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Item 2. Management’s Discussion and Analysis

2020-08-13 compared with 2020-05-14 · 141 added, 129 removed, 247 unchanged (52% 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 financial statements for the three and six months ended April 4, 2020 and March 30, 2019 and related notes appearing in Part I, Item 1 of this Report.

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited financial statements for the three and nine months ended July 4, 2020 and June 29, 2019 and related notes appearing in Part I, Item 1 of this Report.

Our actual results may not be indicative of future performance.

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We refer to the fiscal year ended September 28, 2019 as “fiscal 2019 ”.

We refer to the quarter ended April 4, 2020 as the “ second quarter of fiscal 2020 ” and we refer to the quarter ended March 30, 2019 as the “ second quarter of fiscal 2019 ”.

The second quarters of fiscal 2020 and 2019 both included 13 weeks.

The six month periods in fiscal 2020 and 2019 included 27 and 26 weeks, respectively.

We refer to the quarter ended July 4, 2020 as the “ third quarter of fiscal 2020 ” and we refer to the quarter ended June 29, 2019 as the “ third quarter of fiscal 2019 ”.

The third quarters of fiscal 2020 and 2019 both included 13 weeks.

The nine month periods in fiscal 2020 and 2019 included 40 and 39 weeks, respectively.

Special Note Regarding Forward-Looking Statements

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Impact of COVID-19 on Our Business

During our second fiscal quarter of 2020, the novel coronavirus known as "COVID-19" spread throughout the world creating a global pandemic.

The pandemic has triggered a significant downturn in global commerce and these challenging market conditions may continue for an extended period of time.

During our third fiscal quarter of 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic.

The pandemic had triggered a significant downturn in global commerce as early as February 2020 and the challenging market conditions are expected to continue for an extended period of time.

In early April, in an effort to contain the spread of COVID-19, maintain the well-being of our employees and stakeholders, address the reduced demand from our customers and be responsive and efficient with supply chain constraints, we closed our manufacturing facilities for two weeks and requested our office employees to work from home.

In late April, we restarted manufacturing operations.

In late April, we successfully restarted manufacturing operations and have continued to manufacture buses since that time without further material disruption.

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

The pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely adversely affect our business for the remainder of our fiscal year 2020 and perhaps beyond.

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

It will continue to adversely impact our business for the remainder of our fiscal year 2020 and perhaps beyond.

Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic and its impact on the overall U.S and global economy.

While the global market downturn, closures and limitations on movement are expected to be temporary, the duration of any demand reductions, production and supply chain disruptions, and related financial impacts, cannot be estimated at this time.

The full extent of the potential impacts of COVID-19 on the Company's financial results in FY2020 is uncertain as it must take into account the level of demand among our customers and the ability of school boards to make timely decisions, the ability of suppliers who were shut down to resume operations and finally the ability of our employees to return to work and our ability to maintain continuous production for the balance of our fiscal year.

A prolonged economic shutdown could also have a material adverse impact on sales and financial results beyond FY2020.

The full impacts from COVID-19 on the Company's financial results in fiscal year 2020 are uncertain as we continue to monitor and assess the level of future customer demand, the ability of school boards to make timely decisions, the ability of suppliers to resume and maintain operations, the ability of our employees to continue to work, and our ability to maintain continuous production for the remaining portion of our fiscal year.

A prolonged economic downturn would likely have a material adverse impact on our sales and financial results beyond fiscal 2020.

See PART II, Item 1A.

Risk Factors, of this Quarterly Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

The Company is taking actions to improve liquidity and ensure continuity of supply;

we currently have adequate liquidity and our manufacturing processes are presently operating.

Even with adequate liquidity, we are evaluating and considering actions to reduce costs and spending across our organization to be responsive to potential longer-term impacts of business interruptions from the pandemic.

This includes reducing hiring activities and limiting discretionary spending.

We may reduce anticipated spending on capital investment projects.

We will continue to actively monitor the situation and may take further actions that may alter our business operations as may be required

by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and stockholders.

The Company has taken actions to control spending and improve liquidity, including minor headcount rationalization and an increase in the revolving credit facility from $100.0 million to $141.9 million with a Second Amendment to the Credit Agreement.

Further detail and discussion of this amendment can be found in the "Liquidity and Capital Resources" section of this Item 2.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q.

Even with adequate liquidity, we are evaluating and considering further actions to reduce costs and spending across our organization to be responsive to potential

longer-term impacts of business interruption from the pandemic.

Our actions may include reducing hiring activities, limiting discretionary spending, limiting spending on capital investment projects or other steps necessary to preserve adequate liquidity.

We will continue to actively monitor the situation and may need to take further actions required by federal, state or local authorities or enact measures we determine are in the best interests of our employees, customers, suppliers and shareholders.

For further details and discussion about our liquidity, refer to the following "Liquidity and Capital Resources" section of this Item 2.

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The Company’s accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019 under the caption “ Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” which description is incorporated herein by reference.

Our senior management has reviewed these critical accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies during the six months ended April 4, 2020 , except as follows:

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 4, 2020 , except as follows:

Amortization of Deferred Pension Losses

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Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate.

Student enrollment .

Student enrollment and delivery mechanisms for learning.

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

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

Revenue mix .

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Fleets are also continuously trying to win the business of school districts that operate their own transportation services.

These activities can

have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business.

These activities can have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business.

Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes.

These actions can impact total purchases by fleets in a given year.

Our sales are subject to seasonal variation based on the school calendar.

The peak season has historically been during our third and fourth fiscal quarters.

Sales during the third and fourth fiscal quarters are typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year.

There are, however, variations in the seasonal demands from year to year depending in large part upon municipal budgets, distinct replacement cycles, and student enrollment.

The seasonality and annual variations of seasonality could impact the ability to compare results between fiscal periods.

Historically, our sales have been subject to seasonal variation based on the school calendar with the peak season during our third and fourth fiscal quarters.

Sales during the third and fourth fiscal quarters were typically greater than the first and second fiscal quarters due to the desire of municipalities to have any new buses that they order available to them at the beginning of the new school year.

With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality has become unpredictable.

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

Factors Affecting Our Expenses and Other Items

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Other immaterial amounts not associated with operating expenses may also be included here.

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

Equity in net income of non-consolidated affiliate .

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

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“Adjusted EBITDA”, “Adjusted EBITDA Margin”, and “Free Cash Flow.” Management views these metrics as a useful way to look at the performance of our operations between periods and to exclude decisions on capital investment and financing that might otherwise impact the review of profitability of the business based on present market conditions.

Adjusted EBITDA is defined as net income prior to interest income, interest expense including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents interest expense on lease liabilities, income taxes, depreciation and amortization including the component of lease expense (which is presented as a single operating expense in selling, general and administrative expenses in our GAAP financial statements) that represents amortization charges on right-of-use lease assets, and disposals, as adjusted to add back certain charges that we may record each year, such as stock-compensation expense, as well as non-recurring charges such as (i) significant product design changes;

such as stock-compensation expense, as well as non-recurring charges such as (i) significant product design changes;

(ii) transaction related costs;

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

Consolidated Results of Operations for the Three Months Ended April 4, 2020 and March 30, 2019 :

Consolidated Results of Operations for the Three Months Ended July 4, 2020 and June 29, 2019 :

Three Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Cost of goods sold

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Other income (expense), net

Loss before income taxes

Income tax benefit

Equity in net (loss) income non-consolidated affiliate

Income before income taxes

Income tax expense

Equity in net income of non-consolidated affiliate

Other financial data:

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Net Sales by Segment

April 4, 2020

March 30, 2019

June 29, 2019

Gross Profit by Segment

Net sales were $255.4 million for the second quarter of fiscal 2020 , an increase of $43.8 million , or 20.7% , compared to $211.6 million for the second quarter of fiscal 2019 .

Bus sales increased $43.6 million , or 22.4% , reflecting an increase in units booked and higher sales prices per unit.

Net sales were $189.2 million for the third quarter of fiscal 2020 , a decrease of $119.6 million , or 38.7% , compared to $308.8 million for the third quarter of fiscal 2019 .

The decrease in net sales is attributed to the COVID-19 pandemic which caused the unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of how schooling will be administered in the fall of 2020 and beyond.

Bus sales decreased $111.6 million , or 38.2% , reflecting a decrease in units booked, which was partially offset by higher sales prices per unit.

Bus volumes reflect the timing of orders.

In the second quarter of fiscal 2020 , 2,594 units were booked compared to 2,271 units booked for the same period in fiscal 2019 .

The 7.1% increase in unit price for the second quarter of fiscal 2020 compared to the same period in fiscal 2019 mainly reflects pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales increased $0.1 million , or 0.8% , for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 , as we had higher sales volumes.

In the third quarter of fiscal 2020 , 1,948 units were booked compared to 3,420 units booked for the same period in fiscal 2019 .

The decrease is mainly attributed to lower orders due to the uncertainties caused by the COVID-19 pandemic.

The 8.5% increase in unit price for the third quarter of fiscal 2020 compared to the same period in fiscal 2019 mainly reflects pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales decreased $8.0 million , or 48.3% , for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 , as we had lower sales volume, mainly from lower school bus units in operation due to early school closures caused by the COVID-19 pandemic.

Stay at home orders and school closures reduced bus repair and maintenance activities due to less bus use.

Cost of goods sold .

Total cost of goods sold was $231.2 million for the second quarter of fiscal 2020 , an increase of $45.6 million , or 24.5% , compared to $185.7 million for the second quarter of fiscal 2019 .

Total cost of goods sold was $168.1 million for the third quarter of fiscal 2020 , a decrease of $98.9 million , or 37.0% , compared to $267.0 million for the third quarter of fiscal 2019 .

As a percentage of net sales, total cost of goods sold increased from 86.5% to 88.9% .

Bus segment cost of goods sold increased $45.8 million , or 26.2% , for the second quarter of fiscal 2020 compared to the same period in fiscal 2019 .

The average cost of goods sold per unit for the second quarter of fiscal 2020 was 10.5% higher compared to the second quarter of fiscal 2019 due to increases in manufacturing costs.

The $0.3 million , or 2.6% , decrease in parts segment cost of goods sold for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019 was attributed to a change in product mix.

Bus segment cost of goods sold decreased $93.7 million , or 36.6% , for the third quarter of fiscal 2020 compared to the same period in fiscal 2019 , which aligned with the decrease in sales volume noted above.

The average cost of goods sold per unit for the third quarter of fiscal 2020 was 11.4% higher compared to the third quarter of fiscal 2019 due to increases in manufacturing costs from several COVID-19 related factors including absenteeism amongst our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $5.2 million , or 48.4% , decrease in parts segment cost of goods sold for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 aligned with the decrease in sales volume noted above.

Operating profit .

Operating profit was $4.3 million for the second quarter of fiscal 2020 , an increase of $1.3 million , compared to operating profit of $3.0 million for the second quarter of fiscal 2019 .

Profitability was positively impacted by a decrease of $3.1 million in selling, general and administrative expenses, which was partially offset by a decrease of $1.8 million in gross profit.

Operating profit was $3.3 million for the third quarter of fiscal 2020 , a decrease of $17.5 million , compared to operating profit of $20.8 million for the third quarter of fiscal 2019 .

Profitability was negatively impacted by a decrease of $20.7 million in gross profit as outlined in the revenue and cost of goods sold discussion.

This was partially offset by a decrease of $3.2 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.

Interest expense .

Interest expense was $5.7 million for the second quarter of fiscal 2020 , an increase of $1.7 million , or 41.5% , compared to $4.0 million for the second quarter of fiscal 2019 .

The increase was primarily attributed to changes in the interest rate collar fair value recorded in interest expense, which was partially offset by decreased interest expense on borrowings due to lower interest rates and a lower average borrowing level on the senior term debt.

Interest expense was $2.4 million for the third quarter of fiscal 2020 , a decrease of $1.0 million , or 28.6% , compared to $3.4 million for the third quarter of fiscal 2019 .

The decrease was primarily attributed to lower interest rates and a lower average borrowing level on the senior term debt.

Income taxes .

We recorded an income tax benefit of $0.8 million for the second quarter of fiscal 2020 , compared to an income tax benefit of $0.2 million for the same period in fiscal 2019 .

The effective tax rate for the three-month period ended April 4, 2020 was 70.0% , which differed from the statutory federal income tax rate of 21% .

The difference is mainly due to discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

The effective tax rate for the three-month period ended March 30, 2019 was 14.4% , which differed from the statutory federal tax rate of 21% .

We recorded income tax expense of $0.8 million for the third quarter of fiscal 2020 , compared to income tax expense of $3.2 million for the same period in fiscal 2019 .

The effective tax rate for the three-month period ended July 4, 2020 was 70.1% , which differed from the statutory federal income tax rate of 21% .

The difference is mainly due to discrete period tax expense from prior year tax return adjustments and normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.

The effective tax rate for the three-month period ended June 29, 2019 was 19.1% , which differed from the statutory federal tax rate of 21% .

The difference is mainly due to normal tax rate benefit items, such as federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

Adjusted EBITDA .

Adjusted EBITDA was $12.7 million , or 5.0% of net sales, for the second quarter of fiscal 2020 , an increase of $0.5 million , or 4.1% , compared to $12.2 million , or 5.8% of net sales, for the second quarter of fiscal 2019 .

The increase in Adjusted EBITDA is primarily the result of lower adjusted selling, general and administrative expenses, which was partially offset by a decrease of $1.8 million in gross profit.

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

Adjusted EBITDA was $12.5 million , or 6.6% of net sales, for the third quarter of fiscal 2020 , a decrease of $16.6 million , or 57.0% , compared to $29.0 million , or 9.4% of net sales, for the third quarter of fiscal 2019 .

The decrease in Adjusted EBITDA is primarily result of a decrease of $20.7 million in gross profit, mainly from lower sales volumes due to the COVID-19 pandemic as well as higher manufacturing costs.

The decrease was partially offset by lower adjusted selling, general and administrative expenses.

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

Three Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Interest expense, net (1)

Income tax benefit

Income tax expense

Depreciation, amortization, and disposals (2)

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Product redesign initiatives

Restructuring charges

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

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(2) Includes $0.2 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

Consolidated Results of Operations for the Six Months Ended April 4, 2020 and March 30, 2019 :

Six Months Ended

(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.

Consolidated Results of Operations for the Nine Months Ended July 4, 2020 and June 29, 2019 :

Nine Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Cost of goods sold

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Other income (expense), net

Loss before income taxes

Income tax benefit

Equity in net (loss) income non-consolidated affiliate

(Loss) income before income taxes

Income tax benefit (expense)

Equity in net income of non-consolidated affiliate

Other financial data:

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(in thousands of dollars)

Six Months Ended

Nine Months Ended

Net Sales by Segment

April 4, 2020

March 30, 2019

June 29, 2019

Gross Profit by Segment

Net sales were $408.6 million for the six months ended April 4, 2020 , an increase of $42.1 million , or 11.5% , compared to $366.6 million for the six months ended March 30, 2019 .

Bus sales increased $39.2 million , or 11.7% , reflecting an increase in units booked and higher sales prices per unit.

In the six months ended April 4, 2020 , 4,054 units were booked compared to 3,871 units booked for the same period in fiscal 2019 .

Bus volumes reflect the timing of orders and customer delivery requirements.

The average net sales price per unit for the six months ended April 4, 2020 was 6.7% higher than the price per unit for the six months ended March 30, 2019 .

Net sales were $597.8 million for the nine months ended July 4, 2020 , a decrease of $77.5 million , or 11.5% , compared to $675.3 million for the nine months ended June 29, 2019 .

The decrease in net sales is attributed to the COVID-19 pandemic during our second and third fiscal quarters which caused an unplanned and abrupt increase in remote learning arrangements as school districts remain unsure of how schooling will be administered in the fall of 2020 and beyond.

Bus sales decreased $72.4 million , or 11.6% , reflecting a decrease in units booked and higher sales prices per unit.

In the nine months ended July 4, 2020 , 6,002 units were booked compared to 7,291 units booked for the same period in fiscal 2019 .

The decrease is mainly attributed to lower orders due to the uncertainties caused by the COVID-19 pandemic.

The average net sales price per unit for the nine months ended July 4, 2020 was 7.4% higher than the price per unit for the nine months ended June 29, 2019 .

The increase in unit price mainly reflects pricing actions taken in fiscal 2019 to partially offset commodity costs, as well as product and customer mix changes.

Parts sales increased $2.9 million , or 8.9% , for the six months ended April 4, 2020 compared to the six months ended March 30, 2019 , primarily due to higher sales volumes.

Parts sales decreased $5.2 million , or 10.5% , for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 , as we had lower sales volume, mainly from lower school bus units in operation due to early school closures caused by the COVID-19 pandemic.

Stay at home orders and school closures reduced bus repair and maintenance activities due to less bus use.

Cost of goods sold .

Total cost of goods sold was $363.2 million for the six months ended April 4, 2020 , an increase of $41.7 million , or 13.0% , compared to $321.5 million for the six months ended March 30, 2019 .

Total cost of goods sold was $531.3 million for the nine months ended July 4, 2020 , a decrease of $57.2 million , or 9.7% , compared to $588.5 million for the nine months ended June 29, 2019 .

As a percentage of net sales, total cost of goods sold increased from 87.1% to 88.9% .

Bus segment cost of goods sold increased $40.0 million , or 13.3% , for the six months ended April 4, 2020 compared to the six months ended March 30, 2019 .

The average cost of goods sold per unit for the six months ended April 4, 2020 was 8.2% higher compared to the six months ended March 30, 2019 , mainly due to increases in manufacturing costs.

The $1.6 million , or 7.7% , increase in parts segment cost of goods sold for the six months ended April 4, 2020 compared to the six months ended March 30, 2019 was primarily attributed to increased parts sales volume as well as a change in product mix.

Bus segment cost of goods sold decreased $53.6 million , or 9.6% , for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 .

The average cost of goods sold per unit for the nine months ended July 4, 2020 was 9.8% higher compared to the nine months ended June 29, 2019 due to increases in manufacturing costs in our third fiscal quarter from several COVID-19 related factors including absenteeism amongst our hourly workforce and supply disruptions, each of which created manufacturing inefficiencies and higher costs.

The $3.6 million , or 11.4% , decrease in parts segment cost of goods sold for the nine months ended July 4, 2020 compared to the nine months ended June 29, 2019 aligns with the decrease in sales volume noted above.

Operating profit .

Operating profit was $5.1 million for the six months ended April 4, 2020 , an increase of $0.3 million compared to an operating profit of $4.9 million for the six months ended March 30, 2019 .

Profitability was positively impacted by an increase of $0.4 million in gross profit, which was partially offset by an increase of $0.2 million in selling, general and administrative expenses.

Operating profit was $8.4 million for the nine months ended July 4, 2020 , a decrease of $17.2 million compared to an operating profit of $25.6 million for the nine months ended June 29, 2019 .

Profitability was negatively impacted by a decrease of $20.3 million in gross profit, which was partially offset by a decrease of $3.1 million in selling, general and administrative expenses as we have taken actions to control spending during the pandemic.

Interest expense .

Interest expense was $7.6 million for the six months ended April 4, 2020 , an increase of $0.7 million , or 9.9% , compared to $6.9 million for the six months ended March 30, 2019 .

Interest expense was $10.0 million for the nine months ended July 4, 2020 , a decrease of $0.3 million , or 2.7% , compared to $10.2 million for the nine months ended June 29, 2019 .

Lower interest expense from lower borrowing rates in the nine months ended July 4, 2020 compared to the prior period were offset by the impact of an increase of $1.9 million in mark to market charges due to changes in the fair value of our interest rate hedge.

Income taxes .

Income tax benefit was $1.1 million for the six months ended April 4, 2020 , compared to income tax benefit of $0.4 million for the same period in fiscal 2019 .

The effective tax rate for the six -month period ended April 4, 2020 was 55.4% , which differed from the 2019 statutory federal income tax rate of 21% .

The effective tax rate for the six -month period ended March 30, 2019 was 15.8% and significantly differed from the transitional 2018 statutory federal income tax rate of 21% .

Income tax benefit was $0.4 million for the nine months ended July 4, 2020 , compared to income tax expense of $2.8 million for the same period in fiscal 2019 .

The effective tax rate for the nine -month period ended July 4, 2020 was 38.8% , which differed from the 2019 statutory federal income tax rate of 21% .

The difference is mainly due to a net discrete period tax benefit from share-based compensation expenses, but also due to normal tax rate items, such as the benefit from federal and state tax credits (net of valuation allowance), which were partially offset by net non-deductible compensation expenses and other tax adjustments.

The rate is also disproportionately impacted by the discrete items due to near break-even pretax book income.

The effective tax rate for the nine -month period ended June 29, 2019 was 19.7% and differed from the transitional 2018 statutory federal income tax rate of 21% .

The difference is mainly due to normal tax rate benefit items, primarily federal and state tax credits (net of valuation allowance), which were partially offset by non-deductible share-based compensation expenses and other tax adjustments.

Adjusted EBITDA .

Adjusted EBITDA was $20.7 million or 5.1% of net sales for the six months ended April 4, 2020 , an increase of $1.3 million , or 6.8% , compared to $19.4 million or 5.3% of net sales for the six months ended March 30, 2019 .

The increase in Adjusted EBITDA is primarily the result of lower adjusted selling, general and administrative expenses and a $0.4 million improvement in gross profit.

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

Six Months Ended

Adjusted EBITDA was $32.8 million or 5.5% of net sales for the nine months ended July 4, 2020 , a decrease of $15.7 million , or 32.4% , compared to $48.5 million or 7.2% of net sales for the nine months ended June 29, 2019 .

The decrease in Adjusted EBITDA is primarily the result of a decrease of $20.3 million in gross profit, mainly from lower sales volumes due the COVID-19 pandemic as well as higher manufacturing costs.

The decrease was partially offset by lower adjusted selling, general and administrative expenses.

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

Nine Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Interest expense, net (1)

Income tax benefit

Income tax (benefit) expense

Depreciation, amortization, and disposals (2)

3 unchanged sentences

Product redesign initiatives

Restructuring charges

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

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(1) Includes $0.3 million for both fiscal periods representing interest expense on lease liabilities, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

(2) Includes $0.4 million and $0.3 million for the six months ended April 4, 2020 and March 30, 2019 , 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.

(2) Includes $0.5 million for both fiscal periods, representing amortization charges on right-of-use lease assets, which are a component of lease expense and presented as a single operating expense in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

(3) Primarily costs incurred for third party cleaning services and personal protective equipment for our employees.

Liquidity and Capital Resources

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

At April 4, 2020 , the Company had $34.1 million of available cash (net of outstanding checks) and $63.1 million of additional borrowings available under the revolving line of credit portion of its secured credit facility.

At July 4, 2020 , the Company had $12.5 million of available cash (net of outstanding checks) and $90.0 million of additional borrowings available under the revolving line of credit portion of its secured credit facility.

The Company’s revolving line of credit is available for working capital requirements, capital expenditures and other general corporate purposes.

As reported on the May 8, 2020 8-K Current Report, on May 7, 2020, the Company entered into a Second Amendment which amended the Credit Agreement, dated as of December 12, 2016 (the “Credit Agreement”, as amended by that certain First Amendment to Credit Agreement, dated as of September 13, 2018 (the “First Amendment”), and as further amended by the Second Amendment, the “Amended Credit Agreement”).

The Second Amendment, among other things, provides for an aggregate lender commitment of $41.9 million of additional revolving commitments bringing the total revolving commitments to $141.9 million.

The additional revolving commitments are intended to be used for working capital, to fund general corporate purposes and to pay transaction costs, fees and expenses related thereto and in connection with the Second Amendment.

On May 7, 2020, the Company entered into a Second Amendment which amended the Credit Agreement, dated as of December 12, 2016 (the “Credit Agreement”, as amended by that certain First Amendment to Credit Agreement, dated as of September 13, 2018 (the “First Amendment”), and as further amended by the Second Amendment, the “Amended Credit Agreement”).

The Second Amendment provided $41.9 million in additional revolving commitments bringing the total revolving commitments to $141.9 million.

The revolving commitments under the Amended Credit Agreement will mature on September 13, 2023, which is the fifth anniversary of the effective date of the First Amendment.

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Detailed descriptions of the Company’s original Credit Agreement dated December 12, 2016 and its Amended Credit Agreement dated September 13, 2018 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 28, 2019 , filed with the Securities and Exchange Commission on December 12, 2019 .

At April 4, 2020 , the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

At July 4, 2020 , the Borrower (as defined, Blue Bird Body Company, a subsidiary of the Company) and the guarantors under the Amended Credit Agreement were in compliance with all covenants.

Short-Term and Long-Term Liquidity Requirements

Our ability to make principal and interest payments on borrowings under the Credit Facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.

During our second fiscal quarter of 2020, the novel coronavirus known as "COVID-19" spread throughout the world creating a global pandemic.

Management is actively monitoring the impact of the pandemic on our financial condition, results of operations, liquidity, suppliers, industry, and workforce.

Given the continuous evolution of the global response, Management is presently unable to estimate the effects of the global pandemic on our results of operations, financial condition, or liquidity for fiscal year 2020.

If the pandemic continues for an extended period of time, it is likely to have an adverse effect on our future results of operations, financial position, and liquidity in fiscal 2020 and beyond.

Our ability to make principal and interest payments on borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions.

During our third quarter of fiscal 2020, the novel coronavirus known as "COVID-19" continued to spread throughout the world, perpetuating a global pandemic.

The pandemic materially impacted our third quarter of fiscal 2020 results causing lower customer orders for both buses and parts, supply disruptions, higher rates of absenteeism among our hourly production workforce, and a temporary shutdown of manufacturing.

The continuing development and fluidity of the pandemic precludes any prediction as to the ultimate severity of the adverse impacts on our business, financial condition, results of operations, and liquidity.

A prolonged economic downturn resulting from the continuing pandemic would likely have a material adverse impact on our financial results.

See PART II, Item 1A.

Risk Factors, of this Quarterly Report for a discussion of the material risks we believe we face particularly related to the COVID-19 pandemic.

The pandemic could cause a severe contraction in our profits and/or liquidity which could lead to issues complying with our Credit Facility covenants.

Our primary financial covenant is our Total Net Leverage Ratio.

Our Total Net Leverage Ratio is defined as the ratio of (a) consolidated net debt to (b) consolidated EBITDA, which includes certain add-backs that are not reflected in the definition of Adjusted EBITDA appearing in the Company’s periodic filings on Form 10-K or Form 10-Q, at the end of each fiscal quarter for the consecutive four fiscal quarter period most recently then ending.

We may need to seek amendment for covenant relief or even refinance the debt to a "covenant lite" or "no covenant" structure.

We cannot assure our investors that we would be successful in amending or refinancing the existing debt.

An amendment or refinancing of our existing debt could lead to higher interest rates and possible up front expenses not included in our historical financial statements.

On March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law.

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A 50% minimum payment of the deferred amount is due on December 31, 2021 with the remainder due by December 31, 2022.

We estimate up to $6.0 million of payments may be delayed.

We estimate between $4.0 and $6.0 million in payments could be delayed.

We also have and expect to defer contributions to our defined benefit pension plan of approximately $3.2 million for fiscal 2020.

The delayed contribution payments are due on January 1, 2021.

Our business is highly seasonal.

Most school districts seek to buy 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.

As a result, our two busiest quarters are our third and fourth fiscal quarters, the latter ending on the Saturday closest to September 30.

Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these seasonal patterns.

For example, our revenues are typically highest in our third and fourth fiscal quarters.

There are, however, variations in the seasonal demands from year to year depending, in part, on large direct sales to major fleet customers for which short-term trade credit is generally offered.

Working capital, on the other hand, is typically a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter.

We typically conduct planned shutdowns during our first fiscal quarter.

Historically, our business has been highly seasonal with school districts buying their new schools 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 becoming our two busiest quarters, the latter ending on the Saturday closest to September 30.

Our quarterly results of operations, cash flows, and liquidity have been and are likely to be impacted by the seasonal patterns.

Working capital has historically been a significant use of cash during the first fiscal quarter and a significant source of cash generation in the fourth fiscal quarter with planned shutdowns during our first fiscal quarter.

With the COVID-19 pandemic impact on school systems and the uncertainty surrounding in-person schooling schedules and duration, seasonality and working capital trends have become unpredictable.

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

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

Six Months Ended

Nine Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Cash and cash equivalents at beginning of period

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Total cash used in operating activities

Cash flows used in operating activities totaled $48.2 million for the six months ended April 4, 2020 , as compared to $26.8 million of cash flows used in operating activities for the six months ended March 30, 2019 .

The $21.4 million increase in cash used was primarily attributed to a $19.7 million change in accrued expenses compared to the prior year and a $0.9 million decrease in net income.

Cash flows used in operating activities totaled $78.3 million for the nine months ended July 4, 2020 , as compared to $19.1 million of cash flows used in operating activities for the nine months ended June 29, 2019 .

The $59.2 million increase in cash used was primarily attributed to a $12.5 million reduction in net income and a negative $50.3 million difference (use of cash) in the impacts of changes in accrued expenses and working capital period over period.

The changes were partially offset by increased non-cash components of net income in the nine months ended July 4, 2020 compared to the prior period.

Total cash used in investing activities

Cash flows used in investing activities totaled $14.1 million for the six months ended April 4, 2020 , as compared to $22.7 million of cash flows used in investing activities for the six months ended March 30, 2019 .

The $8.6 million decrease was due to a reduction of spending on manufacturing assets as the new paint facility was completed in fiscal 2019.

Cash flows used in investing activities totaled $16.6 million for the nine months ended July 4, 2020 , as compared to $30.2 million of cash flows used in investing activities for the nine months ended June 29, 2019 .

The $13.6 million decrease was due to a reduction of spending on manufacturing assets as the new paint facility was completed in fiscal 2019, and the delay of certain projects due to the COVID-19 pandemic.

Total cash provided by financing activities

Cash flows provided by financing activities totaled $25.4 million for the six months ended April 4, 2020 , as compared to $14.8 million of cash flows provided by financing activities for the six months ended March 30, 2019 .

The $10.6 million increase was primarily attributed to a $10.0 million increase in borrowings under the revolving credit facility and a $3.5 million increase in cash proceeds from warrant exercises, which were partially offset by an increase of $2.7 million in cash paid for employee taxes on vested restricted shares and stock option exercises.

Cash flows provided by financing activities totaled $36.5 million for the nine months ended July 4, 2020 , as compared to $18.1 million of cash flows provided by financing activities for the nine months ended June 29, 2019 .

The $18.4 million increase was primarily attributed to a $20.0 million increase in borrowings under the revolving credit facility and a $2.7 million increase in cash proceeds from warrant exercises.

The increases were partially offset by $0.9 million in fees paid for the Second Amendment to the Credit Agreement, $0.9 million in finance lease payments, as well as an increase of $2.9 million in cash paid for employee taxes on vested restricted shares and stock option exercises.

Free cash flow

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The following table sets forth the calculation of free cash flow for the periods presented:

Six Months Ended

Nine Months Ended

(in thousands of dollars)

April 4, 2020

March 30, 2019

June 29, 2019

Net cash used in operating activities

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Free cash flow

Free cash flow for the six months ended April 4, 2020 was $13.0 million lower than the six months ended March 30, 2019 , due to, as discussed above, a decrease of $8.5 million in cash paid for fixed assets and a $21.4 million increase in cash used in operating activities .

Free cash flow for the nine months ended July 4, 2020 was $45.8 million lower than the nine months ended June 29, 2019 , primarily due to a $59.2 million increase in cash used in operating activities , partially offset by a decrease of $13.4 million in cash paid for fixed assets.

Off-Balance Sheet Arrangements

We had outstanding letters of credit totaling $6.9 million at April 4, 2020 , the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had a $3.0 million guarantee outstanding at April 4, 2020 which relates to a guarantee of indebtedness for a term loan with a remaining maturity up to 2.8 years .

We had outstanding letters of credit totaling $6.9 million at July 4, 2020 , the majority of which secure our self-insured workers compensation program, the collateral for which is regulated by the State of Georgia.

We had a $3.0 million guarantee outstanding at July 4, 2020 which relates to a guarantee of indebtedness for a term loan with a remaining maturity up to 2.5 years .

The $3.0 million represents the estimated maximum amount we would be required to pay upon default of all guaranteed indebtedness, and we believe the likelihood of required performance to be remote.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis