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Item 2. Management’s Discussion and Analysis

2024-02-07 compared with 2023-08-09 · 172 added, 305 removed, 233 unchanged (67% of the section changed)

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

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited condensed consolidated financial statements as of and for the three and nine months ended July 1, 2023 and July 2, 2022 and related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q ("Report").

The following discussion and analysis of financial condition and results of operations of Blue Bird Corporation (the "Company," "Blue Bird," "we," "our," or "us") should be read in conjunction with the Company’s unaudited condensed consolidated financial statements as of and for the three months ended December 30, 2023 and December 31, 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.

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 entitled “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.

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

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

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2022 Form 10-K, filed with the SEC on December 12, 2022.

As a result of a number of known and unknown

risks and uncertainties, our actual results or performance may be materially different than those expressed or implied by these forward-looking statements.

Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the reports we file with the Securities and Exchange Commission (“SEC”), specifically the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s fiscal 2023 Form 10-K, filed with the SEC on December 11, 2023.

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

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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.

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 or furnish, as applicable, annual, quarterly, and current reports, proxy statements, and other information with the SEC.

We make these documents 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.

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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.

In addition, Blue Bird is the market leader in alternative powered product offerings with its propane-powered, gasoline-powered and all-electric-powered school buses.

Blue Bird sells its buses and parts through an extensive network of U.S.

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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 third quarters of fiscal 2023 and fiscal 2022 both included 13 weeks.

The nine month periods in fiscal 2023 and 2022 both included 39 weeks.

Throughout this Report, we refer to the fiscal year ending September 28, 2024 as "fiscal 2024," the fiscal year ended September 30, 2023 as "fiscal 2023," the fiscal year ended October 1, 2022 as "fiscal 2022," the fiscal year ended October 2, 2021 as “fiscal 2021” and the fiscal year ended October 3, 2020 as "fiscal 2020." There will be or were 52 weeks in fiscal 2024, fiscal 2023 and fiscal 2022.

The first quarters of fiscal 2024 and fiscal 2023 both included 13 weeks.

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

Beginning in our second quarter of the fiscal year that ended October 3, 2020 ("fiscal 2020"), the novel coronavirus known as "COVID-19" began to spread throughout the world, resulting in a global pandemic.

The pandemic triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions continued into the early months of calendar year 2021.

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

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

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

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

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

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

Specifically, management estimates that the sale of approximately 2,000 units was deferred from fiscal 2021 into fiscal 2022 as a result of the shortage of critical components that prevented the Company from initiating or completing, as applicable, the production process for certain units that were otherwise scheduled to be delivered to customers during the year.

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

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

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

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

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

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

The Company has also experienced significant increased purchase costs for many of its raw materials as a result of supply chain disruptions over these same periods and continuing into 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 and third quarters 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 fiscal 2023 remained 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 strong at approximately 5,200 units as of July 1, 2023 despite it selling almost 6,400 units during fiscal 2023, many of which were included in the backlog that existed as of October 1, 2022.

As discussed in detail in the fiscal 2023 Form 10-K filed with the SEC on December 11, 2023, the novel coronavirus known as "COVID-19" materially affected demand for new buses and replacement/maintenance parts during the second half of fiscal 2020 and first half of fiscal 2021, significantly impacting our business and operations.

Although demand for school buses strengthened substantially during the second half of fiscal 2021, the Company, and automotive industry as a whole, began experiencing significant supply chain constraints around this same period of time.

Additionally, the already challenged global supply chain for automotive parts that began in fiscal 2021 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).

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 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 fiscal 2023.

However, the higher costs charged by suppliers to procure inventory that continued into fiscal 2023 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.

prices we charged for those buses generally outpacing the higher costs we paid to procure inventory, resulting in gross profit during the quarters.

While the gross margin on bus sales during the second quarter of fiscal 2023 lagged the historical gross margin reported prior to the COVID-19 pandemic, it returned to more normal historical levels during the latter half of fiscal 2023.

Supply chain disruptions continued into the first quarter of fiscal 2024 as there were still occasional shortages of certain critical components as well as ongoing increases in raw materials costs, both of which impacted our business and operations by limiting the number of school buses that we could produce and sell as well as increasing the costs to manufacture buses.

Nonetheless, the lessons learned, and resulting actions taken, by management over the past three fiscal years allowed the Company to better navigate these supply chain challenges and consistently produce buses to fulfill sales orders.

Ongoing improvements in manufacturing operations, when coupled with periodic pricing actions taken by the Company to ensure that the increased sales prices charged for buses kept pace with increased costs to procure inventory to produce the buses, allowed the Company to report gross profit and gross margin during the first quarter of fiscal 2024 that were consistent with, or better than, historic levels experienced prior to the COVID-19 pandemic.

New bus orders during fiscal 2023 and continuing into fiscal 2024 remained 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 that began during the latter half of fiscal 2021 and continued through the first quarter of fiscal 2024.

Accordingly, the Company's backlog remained strong at approximately 4,600 units and as of both September 30, 2023 and December 30, 2023 despite it selling over 8,500 units during fiscal 2023, the majority of which were included in the backlog that existed as of October 1, 2022, and 2,100 units in the first quarter of fiscal 2024.

