Blue Bird Corp 10-Q

Item 1. Financial Statements (Unaudited) BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars, except for share data) December 31, 2022 October 1, 2022 Assets Current assets Cash and cash equivalents $ 5,664 $ 10,479 Accounts receivable, net 9,125 12,534 Inventories 129,120 142,977 Other current assets 14,048 8,486 Total current assets $ 157,957 $ 174,476 Restricted cash $ 236 $ — Property, plant and equipment, net 99,110 100,608 Goodwill 18,825 18,825 Intangible assets, net 46,931 47,433 Equity investment in affiliate 10,727 10,659 Deferred tax assets 13,892 10,907 Finance lease right-of-use assets 1,560 1,736 Other assets 2,367 1,482 Total assets $ 351,605 $ 366,126 Liabilities and Stockholders' (Deficit) Equity Current liabilities Accounts payable $ 124,789 $ 107,937 Warranty 6,525 6,685 Accrued expenses 18,713 16,386 Deferred warranty income 7,238 7,205 Finance lease obligations 571 566 Other current liabilities 6,681 6,195 Current portion of long-term debt 19,800 19,800 Total current liabilities $ 184,317 $ 164,774 Long-term liabilities Revolving credit facility $ 5,000 $ 20,000 Long-term debt 124,341 130,390 Warranty 9,055 9,285 Deferred warranty income 12,052 11,590 Deferred tax liabilities 72 — Finance lease obligations 1,428 1,574 Other liabilities 8,633 11,107 Pension 15,903 16,024 Total long-term liabilities $ 176,484 $ 199,970 Guarantees, commitments and contingencies (Note 6) Stockholders' (deficit) equity Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized, 0 shares outstanding at December 31, 2022 and October 1, 2022 $ — $ — Common stock, $ 0.0001 par value, 100,000,000 shares authorized, 32,032,067 and 32,024,911 shares outstanding at December 31, 2022 and October 1, 2022, respectively 3 3 Additional paid-in capital 173,592 173,103 Accumulated deficit ( 90,806 ) ( 79,512 ) Accumulated other comprehensive loss ( 41,703 ) ( 41,930 ) Treasury stock, at cost, 1,782,568 shares at December 31, 2022 and October 1, 2022 ( 50,282 ) ( 50,282 ) Total stockholders' (deficit) equity $ ( 9,196 ) $ 1,382 Total liabilities and stockholders' (deficit) equity $ 351,605 $ 366,126 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended (in thousands of dollars except for share data) December 31, 2022 January 1, 2022 Net sales $ 235,732 $ 129,223 Cost of goods sold 228,275 113,026 Gross profit $ 7,457 $ 16,197 Operating expenses Selling, general and administrative expenses 16,832 18,233 Operating loss $ ( 9,375 ) $ ( 2,036 ) Interest expense ( 4,196 ) ( 3,082 ) 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 ) Loss per share: Basic weighted average shares outstanding 32,026,311 28,118,450 Diluted weighted average shares outstanding 32,026,311 28,118,450 Basic loss per share $ ( 0.35 ) $ ( 0.15 ) Diluted loss per share $ ( 0.35 ) $ ( 0.15 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Net loss $ ( 11,294 ) $ ( 4,082 ) Other comprehensive income, net of tax: Net change in defined benefit pension plan 227 221 Total other comprehensive income $ 227 $ 221 Comprehensive loss $ ( 11,067 ) $ ( 3,861 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Cash flows from operating activities Net loss $ ( 11,294 ) $ ( 4,082 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization expense 3,361 3,288 Non-cash interest expense 417 1,143 Share-based compensation expense 589 1,673 Equity in net (income) loss of non-consolidated affiliate ( 69 ) 901 Loss on disposal of fixed assets — 9 Deferred income tax benefit ( 2,986 ) ( 1,704 ) Amortization of deferred actuarial pension losses 299 291 Loss on debt modification 537 561 Changes in assets and liabilities: Accounts receivable 3,409 3,827 Inventories 13,857 ( 16,747 ) Other assets ( 5,227 ) ( 2,554 ) Accounts payable 16,572 ( 11,115 ) Accrued expenses, pension and other liabilities 461 ( 8,568 ) Total adjustments $ 31,220 $ ( 28,995 ) Total cash provided by (used in) operating activities $ 19,926 $ ( 33,077 ) Cash flows from investing activities Cash paid for fixed assets $ ( 1,146 ) $ ( 1,570 ) Total cash used in investing activities $ ( 1,146 ) $ ( 1,570 ) Cash flows from financing activities Revolving credit facility borrowings $ 5,000 $ 35,000 Revolving credit facility repayments ( 20,000 ) ( 75,000 ) Term loan repayments ( 4,950 ) ( 3,713 ) Principal payments on finance leases ( 141 ) ( 328 ) Cash paid for debt costs ( 3,211 ) ( 2,468 ) Sale of common stock — 75,000 Repurchase of common stock in connection with stock award exercises ( 57 ) ( 1,484 ) Total cash (used in) provided by financing activities $ ( 23,359 ) $ 27,007 Change in cash, cash equivalents, and