated by Russia's invasion of Ukraine in February 2022, materially impacted our operations and results during the second half of fiscal 2021 and all of fiscal 2022 due to higher purchasing costs, including freight costs incurred to expedite receipt of critical components, increased manufacturing inefficiencies and our inability to complete the production of buses to fulfill sales orders.

Towards the end of fiscal 2022 and continuing throughout the first quarter of fiscal 2023, there were slight improvements in the supply chain's ability to deliver the parts and components necessary to support our production operations, resulting in increased (i) manufacturing efficiencies and (ii) production of buses to fulfill sales orders during the first quarter of fiscal 2023.

However, the higher costs charged by suppliers to procure inventory continued into the first quarter of fiscal 2023 and had a significant adverse impact on our operations and results as such costs outpaced the increases in sales prices that we charged for the buses that were sold during the quarter, all of which were included in the backlog of fixed price sales orders originating in fiscal 2021 and 2022 that carried forward into fiscal 2023.

The development and fluidity of ongoing or future supply chain constraints 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 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;

(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.

Future COVID-19 outbreaks and/or continuing supply chain constraints could cause a more 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) 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 trailing four fiscal quarter period most recently then ended for fiscal 2022 and at the end of the third and fourth fiscal quarters of fiscal 2023 calculated on an annualized basis;

(ii) for fiscal 2022 through December 30, 2023, minimum liquidity at the end of each fiscal month;

(iii) when applicable during fiscal 2022 through April 1, 2023, minimum school bus units manufactured calculated on a three month trailing basis at the end of each fiscal month for fiscal 2022 and on a cumulative basis at the end of each fiscal month for the first and second fiscal quarters of fiscal 2023;

and (iv) beginning in the fiscal year ending September 28, 2024 ("fiscal 2024") and thereafter, TNLR at the end of each fiscal quarter.

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.

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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.

To increase our liquidity in future periods, we could pursue raising additional capital via an equity or debt offering utilizing a currently effective "shelf" registration statement.

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.

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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.

Our quarterly results of operations, cash flows, and liquidity have historically been, and are likely to be in future periods, impacted by 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 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.

With the COVID-19 pandemic and subsequent 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:

Nine Months Ended

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

Three Months Ended

(in thousands of dollars) December 31, 2022 January 1, 2022

Cash and cash equivalents at beginning of period $ 10,479 $ 11,709

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

Total cash provided by (used in) operating activities 19,926 (33,077)

Total cash used in investing activities (1,146) (1,570)

Total cash provided by (used in) financing activities 73,999 (9,643)

Total cash (used in) provided by financing activities (23,359) 27,007

Change in cash and cash equivalents $ (4,579) $ (7,640)

Cash and cash equivalents at end of period $ 5,900 $ 4,069

Total cash used in operating activities

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 provided by (used in) operating activities

Cash flows provided by operating activities totaled $19.9 million for the three months ended December 31, 2022, an increase of $53.0 million from the $33.1 million of cash flows used in operating activities during the three months ended January 1, 2022.

The increase was primarily due to $30.6 million, $27.7 million, and $9.0 million increases in cash provided by favorable changes in inventory, accounts payable, and accrued expenses, pension and other liabilities, respectively.

At the end of fiscal 2022 and during the first quarter of fiscal 2023, inflationary pressures and supply chain disruptions significantly increased our purchase costs for components and freight, which, when coupled with increased production and sales volumes during the first quarter of fiscal 2023, resulted in a significant increase in the accounts payable balance (a net source of cash) when compared with a significant decrease in the accounts payable balance at the end of the first quarter of fiscal 2022 (a net use of cash).

Additionally, we became more efficient at managing supply chain disruptions, and thus building and selling buses, during the latter months of fiscal 2022 and continuing into the first quarter of fiscal 2023 when compared with the first quarter of fiscal 2022.

These efficiencies resulted in us consuming more inventory in production, which resulted in a significant decrease in the inventory balance at the end of the first quarter of fiscal 2023 (a net source of cash) when compared with a significant increase in the inventory balance at the end of the corresponding period of fiscal 2022 (a net use of cash).

These favorable changes were partially offset by several unfavorable changes including a $7.2 million increase in net loss, a $1.1 million decrease in share-based compensation, and a $2.7 million decrease in cash provided by changes in other assets.

Total cash used in investing activities

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 $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.

Cash flows used in investing activities totaled $1.1 million for the three months ended December 31, 2022, as compared to $1.6 million for the three months ended January 1, 2022.

The $0.4 million decrease was primarily due to a reduction in spending on fixed assets to mitigate the ongoing impact of supply chain constraints on our operations, financial results and cash flows.

Total cash (used in) provided by financing activities

Cash flows used in financing activities totaled $23.4 million for the three months ended December 31, 2022, as compared to $27.0 million of cash flows provided by financing activities for the three months ended January 1, 2022.

The $50.4 million decrease between fiscal periods was primarily attributable to $75.0 million of proceeds received from the issuance and sale of common stock in a private placement transaction during the first quarter of fiscal 2022 with no similar activity in the corresponding period of fiscal 2023.

This cash inflow was partially offset by a net $25.0 million decrease (i.e., repayments) in revolving credit facility borrowings in the three months ended December 31, 2022 compared to the three months ended January 1, 2022.

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.

Management believes the non-GAAP measurement of Free Cash Flow, defined as net cash provided by (used in) operating activities less cash paid for fixed assets and acquired intangible assets, fairly represents the Company’s ability to generate surplus cash that could fund activities not in the ordinary course of business.

See “Key Non-GAAP Financial Measures We Use to Evaluate Our Performance” for further discussion.

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

Nine Months Ended

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

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

Three Months Ended

(in thousands of dollars) December 31, 2022 January 1, 2022

Net cash provided by (used in) operating activities $ 19,926 $ (33,077)

Cash paid for fixed assets (1,146) (1,570)

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$ 18,780 $ (34,647)

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.

Free Cash Flow for the three months ended December 31, 2022 was $53.4 million higher than the three months ended January 1, 2022, due to a $53.0 million increase in cash provided by (used in) operating activities, as well as a decrease of $0.4 million in cash paid for fixed assets, both as discussed above.

Off-Balance Sheet Arrangements

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.

We had outstanding letters of credit totaling $6.3 million at December 31, 2022, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

Quantitative and Qualitative Disclosures About Mar ket Risk.

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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