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 have resulted, and could to continue to result, in significant economic disruption and have adversely affected our business.

They could adversely impact our business for the remainder of fiscal 2024 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 into 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.

Significant uncertainty exists concerning the magnitude of the impact and duration of ongoing supply chain constraints and their potential impact on the overall economy, both within the U.S and globally.

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

The impacts from supply chain constraints on the Company's business and operations during the second half of fiscal 2021 and continuing into fiscal 2024 negatively affected our inventory procurement costs, gross profit, income and cash flows.

We continue to monitor and assess the ability of suppliers to maintain operations and to provide parts and supplies in sufficient quantities to meet our production needs and our ability to maintain continuous production during the remainder of fiscal 2024 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.

"Risk Factors," of our fiscal 2023 Form 10-K, filed with the SEC on December 11, 2023, for a discussion of the material risks we believe we face particularly related to supply chain disruptions and related constraints.

Impact of Russia’s Invasion of Ukraine on Our Business

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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 2024, 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 before slowly decreasing during the third quarter to $878 per ton the last week in June 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 into fiscal 2023, as applicable.

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 has resulted in significant volatility in the price of steel.

While the Company has generally mitigated its direct exposure to steel prices by executing fixed price purchase contracts (generally purchased up to four quarters 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, starting from the latter half of fiscal 2022 and continuing into fiscal 2024, as applicable.

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

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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 $3.767 per gallon during the first three quarters 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.

Accordingly, the disruption in the supply of oil has significantly impacted the price of goods refined from oil, such as diesel fuel, the price of which has been volatile and has remained high since the latter half of fiscal 2022.

These higher costs 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.

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 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 recently intensified its military operations in Ukraine, we currently believe that this matter will continue to adversely impact our business for the remainder of fiscal 2024 and perhaps beyond.

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

Labor Union Representation

On May 22, 2023, the National Labor Relations Board (“NLRB”) certified the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied & Industrial Service Workers International Union, AFL-CIO, CLC (“USW”) as the exclusive bargaining representative for a bargaining unit of the Company’s full-time and regular part-time production, maintenance, quality control, and warehouse employees at the Company’s Fort Valley and Macon, Georgia locations, with certain exceptions.

The bargaining unit consists of approximately 1,350 employees.

As a result, the Company is obligated to bargain with the USW as the bargaining representative for employees within the designated bargaining unit.

The Company has recently commenced bargaining sessions and thus, has not yet entered into any collective bargaining agreement as of July 1, 2023.

The Company's business is labor intensive.

As a result of the USW election, a large majority of our workforce is now represented by a labor union.

The Company expects to negotiate in good faith toward a collective bargaining agreement, and any such resulting agreement may cause it to incur higher labor costs for our employees than we would have incurred absent such agreement.

At this time, it is uncertain as to when and if an agreement with the USW will be reached.

As such, uncertainty exists regarding labor costs and labor actions, which may include increased labor costs, strikes, work stoppages, unfair labor practices claims and other disturbances and disputes.

Union actions that may occur in the future could cause disruptions to our operations and may cause us to incur additional costs, any of which could have a material adverse effect on our cash flow, results of operations and financial condition.

Critical Accounting Policies and Estimates, Recent Accounting Pronouncements

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Application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2022 Form 10-K, filed with the SEC on December 12, 2022, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference.

Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the nine months ended July 1, 2023.

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 fiscal 2023 Form 10-K, filed with the SEC on December 11, 2023, 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.

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.

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/or recently adopted accounting pronouncements, as applicable.

Factors Affecting Our Revenues

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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.

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

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.

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

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

As discussed previously above, supply chain disruptions developing subsequent to the COVID-19 pandemic and Russia's invasion of Ukraine have significantly increased our inventory purchase costs, including freight costs incurred to expedite receipt of critical components, reflected in cost of goods sold during the latter half of fiscal 2021, all of fiscal 2022 and continuing, to a lesser extent, into fiscal 2023 and fiscal 2024.

In response, beginning in July 2021, the Company has 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 only began to marginally impact sales and gross profit in the latter half of fiscal 2022.

Specifically, they 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 began to have a more significant, positive impact on sales and gross profit during the remainder of fiscal 2023, as the Company fulfilled sales orders (i) from the backlog existing as of the end of fiscal 2022 that originated more recently (i.e., during the latter months of fiscal 2022) and (ii) that were taken during fiscal 2023, both of which contained most or all of the cumulative sales prices increases that have been announced.

These cumulative price increases also continued to have a significant, positive impact on sales and gross profit during the first quarter of fiscal 2024.

Factors Affecting Our Expenses and Other Items

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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).

“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 employees 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 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"), which is also utilized in determining the interest rate we pay on borrowings under our Credit Agreement (defined below).

Accordingly, management views these non-GAAP financial metrics as key for the above purposes and as a useful way to evaluate the performance of our operations as discussed further below.

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(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.

or (iii) discrete expenses related to major cost cutting and/or operational transformation initiatives.

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.

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.

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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 define Free Cash Flow as total cash provided by/used in operating activities as adjusted for 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.