restricted cash ( 4,579 ) ( 7,640 ) Cash, cash equivalents, and restricted cash at beginning of period 10,479 11,709 Cash, cash equivalents, and restricted cash at end of period $ 5,900 $ 4,069 Supplemental disclosures of cash flow information Cash paid or received during the period: Interest paid, net of interest received $ 3,170 $ 3,648 Income tax (received) paid, net of tax refunds ( 90 ) — Non-cash investing and financing activities: Changes in accounts payable for capital additions to property, plant and equipment $ 672 $ 469 Accrue debt modification costs 61 — Accrue common stock issuance costs — 178 Right-of-use assets obtained in exchange for operating lease obligations 199 — The accompanying notes are an integral part of these condensed consolidated financial statements. 5 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (Unaudited) Three Months Ended (in thousands of dollars, except for share data) Common Stock Convertible Preferred Stock Treasury Stock Shares Par Value Additional Paid-In-Capital Shares Amount Accumulated Other Comprehensive Loss Accumulated Deficit Shares Amount Total Stockholders' (Deficit) Equity Balance, October 1, 2022 32,024,911 $ 3 $ 173,103 — $ — $ ( 41,930 ) $ ( 79,512 ) 1,782,568 $ ( 50,282 ) $ 1,382 Restricted stock activity 7,156 — ( 57 ) — — — — — — ( 57 ) Share-based compensation expense — — 546 — — — — — — 546 Net loss — — — — — — ( 11,294 ) — — ( 11,294 ) Other comprehensive income, net of tax — — — — — 227 — — — 227 Balance, December 31, 2022 32,032,067 $ 3 $ 173,592 — $ — $ ( 41,703 ) $ ( 90,806 ) 1,782,568 $ ( 50,282 ) $ ( 9,196 ) Balance, October 2, 2021 27,205,269 $ 3 $ 96,170 — $ — $ ( 44,794 ) $ ( 33,753 ) 1,782,568 $ ( 50,282 ) $ ( 32,656 ) Private placement 4,687,500 — 74,822 — — — — — — 74,822 Restricted stock activity 82,505 — ( 1,484 ) — — — — — — ( 1,484 ) Share-based compensation expense — — 1,642 — — — — — — 1,642 Net loss — — — — — — ( 4,082 ) — — ( 4,082 ) Other comprehensive income, net of tax — — — — — 221 — — — 221 Balance, January 1, 2022 31,975,274 $ 3 $ 171,150 — $ — $ ( 44,573 ) $ ( 37,835 ) 1,782,568 $ ( 50,282 ) $ 38,463 6 BLUE BIRD CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Business and Basis of Presentation Nature of Business Blue Bird Body Company ("BBBC"), a wholly-owned subsidiary of Blue Bird Corporation, was incorporated in 1958 and has manufactured, assembled and sold school buses to a variety of municipal, federal and commercial customers since 1927. The majority of BBBC’s sales are made to an independent dealer network, which in turn sells buses to ultimate end users. References in these notes to condensed consolidated financial statements to “Blue Bird,” the “Company,” “we,” “our,” or “us” relate to Blue Bird Corporation and its wholly-owned subsidiaries, unless the context specifically indicates otherwise. We are headquartered in Macon, Georgia. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting and Article 8 of Regulation S-X. The Company’s fiscal year ends on the Saturday closest to September 30 with its quarters consisting of thirteen weeks in most years. The fiscal years ending September 30, 2023 ("fiscal 2023") and ended October 1, 2022 ("fiscal 2022") consist or consisted of 52 weeks. The first quarters of fiscal 2023 and fiscal 2022 both included 13 weeks. In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for any interim period are not necessarily indicative of the results that may be expected for the entire year. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Condensed Consolidated Balance Sheet data as of October 1, 2022 was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes as of and for the fiscal year ended October 1, 2022 as set forth in the Company's fiscal 2022 Form 10-K filed with the Securities and Exchange Commission ("SEC") on December 12, 2022. Impacts of COVID-19 and Subsequent Supply Chain Constraints on our Business Towards the end of our second quarter of the fiscal year that ended October 3, 2020 ("fiscal 2020"), the novel coronavirus known as "COVID-19" spread throughout the world, resulting in a global pandemic. Countermeasures taken to address the COVID-19 pandemic included virtual and hybrid schooling in many jurisdictions throughout the United States of America ("U.S.") and Canada. The uncertainty of when and how schools would open materially affected demand for new buses and replacement/maintenance parts during the second half of fiscal 2020 and first half of the fiscal year that ended October 2, 2021 ("fiscal 2021"), significantly impacting our business and operations. Demand for school buses