Blue Bird Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited condensed consolidated financial statements as of and for the three and six months ended April 1, 2023 and April 2, 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. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them. Special Note Regarding Forward-Looking Statements This Report contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to: • the future financial performance of the Company; • negative changes in the market for Blue Bird products; • expansion plans and opportunities; • challenges or unexpected costs related to manufacturing; • future impacts from the novel coronavirus pandemic known as "COVID-19," and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which include or could include, among other effects: ◦ disruption in global financial and credit markets; ◦ supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic; ◦ negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations; ◦ negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions; ◦ financial difficulties of our customers impacted by the pandemic; ◦ reductions in market demand for our products due to the pandemic; and ◦ potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic. • future impacts resulting from Russia's invasion of Ukraine, which include or could include, among other effects: ◦ disruption in global commodity and other markets; ◦ supply shortages and supplier financial risk, especially from suppliers providing inventory that is dependent on resources originating from either of these countries; and ◦ negative impacts to manufacturing operations resulting from inventory cost volatility or the supply chain due to shutdowns or other disruptions in operations. These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown 18 risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2022 Form 10-K, filed with the SEC on December 12, 2022. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. The following information should be read in conjunction with the financial statements included in the Company’s 2022 Form 10-K, filed with the SEC on December 12, 2022. Available Information We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Report. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Executive Overview Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications 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. Blue Bird sells its buses and parts through an extensive network of U.S. and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and Type D school buses. Blue Bird also sells directly to major fleet operators, the U.S. Government, state governments, and authorized dealers in 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 second quarters of fiscal 2023 and fiscal 2022 both included 13 weeks. The six month periods in fiscal 2023 and 2022 both included 26 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. and Canada. 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; etc. 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 19 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 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 had a positive impact on sales and gross profit during the second quarter of fiscal 2023, which is expected to continue for 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 half 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 5,700 units as of April 1, 2023 despite it selling over 4,200 units during the first half of fiscal 2023, most of which 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) obtain parts and supplies in sufficient quantities to meet our production needs 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 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 half 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 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. 20 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 fiscal 2022 and continuing into 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, 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 and continuing to decline to $791 per ton the last week in September 2022. During fiscal 2023, the decrease in the price of steel continued during the first quarter to $664 per ton the last week in December 2022 but began to increase significantly during the second quarter to $1,152 per ton the last week in March 2023 and continuing into April 2023 (source for all per ton prices: 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 generally mitigated its direct exposure to steel prices by executing fixed price purchase contracts (generally purchased up to six months 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 half 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 $4.128 per gallon during the first half of fiscal 2023 (source: U.S Energy Information Administration - Weekly U.S. No 2 Diesel Retail Prices). 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 fiscal 2022 and continuing into the first half of fiscal 2023. 