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

Consolidated Results of Operations for the Three Months Ended July 1, 2023 and July 2, 2022:

Consolidated Results of Operations for the Three Months Ended December 30, 2023 and December 31, 2022:

Three Months Ended

(in thousands of dollars) July 1, 2023 July 2, 2022

(in thousands of dollars) December 30, 2023 December 31, 2022

$ 317,660 $ 235,732

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Selling, general and administrative expenses 25,602 16,832

Operating profit $ 19,422 $ 1,088

Operating profit (loss) $ 37,956 $ (9,375)

Interest expense (3,631) (4,196)

Interest income 1,088 —

Other (expense) income, net (6,421) 735

Other expense, net (1,221) (236)

Loss on debt refinancing or modification

(1,558) (537)

Income (loss) before income taxes $ 32,634 $ (14,344)

Income tax expense (1,884) (2,860)

Equity in net income (loss) of non-consolidated affiliate 2,502 (1,490)

Income tax (expense) benefit (8,446) 2,981

Equity in net income of non-consolidated affiliate 1,962 69

Net income (loss) $ 26,150 $ (11,294)

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Adjusted EBITDA margin

15.0 % (1.5) %

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

1 unchanged sentence

Net Sales by Segment

July 1, 2023 July 2, 2022

December 30, 2023 December 31, 2022

$ 293,437 $ 213,249

1 unchanged sentence

$ 317,660 $ 235,732

Gross Profit by Segment

Gross Profit (Loss) by Segment

$ 51,294 $ (3,731)

12,264 11,188

Net sales were $294.3 million for the third quarter of fiscal 2023, an increase of $88.2 million, or 42.8%, compared to $206.1 million for the third quarter of fiscal 2022.

$ 63,558 $ 7,457

Net sales were $317.7 million for the first quarter of fiscal 2024, an increase of $81.9 million, or 34.8%, compared to $235.7 million for the first quarter of fiscal 2023.

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 fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production during the third quarter of fiscal 2023 relative to the third quarter of fiscal 2022.

Bus sales increased $80.2 million, or 37.6%, reflecting a 8.8% increase in units booked and a 26.5% increase in average sales price per unit.

In the third quarter of fiscal 2023, 2,137 units were booked compared to 1,726 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 third quarter of fiscal 2022.

The 17.0% increase in unit price for the third 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 $4.6 million, or 23.4%, for the third quarter of fiscal 2023 compared to the third 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 during the third quarter of fiscal 2023 relative to the third quarter of fiscal 2022.

In the first quarter of fiscal 2024, 2,129 units were booked compared to 1,957 units booked for the same period in fiscal 2023.

The increase in units sold was primarily due to slight improvements in supply chain constraints impacting the Company's ability to produce and deliver buses due to shortages of critical components during the first quarter of 2024 relative to the first quarter of fiscal 2023.

The increase in unit price for the first quarter of fiscal 2024 compared to the same period in fiscal 2023 reflects pricing actions taken by management as well as product and customer mix changes.

Parts sales increased $1.7 million, or 7.7%, for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023.

This increase is primarily attributed to price increases, driven by ongoing inflationary pressures, as well as higher fulfillment volumes and slight variations due to product and channel mix.

Cost of goods sold .

Total cost of goods sold was $248.5 million for the third quarter of fiscal 2023, an increase of $64.0 million, or 34.7%, compared to $184.5 million for the third quarter of fiscal 2022.

As a percentage of net sales, total cost of goods sold improved from 89.5% to 84.5%.

Bus segment cost of goods sold increased $63.1 million, or 36.5%, for the third quarter of fiscal 2023 compared to the same period in fiscal 2022.

The increase was primarily driven by the 23.8% increase in units booked in the third 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 third quarter of fiscal 2023 was 10.2% higher compared to the third 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 $0.9 million, or 8.2%, increase in parts segment cost of goods sold for the third quarter of fiscal 2023 compared to the third 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 .

Operating profit was $19.4 million for the third quarter of fiscal 2023, an increase of $18.3 million, compared to operating profit of $1.1 million for the third quarter of fiscal 2022.

Profitability was primarily impacted by an increase of $24.2 million in gross profit as outlined in the revenue and cost of goods sold discussions.

Total cost of goods sold was $254.1 million for the first quarter of fiscal 2024, an increase of $25.8 million, or 11.3%, compared to $228.3 million for the first quarter of fiscal 2023.

As a percentage of net sales, total cost of goods sold improved from 96.8% to 80.0%, primarily due to the pricing actions discussed above taking effect.

Bus segment cost of goods sold increased $25.2 million, or 11.6%, for the first quarter of fiscal 2024 compared to the same period in fiscal 2023.

The increase was primarily driven by the 8.8% increase in units booked in the first quarter of fiscal 2024 compared to the same period in fiscal 2023.

Also contributing was increased inventory costs, as the average cost of goods sold per unit for the first quarter of fiscal 2024 was 2.6% higher compared to the first quarter of fiscal 2023, 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.

The $0.7 million, or 5.9%, increase in parts segment cost of goods sold for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 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 $38.0 million for the first quarter of fiscal 2024, an increase of $47.3 million, compared to operating loss of $9.4 million for the first quarter of fiscal 2023.

Profitability was primarily impacted by an increase of $56.1 million in gross profit as outlined in the revenue and cost of goods sold discussions above.

The increase in gross profit was partially offset by an increase of $8.8 million in selling, general and administrative expenses, primarily due to an increase in labor costs.