strengthened substantially during the second half of fiscal 2021 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 this same period of time, the Company, and automotive industry as a whole, began experiencing significant supply chain constraints resulting from, among others, labor shortages; the lack of maintenance on, and acquisition of, capital assets by suppliers 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; etc. These supply chain disruptions had a significant adverse impact on 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 7 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. Additionally, Russian military forces launched a large-scale invasion of Ukraine on February 24, 2022, which further exacerbated global supply chain disruptions. While the Company has no assets or customers in either of these countries, this military conflict significantly impacted our financial results during the second half of 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. Specifically, it has contributed to increased a) costs charged by suppliers for the purchase of inventory that is at least partially dependent on resources originating from either of the countries and b) freight costs, both of which negatively impacted the gross profit recognized on sales during the second half of fiscal 2022 and continuing into the first quarter of fiscal 2023. The continuing development and fluidity of the pandemic and subsequent supply chain constraints and their trailing impacts preclude any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity. Use of Estimates and Assumptions The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. At the date of the financial statements, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, and during the reporting period, these estimates and assumptions affect the reported amounts of revenues and expenses. For example, significant management judgments are required in determining excess, obsolete, or unsalable inventory; the allowance for doubtful accounts; potential impairment of long-lived assets, goodwill and intangible assets; and the accounting for self-insurance reserves, warranty reserves, pension obligations, income taxes, environmental liabilities and contingencies. Future events, including the extent and duration of any COVID-19 outbreaks and continued supply chain constraints and their related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in the Company’s evaluations. Actual results could differ from the estimates that the Company has used. 2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards The Company’s significant accounting policies are described in the Company’s fiscal 2022 Form 10-K, filed with the SEC on December 12, 2022. Our senior management has reviewed these significant accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the three months ended December 31, 2022. Recently Issued Accounting Standards ASU 2020-04 On March 12, 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR (defined below), which was initially expected to occur on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. ASU 2021-01 On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope , which refines the scope of Accounting Standards Codification Topic ("ASC") 848, Reference Rate Reform , and clarifies some of its guidance as part of the FASB’s ongoing monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. ASU 2022-06 On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 , which defers the sunset date of ASC 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in ASC 848. The above amendments are effective for all entities from March 12, 2020 through December 31, 2024. An entity may elect to apply the amendments to contract modifications on a (i) full retrospective basis as of any date from the beginning of an interim period that 8 includes or is subsequent to March 12, 2020 or (ii) prospective basis from any date within an interim period that includes or is subsequent to March 12, 2020 through the date that the interim financial statements are issued or available to be issued. On March 5, 2021, the Intercontinental Exchange, Inc. ("ICE") Benchmark Administration ("IBA"), the administrator of the United States Dollar London Interbank Offering Rate ("LIBOR"), issued a statement, following the completion of a formal consultation process, reaffirming the preliminary announcement it made on November 30, 2020, to cease publication of (i) 1 week and 2 month LIBOR subsequent to December 31, 2021 and (ii) the overnight and 1, 3, 6 and 12 month LIBOR tenors subsequent to June 30, 2023. The IBA’s statement regarding such cessation dates primarily resulted from a majority of LIBOR panel banks communicating to the IBA that they would be unwilling to continue contributing to the relevant LIBOR settings after such dates. As a result, the IBA determined that it would be unable to publish the relevant LIBOR settings on a representative basis after such dates. The United Kingdom Financial Conduct Authority ("FCA"), which regulates the IBA, confirmed that, based on information it received from LIBOR panel banks, it does not expect that any LIBOR settings will become unrepresentative before the announced cessation dates summarized above. With the maturity of the interest rate collar on September 30, 2022 and execution of the Fifth Amended Credit Agreement (defined below) on September 2, 2022, which, among other things, changed one of the market interest rate indices that the Company can elect to accrue interest on outstanding borrowings from LIBOR to the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York (“SOFR”) and became effective at the end of the applicable interest period for any LIBOR borrowings outstanding on the fifth amendment effective date, the Company no longer has any contracts that reference LIBOR as of December 31, 2022 and has no plans to enter such contracts prior to the discontinuation of LIBOR. The change in interest rate indices from LIBOR to SOFR had virtually no impact on the first quarter of fiscal 2023 as the LIBOR interest rate on outstanding borrowings on the fifth amendment effective date remained in place through approximately the end of December 2022. Accordingly, interest was accrued utilizing SOFR for only a short period of time and the Company adjusted the effective interest rate on outstanding borrowings on a prospective basis, which did not have a material impact on the condensed consolidated financial statements. 3. Supplemental Financial Information Inventories The following table presents the components of inventories at the dates indicated: (in thousands of dollars) December 31, 2022 October 1, 2022 Raw materials $ 89,099 $ 106,070 Work in process 36,961 35,398 Finished goods 3,060 1,509 Total inventories $ 129,120 $ 142,977 Restricted Cash The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Condensed Consolidated Balance Sheets that sum to the total of such amounts reported on the Condensed Consolidated Statements of Cash Flows: (in thousands of dollars) December 31, 2022 January 1, 2022 Cash and cash equivalents $ 5,664 $ 4,069 Restricted cash 236 — Total cash, cash equivalents, and restricted cash reported on the Condensed Consolidated Statements of Cash Flows $ 5,900 $ 4,069 Amounts included in restricted cash represent those required by a contractual agreement with a financial institution to serve as collateral against outstanding balances pertaining to the Company's corporate credit card program. 9 Product Warranties The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Balance at beginning of period $ 15,970 $ 18,550 Add current period accruals 2,033 1,236 Current period reductions of accrual ( 2,423 ) ( 2,534 ) Balance at end of period $ 15,580 $ 17,252 Extended Warranties The following table reflects activity in deferred warranty income (current and long-term portions combined), for the sale of extended warranties of two to five years , for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Balance at beginning of period $ 18,795 $ 20,144 Add current period deferred income 2,336 939 Current period recognition of income ( 1,841 ) ( 1,995 ) Balance at end of period $ 19,290 $ 19,088 The outstanding balance of deferred warranty income in the table above is considered a "contract liability," and represents a performance obligation of the Company that we satisfy over the term of the arrangement but for which we have been paid in full at the time the warranty was sold. We expect to recognize $ 5.6 million of the outstanding contract liability during the remainder of fiscal 2023, $ 5.7 million in fiscal 2024, and the remaining balance thereafter. Self-Insurance The following table reflects our total accrued self-insurance liability, comprised of workers' compensation and health insurance related claims, at the dates indicated: (in thousands of dollars) December 31, 2022 October 1, 2022 Current portion $ 3,813 $ 3,996 Long-term portion 1,893 1,794 Total accrued self-insurance $ 5,706 $ 5,790 The current and long-term portions of the accrued self-insurance liability are reflected in accrued expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets. Shipping and Handling Revenues Shipping and handling revenues were $ 4.3 million and $ 3.4 million for the quarters ended December 31, 2022 and January 1, 2022, respectively. The related cost of goods sold was $ 3.8 million and $ 3.1 million for the quarters ended December 31, 2022 and January 1, 2022, respectively. 10 Pension Expense Components of net periodic pension benefit expense (income) were as follows for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Interest cost $ 1,509 $ 1,092 Expected return on plan assets ( 1,630 ) ( 2,122 ) Amortization of prior loss 299 291 Net periodic benefit expense (income) $ 178 $ ( 739 ) Amortization of prior loss, recognized in other comprehensive income ( 299 ) ( 291 ) Total recognized in net periodic pension benefit expense (income) and other comprehensive income $ ( 121 ) $ ( 1,030 ) 4. Debt 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 Total Net Leverage Ratio ("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 July 1, 2023 $ 50.0 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 Sixth amendment effective date through December 30, 2023 $ 30.0 11 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 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 % II Greater than or equal to 2.00x and less than 2.50x 1.00 % 2.00 % III Greater than or equal to 2.50x and less than 3.00x 1.25 % 2.25 % IV Greater than or equal to 3.00x and less than 3.25x 1.50 % 2.50 % V Greater than or equal to 3.25x and less than 3.50x 1.75 % 2.75 % VI Greater than or equal to 3.50x and less than 4.00x 2.00 % 3.00 % VII Greater than or equal to 4.00x and less than 4.50x 2.75 % 3.75 % 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. The Company incurred approximately $ 3.3 million in lender fees and other issuance costs relating to the sixth amendment. Of such total, approximately $ 1.2 million and $ 1.5 million was capitalized within other assets and long-term debt (as a contra-balance), respectively, on the Condensed Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis and utilizing the effective interest method, respectively, until maturity of the Amended Credit Agreement. The remaining approximate $ 0.5 million was recorded to loss on debt modification on the Condensed Consolidated Statements of Operations. 12 Term debt consisted of the following at the dates indicated: (in thousands of dollars) December 31, 2022 October 1, 2022 2023 term loan, net of deferred financing costs of $ 2,509 and $ 1,410 , respectively $ 144,141 $ 150,190 Less: current portion of long-term debt 19,800 19,800 Long-term debt, net of current portion $ 124,341 $ 130,390 Term loans are recognized on the Condensed Consolidated Balance Sheets at the unpaid principal balance, and are not subject to fair value measurement; however, given the variable rates on the loans, the Company estimates that the unpaid principal balance approximates fair value. If measured at fair value in the financial statements, the term loans would be classified as Level 2 in the fair value hierarchy. At December 31, 2022 and October 1, 2022, $ 146.7 million and $ 151.6 million, respectively, were outstanding on the term loans. At December 31, 2022 and October 1, 2022, the stated interest rates on the term loans were 10.5 % and 7.9 %, respectively. At December 31, 2022 and October 1, 2022, the weighted-average annual effective interest rates for the term loans were 9.6 % and 8.0 %, respectively, which includes amortization of the deferred financing costs and interest relating to the interest rate collar, as applicable. At December 31, 2022, $ 6.3 million of letters of credit were outstanding, which reduces the availability on the revolving line of credit. There were $ 5.0 million in borrowings outstanding on the revolving credit facility; therefore, the Company would have been able to borrow $ 78.7 million on the revolving line of credit. Interest expense on all indebtedness was $ 4.2 million and $ 3.1 million for the three months ended December 31, 2022 and January 1, 2022, respectively. The schedule of remaining principal payments through maturity for the term loans is as follows: (in thousands of dollars) Fiscal Year Principal Payments 2023 $ 14,850 2024 19,800 2025 112,000 Total remaining principal payments $ 146,650 5. Income Taxes Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items that are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the annual forecasted pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily in the U.S. In periods where our pre-tax income approximates or is equal to break-even, the effective tax rates for quarter-to-date and full-year periods may not be meaningful due to discrete period items. Three Months 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. 13 6. Guarantees, Commitments and Contingencies Litigation At December 31, 2022, the Company had a number of product liability and other cases pending. Management believes that, considering the Company’s insurance coverage and its intention to vigorously defend its positions, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements. Environmental The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company is currently not involved in any material environmental proceedings and therefore, management believes that the resolution of pending environmental matters will not have a material adverse effect on the Company’s financial statements. 7. Segment Information We manage our business in two operating segments: (i) the Bus segment, which includes the manufacturing and assembly of buses to be sold to a variety of customers across the U.S., Canada and in certain limited international markets; and (ii) the Parts segment, which consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network and certain large fleet customers. Management evaluates the segments based primarily upon revenues and gross profit, which are reflected in the tables below for the periods presented : Net sales Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Bus (1) $ 213,249 $ 112,437 Parts (1) 22,483 16,786 Segment net sales $ 235,732 $ 129,223 (1) Parts segment revenue includes $ 1.1 million and $ 0.8 million for the three months ended December 31, 2022 and January 1, 2022, respectively, related to inter-segment sales of parts that were eliminated by the Bus segment upon consolidation. Gross profit Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Bus $ ( 3,731 ) $ 9,642 Parts 11,188 6,555 Segment gross profit $ 7,457 $ 16,197 The following table is a reconciliation of segment gross profit to consolidated loss before income taxes for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Segment gross profit $ 7,457 $ 16,197 Adjustments: Selling, general and administrative expenses ( 16,832 ) ( 18,233 ) Interest expense ( 4,196 ) ( 3,082 ) Other (expense) income, net ( 236 ) 736 Loss on debt modification ( 537 ) ( 561 ) Loss before income taxes $ ( 14,344 ) $ ( 4,943 ) 14 Sales are attributable to geographic areas based on customer location and were as follows for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 United States $ 204,541 $ 100,547 Canada 30,521 26,304 Rest of world 670 2,372 Total net sales $ 235,732 $ 129,223 8. Revenue The following table disaggregates revenue by product category for the periods presented: Three Months Ended (in thousands of dollars) December 31, 2022 January 1, 2022 Diesel buses $ 71,494 $ 46,033 Alternative power buses (1) 131,946 57,637 Other (2) 10,455 9,297 Parts 21,837 16,256 Net sales $ 235,732 $ 129,223 (1) Includes buses sold with any power source other than diesel (e.g., gasoline, propane, compressed natural gas ("CNG") or electric). (2) Includes shipping and handling revenue, extended warranty income, surcharges and chassis and bus shell sales . 9. Loss Per Share The following table presents the loss per share computation for the periods presented: Three Months Ended (in thousands except for share data) December 31, 2022 January 1, 2022 Numerator: Net loss $ ( 11,294 ) $ ( 4,082 ) Denominator: Weighted-average common shares outstanding 32,026,311 28,118,450 Weighted-average shares and dilutive potential common shares (1) 32,026,311 28,118,450 Loss per share: Basic loss per share $ ( 0.35 ) $ ( 0.15 ) Diluted loss per share $ ( 0.35 ) $ ( 0.15 ) (1) Potentially dilutive securities representing 0.8 million and 0.4 million shares of common stock were excluded from the computation of diluted loss per share for the three months ending December 31, 2022 and January 1, 2022, respectively, as their effect would have been antidilutive. 15 10. Accumulated Other Comprehensive Loss The following table provides information on changes in accumulated other comprehensive loss ("AOCL") for the periods presented: Three Months Ended (in thousands of dollars) Defined Benefit Pension Plan Total AOCL December 31, 2022 Beginning Balance $ ( 41,930 ) $ ( 41,930 ) Amounts reclassified and included in earnings 299 299 Total before taxes 299 299 Income taxes ( 72 ) ( 72 ) Ending Balance December 31, 2022 $ ( 41,703 ) $ ( 41,703 ) January 1, 2022 Beginning Balance $ ( 44,794 ) $ ( 44,794 ) Amounts reclassified and included in earnings 291 291 Total before taxes 291 291 Income taxes ( 70 ) ( 70 ) Ending Balance January 1, 2022 $ ( 44,573 ) $ ( 44,573 ) 16