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 for the remainder of fiscal 2023 and perhaps beyond. Significant uncertainty exists concerning the magnitude of the impact and duration of the ongoing military conflict and its impact on the overall economy, both within the U.S. and globally. Accordingly, the duration of any production and supply chain disruptions, and related financial impacts, cannot be estimated at this time. Labor Union Representation Petition In April 2023, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC ("USW") filed a petition with the National Labor Relations Board ("NLRB") seeking a representation election for the Company's full-time and regular part-time production, maintenance, quality control, and warehouse employees at the Company's Fort Valley and Macon (warehouse) facilities, with certain exceptions. The election is expected to be held in mid-May 2023. Critical Accounting Policies and Estimates, Recent Accounting Pronouncements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies 21 involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 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 six months ended April 1, 2023. Recent Accounting Pronouncements See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements. Factors Affecting Our Revenues Our revenues are driven primarily by the following factors: • Property tax revenues . Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate. • Student enrollment and delivery mechanisms for learning. Increases or decreases in the number of school bus riders have a direct impact on school district demand. 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 . We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, electric-powered buses, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period. • Strength of the dealer network . We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district. • Pricing . Our products are sold to school districts throughout the U.S. and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions. Additionally, in certain cases, prices originally quoted with dealers and school districts may have become less favorable, or more unfavorable, to us given increasing inventory costs between the time the sales order was contractually agreed upon and the bus is built and delivered as a result of ongoing supply chain disruptions and general inflationary pressures. • Buying patterns of major fleets . Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year. • Seasonality. Historically, our sales have been subject to seasonal variation based on the school calendar with the peak season during our third and fourth fiscal quarters. Sales during the third and fourth fiscal quarters are typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year. With the COVID-19 pandemic 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. • Inflation. 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 22 fiscal 2022 and continuing into the first half 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. 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 had a positive impact on sales and gross profit during the second quarter of fiscal 2023, which is expected to continue for 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 Our expenses and other line items on our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors: • Cost of goods sold . The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper) including freight costs, labor expense, and overhead. Our cost of goods sold may vary from period to period due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, fluctuations in freight costs, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities. • Selling, general and administrative expenses . Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing, information technology services, along with other administrative matters and functions. In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel. • Interest expense . Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt. Interest expense also includes unrealized gains or losses from interest rate hedges, if any, and changes in the fair value of interest rate derivatives not designated in hedge accounting relationships, if any, as well as expenses related to debt guarantees, if any. • Income taxes . We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken. • Other 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 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. Key Non-GAAP Financial Measures We Use to Evaluate Our Performance The condensed consolidated financial statements included in this Report in Item 1. "Financial Statements (Unaudited)" are prepared in conformity with U.S. GAAP. This Report also includes the following financial measures that are not prepared in accordance with U.S. GAAP ("non-GAAP"): “Adjusted EBITDA;” “Adjusted EBITDA Margin;” and “Free Cash Flow.” Adjusted EBITDA and Free Cash Flow are financial metrics that are utilized by management and the board of directors to determine (a) the annual cash bonus payouts, if any, to be made to certain members of management based upon the terms of the Company’s Management Incentive Plan, and (b) whether the performance criteria have been met for the vesting of certain equity awards granted annually to certain members of management based upon the terms of the Company’s Omnibus Equity Incentive Plan. Additionally, consolidated EBITDA, which is an adjusted EBITDA metric defined by our Amended Credit Agreement (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. 23 Adjusted EBITDA is defined as net income or loss prior to interest income; interest expense including the component of operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our U.S. GAAP financial statements) that represents interest expense on lease liabilities; income taxes; and depreciation and amortization including the component of operating lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our U.S. GAAP financial statements) that represents amortization charges on right-of-use lease assets; as adjusted for certain non-cash charges or credits that we may record on a recurring basis such as share-based compensation expense and unrealized gains or losses on certain derivative financial instruments; net gains or losses on the disposal of assets as well as certain charges such as (i) significant product design changes; (ii) transaction related costs; (iii) discrete expenses related to major cost cutting and/or operational transformation initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. While certain of the charges that are added back in the Adjusted EBITDA calculation, such as transaction related costs and operational transformation and major product redesign initiatives, represent operating expenses that may be recorded in more than one annual period, the significant project or transaction giving rise to such expenses is not considered to be indicative of the Company’s normal operations. Accordingly, we believe that these, as well as the other credits and charges that comprise the amounts utilized in the determination of Adjusted EBITDA described above, should not be used in evaluating the Company’s ongoing annual operating performance. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA Margin are not measures of performance defined in accordance with U.S. GAAP. The measures are used as a supplement to U.S. GAAP results in evaluating certain aspects of our business, as described below. We believe that Adjusted EBITDA and Adjusted EBITDA Margin are useful to investors in evaluating our performance because the measures consider the performance of our ongoing operations, excluding decisions made with respect to capital investment, financing, and certain other significant initiatives or transactions as outlined in the preceding paragraphs. We believe the non-GAAP measures offer additional financial metrics that, when coupled with the U.S. GAAP results and the reconciliation to U.S. GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. Adjusted EBITDA and Adjusted EBITDA Margin should not be considered as alternatives to net income or loss as an indicator of our performance or as alternatives to any other measure prescribed by U.S. GAAP as there are limitations to using such non-GAAP measures. Although we believe that Adjusted EBITDA and Adjusted EBITDA Margin may enhance an evaluation of our operating performance based on recent revenue generation and product/overhead cost control because they exclude the impact of prior decisions made about capital investment, financing, and certain other significant initiatives or transactions, (i) other companies in Blue Bird’s industry may define Adjusted EBITDA and Adjusted EBITDA Margin differently than we do and, as a result, they may not be comparable to similarly titled measures used by other companies in Blue Bird’s industry, and (ii) Adjusted EBITDA and Adjusted EBITDA Margin exclude certain financial information that some may consider important in evaluating our performance. We compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and U.S. GAAP results, including providing a reconciliation to U.S. GAAP results, to enable investors to perform their own analysis of our ongoing operating results. Our measure of Free Cash Flow is used in addition to and in conjunction with results presented in accordance with U.S. GAAP and it should not be relied upon to the exclusion of U.S. GAAP financial measures. Free Cash Flow reflects an additional way of evaluating our liquidity that, when viewed with our U.S. GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. We strongly encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. We define Free Cash Flow as total cash provided by/used in operating activities as adjusted for net cash paid for the acquisition of fixed assets and intangible assets. We use Free Cash Flow, and ratios based on Free Cash Flow, to conduct and evaluate our business because, although it is similar to cash flow from operations, we believe it is a more conservative measure of cash flow since purchases of fixed assets and intangible assets are a necessary component of ongoing operations. Accordingly, Free Cash Flow will be less than operating cash flows. Our Segments We manage our business in two operating segments, which are also our reportable segments: (i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties; and (ii) the Parts segment, which includes the sale of replacement bus parts. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit. 24 Consolidated Results of Operations for the Three Months Ended April 1, 2023 and April 2, 2022: Three Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Net sales $ 299,814 $ 207,659 Cost of goods sold 264,165 204,502 Gross profit $ 35,649 $ 3,157 Operating expenses Selling, general and administrative expenses 23,205 19,858 Operating profit (loss) $ 12,444 $ (16,701) Interest expense (5,192) (2,491) Interest income 12 — Other (expense) income, net (342) 744 Income (loss) before income taxes $ 6,922 $ (18,448) Income tax (expense) benefit (1,389) 7,415 Equity in net income (loss) of non-consolidated affiliate 1,597 (1,114) Net income (loss) $ 7,130 $ (12,147) Other financial data: Adjusted EBITDA $ 19,841 $ (10,690) Adjusted EBITDA margin 6.6 % (5.1) % The following provides the results of operations of Blue Bird’s two reportable segments: (in thousands of dollars) Three Months Ended Net Sales by Segment April 1, 2023 April 2, 2022 Bus $ 273,472 $ 188,484 Parts 26,342 19,175 Total $ 299,814 $ 207,659 Gross Profit by Segment Bus $ 23,099 $ (3,984) Parts 12,550 7,141 Total $ 35,649 $ 3,157 Net sales . Net sales were $299.8 million for the second quarter of fiscal 2023, an increase of $92.2 million, or 44.4%, compared to $207.7 million for the second 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, during the first half of fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production during the second quarter of fiscal 2023 relative to the second quarter of fiscal 2022. Bus sales increased $85.0 million, or 45.1%, reflecting a 19.3% increase in units booked and a 21.6% increase in average sales price per unit. In the second quarter of fiscal 2023, 2,304 units were booked compared to 1,931 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 second quarter of fiscal 2022. The 21.6% increase in unit price for the second 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 $7.2 million, or 37.4%, for the second quarter of fiscal 2023 compared to the second 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 second quarter of fiscal 2023 relative to the second quarter of fiscal 2022. 25 Cost of goods sold . Total cost of goods sold was $264.2 million for the second quarter of fiscal 2023, an increase of $59.7 million, or 29.2%, compared to $204.5 million for the second quarter of fiscal 2022. As a percentage of net sales, total cost of goods sold improved from 98.5% to 88.1%. Bus segment cost of goods sold increased $57.9 million, or 30.1%, for the second quarter of fiscal 2023 compared to the same period in fiscal 2022. The increase was primarily driven by the 19.3% increase in units booked, in the second 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 second quarter of fiscal 2023 was 9.0% higher compared to the second 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 $1.8 million, or 14.6%, increase in parts segment cost of goods sold for the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022 was primarily due to 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 profit (loss) . Operating profit was $12.4 million for the second quarter of fiscal 2023, an increase of $29.1 million, compared to operating loss of $16.7 million for the second quarter of fiscal 2022. Profitability was primarily impacted by an increase of $32.5 million in gross profit as outlined in the revenue and cost of goods sold discussions. The increase in gross profit was partially offset by an increase of $3.3 million in selling, general and administrative expenses, primarily due to an increase in labor costs. Interest expense . Interest expense was $5.2 million for the second quarter of fiscal 2023, an increase of $2.7 million, or 108.4%, compared to $2.5 million for the second quarter of fiscal 2022. The increase was primarily attributable to an increase in the stated term loan interest rate from 6.1% at April 2, 2022 to 10.5% at April 1, 2023. Income taxes . Income tax expense was $1.4 million for the second quarter of fiscal 2023, compared to income tax benefit of $7.4 million for the same period in fiscal 2022. The effective tax rate for the three months ended April 1, 2023 was 20.1%, 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 April 2, 2022 was 40.2%, 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 were partially offset by discrete period tax expense resulting from net non-deductible compensation expenses and other tax adjustments. Adjusted EBITDA . Adjusted EBITDA was $19.8 million, or 6.6% of net sales, for the second quarter of fiscal 2023, an increase of $30.5 million, or 285.6%, compared to $(10.7) million, or (5.1)% of net sales, for the second quarter of fiscal 2022. The increase in Adjusted EBITDA is primarily the result of the $19.3 million increase in net income and the related $8.8 million increase in income tax expense, as well as the $2.7 million increase in interest expense, as a result of the factors discussed above. 26 The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA for the periods presented: Three Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Net income (loss) $ 7,130 $ (12,147) Adjustments: Interest expense, net (1) 5,281 2,563 Income tax expense (benefit) 1,389 (7,415) Depreciation, amortization, and disposals (2) 4,181 3,622 Operational transformation initiatives 137 1,585 Share-based compensation 699 813 Product redesign initiatives — 281 Other 1,024 8 Adjusted EBITDA $ 19,841 $ (10,690) Adjusted EBITDA margin (percentage of net sales) 6.6 % (5.1) % (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 April 1, 2023 and April 2, 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. Consolidated Results of Operations for the Six Months Ended April 1, 2023 and April 2, 2022: Six Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Net sales $ 535,546 $ 336,882 Cost of goods sold 492,440 317,528 Gross profit $ 43,106 $ 19,354 Operating expenses Selling, general and administrative expenses 40,037 38,091 Operating profit (loss) $ 3,069 $ (18,737) Interest expense (9,388) (5,573) Interest income 12 — Other (expense) income, net (578) 1,480 Loss on debt modification (537) (561) Loss before income taxes $ (7,422) $ (23,391) Income tax benefit 1,592 9,177 Equity in net income (loss) of non-consolidated affiliate 1,666 (2,015) Net loss $ (4,164) $ (16,229) Other financial data: Adjusted EBITDA $ 15,596 $ (7,091) Adjusted EBITDA margin 2.9 % (2.1) % 27 The following provides the results of operations of Blue Bird’s two reportable segments: (in thousands of dollars) Six Months Ended Net Sales by Segment April 1, 2023 April 2, 2022 Bus $ 486,721 $ 300,921 Parts 48,825 35,961 Total $ 535,546 $ 336,882 Gross Profit by Segment Bus $ 19,368 $ 5,658 Parts 23,738 13,696 Total $ 43,106 $ 19,354 Net sales . Net sales were $535.5 million for the six months ended April 1, 2023, an increase of $198.7 million, or 59.0%, compared to $336.9 million for the six months ended April 2, 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 most of fiscal 2022. However, during the first half of fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production relative to the first half of fiscal 2022. Bus sales increased $185.8 million, or 61.7%, reflecting a 38.3% increase in units booked and a 16.9% increase in average sales price per unit. 4,261 units booked in the six months ended April 1, 2023 compared with 3,080 units booked during 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 half of fiscal 2022. The increase in unit price for the first half 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 $12.9 million, or 35.8%, for the six months ended April 1, 2023 compared to the six months ended April 2, 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 half of fiscal 2023 relative to the first half of fiscal 2022. Cost of goods sold . Total cost of goods sold was $492.4 million for the six months ended April 1, 2023, an increase of $174.9 million, or 55.1%, compared to $317.5 million for the six months ended April 2, 2022. As a percentage of net sales, total cost of goods sold decreased from 94.3% to 92.0%. Bus segment cost of goods sold increased $172.1 million, or 58.3%, for the six months ended April 1, 2023 compared to the six months ended April 2, 2022. The increase was primarily driven by the 38.3% increase in units booked in the six months ended April 1, 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 six months ended April 1, 2023 was 14.4% higher compared to the six months ended April 2, 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 $2.8 million, or 12.7%, increase in parts segment cost of goods sold for the six months ended April 1, 2023 compared to the six months ended April 2, 2022 was primarily due to 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 profit (loss) . Operating profit was $3.1 million for the six months ended April 1, 2023, an increase of $21.8 million compared to operating loss of $18.7 million for the six months ended April 2, 2022. Profitability was primarily impacted by an increase of $23.8 million in gross profit as outlined in the revenue and cost of goods sold discussions. The increase in gross profit was partially offset by an increase of $1.9 million in selling, general and administrative expenses, primarily due to an increase in labor costs. Interest expense . Interest expense was $9.4 million for the six months ended April 1, 2023, an increase of $3.8 million, or 68.5%, compared to $5.6 million for the six months ended April 2, 2022. The increase was primarily attributable to an increase in the stated term loan interest rate from 6.1% at April 2, 2022 to 10.5% at April 1, 2023. Income taxes . Income tax benefit was $1.6 million and $9.2 million for the six months ended April 1, 2023 and April 2, 2022, respectively. 28 The effective tax rate for the six months ended April 1, 2023 was 21.4%, which aligned with the statutory federal 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 period. The effective tax rate for the six months ended April 2, 2022 was 39.2%, which differed from the statutory federal income tax rate of 21%. The difference is mainly due to normal tax rate items, including impacts from state taxes and federal and state tax credits (net of valuation allowances), which were partially offset by discrete period tax expense resulting from net non-deductible compensation expenses and other tax adjustments. Adjusted EBITDA . Adjusted EBITDA was $15.6 million, or 2.9% of net sales, for the six months ended April 1, 2023, an increase of $22.7 million, or 319.9%, compared to $(7.1) million, or (2.1)% of net sales, for the six months ended April 2, 2022. The increase in Adjusted EBITDA is primarily the result of the $12.1 million decrease in net loss and the related $7.6 million decrease in income tax benefit, as well as the $3.8 million increase in interest expense, 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: Six Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Net loss $ (4,164) $ (16,229) Adjustments: Interest expense, net (1) 9,570 5,720 Income tax benefit (1,592) (9,177) Depreciation, amortization, and disposals (2) 7,996 7,145 Operational transformation initiatives 937 1,586 Loss on debt modification 537 561 Share-based compensation 1,288 2,486 Product redesign initiatives — 534 Other 1,024 283 Adjusted EBITDA $ 15,596 $ (7,091) Adjusted EBITDA margin (percentage of net sales) 2.9 % (2.1) % (1) Includes $0.2 million and $0.1 million for the six months ended April 1, 2023 and April 2, 2022, respectively, 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 $0.9 million and $0.4 million for the six months ended April 1, 2023 and April 2, 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. Liquidity and Capital Resources The Company’s primary sources of liquidity are cash generated from its operations, available cash and cash equivalents and borrowings under its credit facility. At April 1, 2023, the Company had $17.8 million of available cash (net of outstanding checks) and $83.7 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. 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 29 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 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 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 30 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 quarters 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 April 1, 2023, 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 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 into 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 half of fiscal 2023. However, the higher costs charged by suppliers to procure inventory continued into the first half of fiscal 2023 and had a significant adverse impact on our operations and results. Specifically, such cost increases outpaced the increases in sales prices that we charged for the buses that were sold during the first quarter of fiscal 2023, many of which were included in the backlog of fixed price sales orders originating in fiscal 2021 and the early months of fiscal 2022 that carried forward into fiscal 2023. During the second quarter of fiscal 2023, the buses that were sold were generally included in the backlog of fixed price sales orders originating more recently (i.e., the latter months of fiscal 2022 and in fiscal 2023), with the cumulative increases in sales prices we charged for those buses generally outpacing the higher costs we paid to procure inventory, resulting in gross profit during the quarter. However, the gross margin on bus sales during the second quarter of 31 fiscal 2023 still lags the historical gross margin reported prior to the COVID-19 pandemic. 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 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. 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. We cannot assure our investors that we would be successful in amending or refinancing the existing debt. An amendment or refinancing of our existing debt could lead to higher interest rates and possible up-front expenses not included in our historical financial statements. 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. Seasonality Historically, our business has been highly seasonal with school districts buying their new school buses so that they will be available for use on the first day of the school year, typically in mid-August to early September. This has resulted in our third and fourth fiscal quarters representing our two busiest quarters from a sales and production perspective, the latter ending on the Saturday closest to September 30. Our quarterly results of operations, cash flows, and liquidity have 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 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. Cash Flows The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows: Six Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Cash, cash equivalents and restricted cash at beginning of period $ 10,479 $ 11,709 Total cash provided by (used in) operating activities 44,716 (11,410) Total cash used in investing activities (3,740) (3,478) Total cash (used in) provided by financing activities (33,444) 18,046 Change in cash, cash equivalents and restricted cash $ 7,532 $ 3,158 Cash, cash equivalents and restricted cash at end of period $ 18,011 $ 14,867 Total cash provided by (used in) operating activities Cash flows provided by operating activities totaled $44.7 million for the six months ended April 1, 2023, an increase of $56.1 million from the $11.4 million of cash flows used in operating activities during the six months ended April 2, 2022. The increase was primarily due to $44.3 million, $9.8 million, and $7.5 million increases in cash provided by favorable changes in inventory, accrued expenses, pension and other liabilities, and deferred income tax benefit, respectively, as well as the $12.1 million decrease in net loss. At the end of fiscal 2022 and during the first half of fiscal 2023, 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 half of fiscal 2023 when compared with the first half of fiscal 2022. These efficiencies resulted in us consuming more inventory in production, which resulted in a 32 significant decrease in the inventory balance at the end of the second 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 $10.8 million decrease in cash provided by changes in accounts payable, $3.7 million increase in equity in net income of non-consolidated affiliate, $1.7 million decrease in non-cash interest expense, $1.4 million decrease in impairment of fixed assets, and $1.2 million decrease in share-based compensation expense. Total cash used in investing activities Cash flows used in investing activities totaled $3.7 million for the six months ended April 1, 2023, as compared to $3.5 million for the six months ended April 2, 2022. The $0.3 million increase 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 $33.4 million for the six months ended April 1, 2023, as compared to $18.0 million of cash flows provided by financing activities for the six months ended April 2, 2022. The $51.5 million difference 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 half 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 six months ended April 1, 2023 compared to the six months ended April 2, 2022. Free cash flow 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: Six Months Ended (in thousands of dollars) April 1, 2023 April 2, 2022 Net cash provided by (used in) operating activities $ 44,716 $ (11,410) Cash paid for fixed assets (3,740) (3,478) Free Cash Flow $ 40,976 $ (14,888) Free Cash Flow for the six months ended April 1, 2023 was $55.9 million higher than the six months ended April 2, 2022, due to a $56.1 million increase in cash provided by (used in) operating activities, as well as an increase of $0.3 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 April 1, 2023, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia. Item 3. Quantitative and Qualitative Disclosures About Mar ket Risk. There have not been any material changes to our interest rate, commodity or currency risks previously disclosed in Part II, Item 7A of the Company’s 2022 Form 10-K.