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

Interest expense .

Interest expense was $4.5 million for the third quarter of fiscal 2023, an increase of $0.6 million, or 15.3%, compared to $3.9 million for the third quarter of fiscal 2022.

The increase was primarily attributable to an increase in the stated term loan interest rate from 7.9% at July 2, 2022 to 11.1% at July 1, 2023, which was partially offset by lower borrowings.

Other expense/income, net.

Other expense, net, was $6.4 million for the third quarter of fiscal 2023, an increase of $7.2 million, or 973.6%, compared to $0.7 million of other income, net, for the same period in fiscal 2022.

We recorded $0.2 million of net periodic pension expense during the third quarter of fiscal 2023 when compared with $0.7 million of net periodic pension income recorded during the third quarter of fiscal 2022.

Additionally, on June 7, 2023, the Company entered into an underwriting agreement with BofA Securities, Inc.

and Barclays Capital Inc., as representatives of the several underwriters and American Securities LLC, Coliseum Capital Partners, L.P., and Blackwell Partners LLC – Series A ("Selling Stockholders"), pursuant to which the Selling Stockholders agreed to sell 5,175,000 shares of common stock, including the sale of 675,000 shares pursuant to the underwriters’ exercise of their over-allotment option, at a purchase price of $20.00 per share (“Offering”).

The Offering was conducted pursuant to a prospectus supplement, dated June 7, 2023, to the prospectus, dated December 22, 2021, included in the Company’s registration statement on Form S-3 (File No.

Interest expense was $3.6 million for the first quarter of fiscal 2024, a decrease of $0.6 million, or 13.5%, compared to $4.2 million for the first quarter of fiscal 2023.

The decrease was primarily attributable to a decrease in the stated term loan interest rate from 10.5% at December 31, 2022 to 8.5% at December 30, 2023, as well as lower outstanding borrowings in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023.

Other expense, net.

Other expense, net, was $1.2 million for the first quarter of fiscal 2024, an increase of $1.0 million, or 417.4%, compared to $0.2 million of other expense, net, for the same period in fiscal 2023.

On December 14, 2023, the Company entered into an underwriting agreement with BofA Securities, Inc.

and Barclays Capital Inc., as representatives of the several underwriters and American Securities LLC ("Selling Stockholder"), pursuant to which the Selling Stockholder agreed to sell 2,500,000 shares of common stock at a purchase price of $25.10 per share (“Offering”).

The Offering was conducted pursuant to a prospectus supplement, dated December 14, 2023, to the prospectus, dated December 22, 2021, included in the Company’s registration statement on Form S-3 (File No.

333-261858) that was initially filed with the SEC on December 23, 2021.

The Offering closed on June 12, 2023.

Although the Company did not sell any shares or receive any proceeds from the Offering.

it was required to pay certain expenses in connection with the Offering that totaled $6.3 million (approximately $0.7 million of which were expensed in the second quarter of fiscal 2023 within selling, general and administrative expenses and reclassified to other expense, net, during the third quarter of fiscal 2023), with no similar expense recorded during the same period of fiscal 2022.

The Offering closed on December 19, 2023.

Although the Company did not sell any shares or receive any proceeds from the Offering, it was required to pay certain expenses in connection with the Offering that totaled approximately $1.2 million for the three month period ending December 30, 2023, with no similar expense recorded during the same period of fiscal 2023.

Income taxes .

Income tax expense was $1.9 million for the third quarter of fiscal 2023 compared to $2.9 million for the same period in fiscal 2022.

The effective tax rate for the three months ended July 1, 2023 was 21.6%, which aligned with the statutory federal income tax rate of 21% and is comprised of normal tax rate items, including impacts from state taxes, federal and state tax credits (net of valuation allowances) and permanent differences, which were partially offset by the impact of discrete period items during the quarter.

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

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

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

Income tax expense was $8.4 million for the first quarter of fiscal 2024 compared to income tax benefit of $3.0 million for the same period in fiscal 2023.

The effective tax rate for the three months ended December 30, 2023 was 25.9% and differed from the statutory federal income tax rate of 21%.

The increase was primarily due to the impacts from state taxes and certain permanent items on the federal rate, which were partially offset by the impacts from federal and state tax credits (net of valuation allowances) and discrete period items during the quarter.

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.

Adjusted EBITDA .

Adjusted EBITDA was $28.0 million, or 9.5% of net sales, for the third quarter of fiscal 2023, an increase of $19.2 million, or 218.6%, compared to $8.8 million, or 4.3% of net sales, for the third quarter of fiscal 2022.

The increase in Adjusted EBITDA is primarily the result of the $15.8 million increase in net income as a result of the factors discussed above as well as a $1.8 million increase in depreciation, amortization, and disposals and a $5.5 million increase in stockholder transaction costs, which were

partially offset by a $3.9 million decrease in operational transformation initiative costs that we incurred in fiscal 2022 to address the supply chain constraints that were having a significant adverse impact on our operations and financial results, with only minor amounts of such activity recorded during fiscal 2023.

Adjusted EBITDA was $47.6 million, or 15.0% of net sales, for the first quarter of fiscal 2024, an increase of $51.1 million, or 1,446.3%, compared to $(3.5) million, or (1.5)% of net sales, for the first quarter of fiscal 2023.

The increase is primarily the result of the $37.4 million increase in net income as a result of the factors discussed above as well as the $11.4 million corresponding increase in income tax expense.

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) July 1, 2023 July 2, 2022

(in thousands of dollars) December 30, 2023 December 31, 2022

Net income (loss) $ 26,150 $ (11,294)

Interest expense, net (1) 2,655 4,289

Income tax expense 1,884 2,860

Income tax expense (benefit) 8,446 (2,981)

Depreciation, amortization, and disposals (2) 4,210 3,815

Operational transformation initiatives — 800

Share-based compensation 941 667

Product redesign initiatives — 15

Share-based compensation expense

Stockholder transaction costs 1,221 —

Adjusted EBITDA

$ 28,015 $ 8,792

Adjusted EBITDA margin (percentage of net sales)

(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 $0.5 million and $0.2 million for the three months ended July 1, 2023 and July 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 Nine Months Ended July 1, 2023 and July 2, 2022:

Nine Months Ended

(in thousands of dollars) July 1, 2023 July 2, 2022

$ 829,830 $ 542,965

Cost of goods sold

740,974 502,018

$ 88,856 $ 40,947

Operating expenses

Selling, general and administrative expenses

Loss on debt refinancing or modification

Subtotal (Adjusted EBITDA as previously presented)

$ 46,209 $ (4,245)

Operating profit (loss) $ 22,491 $ (17,649)

Interest expense (13,895) (9,481)

Interest income 258 —

Other (expense) income, net (6,999) 2,215

Loss on debt modification (537) (561)

Income (loss) before income taxes $ 1,318 $ (25,476)

Income tax (expense) benefit (292) 6,317

Equity in net income (loss) of non-consolidated affiliate 4,168 (3,505)

Net income (loss) $ 5,194 $ (22,664)

Other financial data:

Micro Bird Holdings, Inc.

total interest expense, net;

income tax expense or benefit;

depreciation expense and amortization expense

Adjusted EBITDA

$ 47,604 $ (3,536)

Adjusted EBITDA margin

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

(in thousands of dollars) Nine Months Ended

Net Sales by Segment July 1, 2023 July 2, 2022

$ 757,003 $ 487,552

72,827 55,413

Total $ 829,830 $ 542,965

Gross Profit by Segment

$ 53,544 $ 19,290

35,312 21,657

$ 88,856 $ 40,947

Net sales were $829.8 million for the nine months ended July 1, 2023, an increase of $286.9 million, or 52.8%, compared to $543.0 million for the nine months ended July 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.

However, during fiscal 2023, supply chain constraints began to improve slightly, allowing for increased production relative to the first three quarters of fiscal 2022.

Bus sales increased $269.5 million, or 55.3%, reflecting a 33.1% increase in units booked and a 16.6% increase in average sales price per unit.

6,398 units booked in the nine months ended July 1, 2023 compared with 4,806 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 three quarters of fiscal 2022.

The increase in unit price for the first three quarters 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 $17.4 million, or 31.4%, for the nine months ended July 1, 2023 compared to the nine months ended July 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 fiscal 2023 relative to the first three quarters of fiscal 2022.

Cost of goods sold .

Total cost of goods sold was $741.0 million for the nine months ended July 1, 2023, an increase of $239.0 million, or 47.6%, compared to $502.0 million for the nine months ended July 2, 2022.

As a percentage of net sales, total cost of goods sold improved from 92.5% to 89.3%.

Bus segment cost of goods sold increased $235.2 million, or 50.2%, for the nine months ended July 1, 2023 compared to the nine months ended July 2, 2022.

The increase was primarily driven by the 33.1% increase in units booked in the nine months ended July 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 nine months ended July 1, 2023 was 12.9% higher compared to the nine months ended July 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 $3.8 million, or 11.1%, increase in parts segment cost of goods sold for the nine months ended July 1, 2023 compared to the nine months ended July 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 $22.5 million for the nine months ended July 1, 2023, an increase of $40.1 million compared to operating loss of $17.6 million for the nine months ended July 2, 2022.

Profitability was primarily impacted by an increase of $47.9 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 $7.8 million in selling, general and administrative expenses, primarily due to an increase in labor costs.

Interest expense .

Interest expense was $13.9 million for the nine months ended July 1, 2023, an increase of $4.4 million, or 46.6%, compared to $9.5 million for the nine months ended July 2, 2022.

The increase was primarily attributable to an increase in the stated term loan interest rate from 7.9% at July 2, 2022 to 11.1% at July 1, 2023, which was partially offset by lower borrowings.

Other expense/income, net.

Other expense, net, was $7.0 million for the nine months ended July 1, 2023, an increase of $9.2 million, or 416.0%, compared to $2.2 million of other income, net, for the nine months ended July 2, 2022.

We recorded $0.5 million of net

periodic pension expense during the nine months ended July 1, 2023 when compared with $2.2 million of net periodic pension income recorded during the nine months ended July 2, 2022.

Additionally, we were required to pay certain expenses in connection with the Offering that totaled $6.3 million during the nine months ended July 1, 2023, with no similar expense recorded during the same period of fiscal 2022.

Income taxes .

Income tax expense was $0.3 million for the nine months ended July 1, 2023 compared to income tax benefit of $6.3 million for the nine months ended July 2, 2022.

The effective tax rate for the nine months ended July 1, 2023 was 22.2%, which aligned with the statutory federal tax rate of 21% and is comprised of normal tax rate items, including impacts from state taxes, federal and state tax credits (net of valuation allowances) and permanent items, which were partially offset by the impact of discrete period items during the period.

The effective tax rate for the nine months ended July 2, 2022 was 24.8%, 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 $43.6 million, or 5.3% of net sales, for the nine months ended July 1, 2023, an increase of $41.9 million, or 2,463.8%, compared to $1.7 million, or 0.3% of net sales, for the nine months ended July 2, 2022.

The increase in Adjusted EBITDA is primarily the result of the $27.9 million increase in net income and the related $6.6 million increase in income tax expense, as well as a $4.4 million increase in interest expense, as a result of the factors discussed above.

Additionally, it was further impacted by a $2.7 million increase in depreciation, amortization, and disposals and a $6.3 million increase in stockholder transaction costs, which were partially offset by a $4.5 million decrease in operational transformation initiative costs that we incurred in fiscal 2022 to address the supply chain constraints that were having a significant adverse impact on our operations and financial results, with only minor amounts of such activity recorded during fiscal 2023.

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

Nine Months Ended

(in thousands of dollars) July 1, 2023 July 2, 2022

Net income (loss) $ 5,194 $ (22,664)

Interest expense, net (1) 13,923 9,696

Income tax expense (benefit) 292 (6,317)

Depreciation, amortization, and disposals (2) 13,477 10,787

Operational transformation initiatives 1,133 5,651

Loss on debt modification 537 561

Share-based compensation 2,229 3,153

Product redesign initiatives — 549

Stockholder transaction costs 6,252 —

Other 574 285

Adjusted EBITDA $ 43,611 $ 1,701

Adjusted EBITDA margin (percentage of net sales)

(1) Includes $0.3 million and $0.2 million for the nine months ended July 1, 2023 and July 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 $1.3 million and $0.6 million for the nine months ended July 1, 2023 and July 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.

15.0 % (1.5) %

(2) Includes $0.6 million and $0.4 million for the three months ended December 30, 2023 and December 31, 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 July 1, 2023, the Company had $50.5 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 primary sources of liquidity are cash generated from its operations, available cash and cash equivalents and borrowings under its revolving credit facility.

At December 30, 2023, the Company had $77.3 million of available cash (net of outstanding checks) and $107.1 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, Blue Bird Body Company ("BBBC," as "Borrower") executed a sixth amendment to the Credit Agreement, dated as of December 12, 2016 ("Credit Agreement");

as amended by the first amendment to the Credit Agreement, dated as of September 13, 2018 (the "First Amended Credit Agreement"), the second amendment to the Credit Agreement, dated as of May 7, 2020 (the "Second Amended Credit Agreement"), the third amendment to the Credit Agreement, dated as of December 4, 2020 (the "Third Amended Credit Agreement");

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

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

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

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

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

There was no change in the term loan facility commitment;

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

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

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

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

The minimum consolidated EBITDA that the Company is required to maintain during the Amended Limited Availability Period is updated as set forth in the table below (in millions):

Period Minimum Consolidated EBITDA

Fiscal quarter ending 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

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

Credit Agreement

On November 17, 2023 (the “Closing Date”), Blue Bird Body Company ("Borrower") executed a $250.0 million five-year credit agreement with Bank of Montreal, acting as administrative agent and an issuing bank;

several joint lead arranger partners and issuing banks, including Bank of America;

and a syndicate of other lenders (the "Credit Agreement").

The credit facilities provided for under the Credit Agreement consist of a term loan facility in an aggregate initial principal amount of $100.0 million (the “Term Loan Facility”) and a revolving credit facility with aggregate commitments of $150.0 million.

The revolving credit facility includes a $25.0 million letter of credit sub-facility and $5.0 million swingline sub-facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, each a “Credit Facility” and collectively, the “Credit Facilities”).

A minimum of $100.0 million of additional term loans and/or revolving credit commitments may be incurred under the Credit Agreement, subject to certain limitations as set forth in the Credit Agreement, and which additional loans and/or commitments would require further commitments from existing lenders or from new lenders.

Borrower has the right to prepay the loans outstanding under the Credit Facilities without premium or penalty (subject to customary breakage costs, if applicable).

Additionally, proceeds from asset sales, condemnation, casualty insurance and/or debt issuances (in certain circumstances) are required to be used to prepay borrowings outstanding under the Credit Facilities.

Borrowings under the Term Loan Facility, which were made at the Closing Date, may not be reborrowed once they are repaid while borrowings under the Revolving Credit Facility may be repaid and reborrowed from time to time at our election.

The Term Loan Facility is subject to amortization of principal, payable in equal quarterly installments on the last day of each fiscal quarter, commencing on March 30, 2024, with 5.0% of the $100.0 million aggregate principal amount of all initial term loans outstanding at the Closing Date payable each year prior to the maturity date of the Term Loan Facility.

The remaining initial aggregate principal amount outstanding under the Term Loan Facility, as well as any outstanding borrowings under the Revolving Credit Facility, will be payable on the November 17, 2028 maturity date of the Credit Agreement.

The Credit Facilities are guaranteed by all of the Company’s wholly-owned domestic restricted subsidiaries (subject to customary exceptions) and are secured by a security agreement which pledges a lien on virtually all of the assets of Borrower, the Company and the Company’s other wholly-owned domestic restricted subsidiaries, other than any owned or leased real property and subject to customary exceptions.

The $100.0 million of Term Loan Facility proceeds and $36.2 million of Revolving Credit Facility proceeds that were borrowed on the Closing Date were used to pay (i) the $131.8 million of term loan indebtedness outstanding under the previous credit agreement ("Amended Credit Agreement"), (ii) interest and commitment fees accrued under the Amended Credit Agreement through the Closing Date and (iii) transaction costs associated with the consummation of the Credit Agreement.

Under the terms of the Credit Agreement, Borrower, the Company and the Company’s other wholly-owned domestic restricted subsidiaries are subject to customary affirmative and negative covenants and events of default for facilities of this type (with customary grace periods, as applicable, and lender remedies).

Borrowings under the Credit Facilities bear interest, at our option, at (i) base rate ("ABR") or (ii) the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York ("SOFR") plus 0.10%, plus an applicable margin depending on the TNLR (which is defined in the Credit Agreement as the ratio of consolidated net debt to consolidated EBITDA on a trailing four quarter basis) of the Company as follows:

ABR Loans SOFR Loans

I Less than 1.00x

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III Greater than or equal to 1.50x and less than 2.25x

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 July 1, 2023, the Borrower and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

IV Greater than or equal to 2.25x

Pricing on the Closing Date was set at Level III until receipt of the financial information and related compliance certificate for the first fiscal quarter ending after the Closing Date.

Borrower is also required to pay lenders an unused commitment fee of between 0.25% and 0.45% per annum on the undrawn commitments under the Revolving Credit Facility, depending on the TNLR, quarterly in arrears.

The Credit Agreement also includes a requirement that the Company comply with the following financial covenants on the last day of each fiscal quarter through maturity:

(i) a pro forma TNLR of not greater than 3.00:1.00 and (ii) a pro forma fixed charge coverage ratio (as defined in the Credit Agreement) of not less than 1.20:1.00.

Detailed descriptions of the Amended Credit Agreement 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 September 30, 2023, filed with the SEC on December 11, 2023.

At December 30, 2023, Borrower and the guarantors under the 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 facility 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.

Our ability to make principal and interest payments on borrowings under our Credit Facility\ies 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 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.

However, the higher costs charged by suppliers to procure inventory that continued into fiscal 2023 had a significant adverse impact on our operations and results.

During the second and third quarters 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 quarters.

During the remainder 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 quarters.

Nonetheless, ongoing improvements in manufacturing operations, when coupled with periodic pricing actions taken by the Company to ensure that the increased sales prices charged for buses kept pace with increased costs to procure inventory to produce the buses, allowed the Company to report gross profit and gross margin during the first quarter of fiscal 2024 that were consistent with, or better than, historic levels experienced 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.

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.

"Risk Factors," of our fiscal 2023 Form 10-K, filed with the SEC on December 11, 2023, for a discussion of the material risks we believe we face particularly related to health epidemics and supply chain constraints.

Future health epidemics and/or continuing supply chain constraints could cause a contraction in our profits and/or liquidity, which could lead to issues complying with our Credit Agreement covenants.

If we are not able to comply with covenants, we may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure.

We can offer no assurance 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.

However, we can offer no assurance 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.

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.

This has, in fiscal years prior to the COVID-19 pandemic, 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.

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The following table sets forth general information derived from our Condensed Consolidated Statements of Cash Flows:

Nine Months Ended

(in thousands of dollars) July 1, 2023 July 2, 2022

Three Months Ended

(in thousands of dollars) December 30, 2023 December 31, 2022

Cash, cash equivalents and restricted cash at beginning of period $ 78,988 $ 10,479

Total cash provided by (used in) operating activities 84,131 (54,451)

Total cash provided by operating activities 217 19,926

Total cash used in investing activities (2,904) (1,146)

Total cash (used in) provided by financing activities (37,485) 73,999

Total cash provided by (used in) financing activities 995 (23,359)

Change in cash, cash equivalents and restricted cash $ (1,692) $ (4,579)

Cash, cash equivalents and restricted cash at end of period $ 77,296 $ 5,900

Total cash provided by (used in) operating activities

Cash flows provided by operating activities totaled $84.1 million for the nine months ended July 1, 2023, an increase of $138.6 million from the $54.5 million of cash flows used in operating activities during the nine months ended July 2, 2022.

The increase was primarily due to $105.3 million, $33.0 million, $4.1 million, $2.0 million, and $6.8 million increases in cash provided by favorable changes in inventory, accrued expenses, pension and other liabilities, accounts receivable, depreciation and amortization, and deferred income tax expense, respectively, as well as the $27.9 million increase in net income.

At the end of fiscal 2022 and continuing into fiscal 2023, we became more efficient at managing supply chain disruptions, and thus building and selling buses.

These efficiencies resulted in us consuming more inventory in production, which resulted in a significant decrease in the inventory balance at the end of the third 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 $28.3 million decrease in cash resulting from changes in accounts payable, $7.7 million increase in equity in net income of non-consolidated affiliate, $2.0 million decrease in non-cash interest expense, and $1.4 million decrease in impairment of fixed assets.

Total cash provided by operating activities

Cash flows provided by operating activities totaled $0.2 million for the three months ended December 30, 2023, a decrease of $19.7 million from the $19.9 million of cash flows provided by operating activities during the three months ended December 31, 2022.

The effect of net changes in operating assets and liabilities negatively impacted operating cash flows by $64.7 million during the three months ended December 30, 2023 compared to the three months ended December 31, 2022.

The primary drivers in this category were unfavorable changes in inventory and accounts payable of $21.0 million and $39.7 million, respectively.

At the end of fiscal 2022 and during the first quarter of fiscal 2023, inflationary pressures and supply chain disruptions significantly increased our purchase costs for components and freight, which, when coupled with increased production and sales volumes during the first quarter of fiscal 2023, resulted in a significant increase in the accounts payable balance (a net source of cash) when compared with a significant decrease in the accounts payable balance at the end of the first quarter of fiscal 2024 (a net use of cash).

Additionally, we became more efficient at managing supply chain disruptions, and thus building and selling buses, during the the first quarter of fiscal 2023.

These efficiencies resulted in us consuming more inventory in production, which resulted in a significant decrease in the inventory balance at the end of the first quarter of fiscal 2023 (a net source of cash).

In comparison, we had a marginal increase in the inventory balance at the end of the first quarter of fiscal 2024 (a net use of cash) as we elected to strategically acquire larger quantities of certain components (i) that have longer lead times and could impact our production schedule if not manufactured by our suppliers and delivered to us in a timely manner and (ii) in anticipation of model year changeovers by some of our larger suppliers that are expected to decrease the availability of such inventory later in fiscal 2024.

These unfavorable changes were partially offset by a $37.4 million increase in net income and a $3.0 million increase in the dividend received from our unconsolidated Canadian joint venture during the first quarter of fiscal 2024 when compared with the corresponding period in fiscal 2023.

Total cash used in investing activities

Cash flows used in investing activities totaled $6.4 million for the nine months ended July 1, 2023, as compared to $4.7 million for the nine months ended July 2, 2022.

The $1.6 million increase was primarily due to an increase in spending on fixed assets, as increased profitability in the first three quarters of fiscal 2023 compared to the same period in fiscal 2022 allowed for more capital spending.

During this period in fiscal 2022, capital spending was reduced to lower than normal amounts in an effort to mitigate the 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 $37.5 million for the nine months ended July 1, 2023 as compared to $74.0 million of cash flows provided by financing activities for the nine months ended July 2, 2022.

The $111.5 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 three quarters of fiscal 2022 with no similar activity in the corresponding period of fiscal 2023, as well as a net $35.0 million decrease (i.e., repayments) in revolving credit facility borrowings in the nine months ended July 1, 2023 compared to the nine months ended July 2, 2022.

Cash flows used in investing activities totaled $2.9 million for the three months ended December 30, 2023, as compared to $1.1 million for the three months ended December 31, 2022.

The $1.8 million increase was primarily due to an increase in spending on fixed assets, as increased profitability in the first quarter of fiscal 2024 when compared to the same period in fiscal 2023 allowed for more capital spending.

During the first quarter of fiscal 2023, capital spending was reduced to lower than normal amounts in an effort to mitigate the impact of supply chain constraints on our operations, financial results and cash flows.

Total cash provided by (used in) financing activities

Cash flows provided by financing activities totaled $1.0 million for the three months ended December 30, 2023 as compared to $23.4 million of cash flows used in financing activities for the three months ended December 31, 2022.

The $24.4 million increase between fiscal periods was primarily attributable to $100.0 million of proceeds received from term loan borrowings under the Credit Agreement as well as a $51.2 million net increase in revolving line of credit borrowings, which were partially offset by a $126.9 million net decrease in term loan principal repayments under the previous credit agreement.

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.

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

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

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

Nine Months Ended

(in thousands of dollars) July 1, 2023 July 2, 2022

Net cash provided by (used in) operating activities $ 84,131 $ (54,451)

Three Months Ended

(in thousands of dollars) December 30, 2023 December 31, 2022

Net cash provided by operating activities $ 217 $ 19,926

Cash paid for fixed assets (2,904) (1,146)

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$ (2,687) $ 18,780

Free Cash Flow for the nine months ended July 1, 2023 was $136.9 million higher than the nine months ended July 2, 2022, due to a $138.6 million increase in cash provided by (used in) operating activities, which was partially offset by an increase of $1.6 million in cash paid for fixed assets, both as discussed above.

Free Cash Flow for the three months ended December 30, 2023 was $21.5 million lower than for the three months ended December 31, 2022 due to a $19.7 million decrease in net cash provided by operating activities as well as an increase of $1.8 million in cash paid for fixed assets, both as discussed above.

Off-Balance Sheet Arrangements

We had outstanding letters of credit totaling $6.3 million at July 1, 2023, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had outstanding letters of credit totaling $6.7 million at December 30, 2023, the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

Quantitative and Qualitative Disclosures About Mar ket Risk.

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.

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 fiscal 2023 Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis