Blue Bird Corp 10-Q

Item 1. Financial Statements (Unaudited). BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars, except for share data) July 4, 2020 September 28, 2019 Assets Current assets Cash and cash equivalents $ 12,538 $ 70,959 Accounts receivable, net 13,694 10,537 Inventories 155,717 78,830 Other current assets 9,459 11,765 Total current assets $ 191,408 $ 172,091 Property, plant and equipment, net 104,667 100,058 Goodwill 18,825 18,825 Intangible assets, net 52,404 54,720 Equity investment in affiliate 11,946 11,106 Deferred tax assets 3,882 3,600 Finance lease right-of-use assets 5,790 4,638 Other assets 1,133 375 Total assets $ 390,055 $ 365,413 Liabilities and Stockholders' Deficit Current liabilities Accounts payable $ 95,538 $ 102,266 Warranty 8,123 9,161 Accrued expenses 15,638 28,697 Deferred warranty income 8,448 8,632 Finance lease obligations 1,032 716 Other current liabilities 13,425 10,310 Current portion of long-term debt 9,900 9,900 Total current liabilities $ 152,104 $ 169,682 Long-term liabilities Revolving credit facility $ 45,000 $ — Long-term debt 166,467 173,226 Warranty 12,705 13,182 Deferred warranty income 13,597 15,413 Deferred tax liabilities 792 168 Finance lease obligations 4,870 3,921 Other liabilities 13,251 12,108 Pension 43,197 45,524 Total long-term liabilities $ 299,879 $ 263,542 Guarantees, commitments and contingencies (Note 6) Stockholders' deficit Preferred stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares issued at July 4, 2020 and September 28, 2019 $ — $ — Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,048,404 and 26,476,336 shares outstanding at July 4, 2020 and September 28, 2019, respectively 3 3 Additional paid-in capital 88,930 84,271 Accumulated deficit ( 45,405 ) ( 45,649 ) Accumulated other comprehensive loss ( 55,174 ) ( 56,154 ) Treasury stock, at cost, 1,782,568 shares at July 4, 2020 and September 28, 2019 ( 50,282 ) ( 50,282 ) Total stockholders' deficit $ ( 61,928 ) $ ( 67,811 ) Total liabilities and stockholders' deficit $ 390,055 $ 365,413 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended (in thousands of dollars except for share data) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Net sales $ 189,181 $ 308,774 $ 597,810 $ 675,342 Cost of goods sold 168,099 266,992 531,259 588,496 Gross profit $ 21,082 $ 41,782 $ 66,551 $ 86,846 Operating expenses Selling, general and administrative expenses 17,793 20,996 58,146 61,197 Operating profit $ 3,289 $ 20,786 $ 8,405 $ 25,649 Interest expense ( 2,406 ) ( 3,369 ) ( 9,961 ) ( 10,241 ) Interest income 27 — 27 9 Other income (expense), net 181 ( 410 ) 555 ( 1,034 ) Income (loss) before income taxes $ 1,091 $ 17,007 $ ( 974 ) $ 14,383 Income tax (expense) benefit ( 765 ) ( 3,248 ) 378 ( 2,833 ) Equity in net income of non-consolidated affiliate 960 842 840 1,158 Net income $ 1,286 $ 14,601 $ 244 $ 12,708 Earnings per share: Basic weighted average shares outstanding 27,027,731 26,451,107 26,784,404 26,449,751 Diluted weighted average shares outstanding 27,080,015 26,720,110 26,980,480 26,788,306 Basic earnings per share $ 0.05 $ 0.55 $ 0.01 $ 0.48 Diluted earnings per share $ 0.05 $ 0.55 $ 0.01 $ 0.47 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Net income $ 1,286 $ 14,601 $ 244 $ 12,708 Other comprehensive income, net of tax Net change in defined benefit pension plan 327 524 980 1,572 Total other comprehensive income $ 327 $ 524 $ 980 $ 1,572 Comprehensive income $ 1,613 $ 15,125 $ 1,224 $ 14,280 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 Cash flows from operating activities Net income $ 244 $ 12,708 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 10,728 7,406 Non-cash interest expense 3,560 2,172 Share-based compensation 4,105 3,146 Equity in net income of non-consolidated affiliate ( 840 ) ( 1,158 ) (Gain) loss on disposal of fixed assets ( 100 ) 50 Deferred taxes 32 500 Amortization of deferred actuarial pension losses 1,289 2,068 Foreign currency hedges — 109 Changes in assets and liabilities: Accounts receivable ( 3,157 ) ( 16,162 ) Inventories ( 76,887 ) ( 83,355 ) Other assets 2,480 ( 5,014 ) Accounts payable ( 3,115 ) 42,429 Accrued expenses, pension and other liabilities ( 16,644 ) 15,988 Total adjustments $ ( 78,549 ) $ ( 31,821 ) Total cash used in operating activities $ ( 78,305 ) $ ( 19,113 ) Cash flows from investing activities Cash paid for fixed assets $ ( 16,724 ) $ ( 30,154 ) Proceeds from sale of fixed assets 150 — Total cash used in investing activities $ ( 16,574 ) $ ( 30,154 ) Cash flows from financing activities Borrowings under the revolving credit facility $ 45,000 $ 25,000 Borrowings under the senior term loan — 50,000 Repayments under the senior term loan ( 7,425 ) ( 7,425 ) Principal payments on finance leases ( 854 ) — Cash paid for debt issuance costs ( 935 ) — Cash paid for employee taxes on vested restricted shares and stock option exercises ( 3,568 ) ( 622 ) Proceeds from exercises of warrants 4,240 1,499 Tender offer repurchase of common stock and preferred stock — ( 50,370 ) Total cash provided by financing activities $ 36,458 $ 18,082 Change in cash and cash equivalents ( 58,421 ) ( 31,185 ) Cash and cash equivalents, beginning of period 70,959 60,260 Cash and cash equivalents, end of period $ 12,538 $ 29,075 Supplemental disclosures of cash flow information Cash paid during the period for: Interest paid, net of interest received $ 6,616 $ 7,916 Income tax paid, net of tax refunds ( 1,668 ) 2,431 Non-cash investing and financing activities: Changes in accounts payable for capital additions to property, plant and equipment $ ( 3,613 ) $ ( 1,307 ) Cashless exercise of stock options 5,246 295 Right-of-use assets obtained in exchange for finance lease obligations 1,942 — Right-of-use assets obtained in exchange for operating lease obligations — 8,040 Conversion of preferred stock into common stock — 9,264 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 BLUE BIRD CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Unaudited) Three Months Ended (in thousands of dollars, except for share data) Common Stock Convertible Preferred Stock Treasury Stock Shares Par Value Additional Paid-In-Capital Shares Amount Accumulated Other Comprehensive Loss Accumulated Deficit Shares Amount Total Stockholders' Deficit Balance, April 4, 2020 27,027,272 $ 3 $ 87,408 — $ — $ ( 55,501 ) $ ( 46,691 ) 1,782,568 $ ( 50,282 ) $ ( 65,063 ) Restricted stock activity — — ( 255 ) — — — — — — ( 255 ) Stock option activity 21,132 — — — — — — — — — Share-based compensation expense — — 1,777 — — — — — — 1,777 Net income — — — — — — 1,286 — — 1,286 Other comprehensive income, net of tax — — — — — 327 — — — 327 Balance, July 4, 2020 27,048,404 $ 3 $ 88,930 — $ — $ ( 55,174 ) $ ( 45,405 ) 1,782,568 $ ( 50,282 ) $ ( 61,928 ) Balance, March 30, 2019 26,440,663 $ 3 $ 81,889 — $ — $ ( 37,379 ) $ ( 71,842 ) 1,782,568 $ ( 50,261 ) $ ( 77,590 ) Warrant exercises 17,750 — 204 — — — — — — 204 Stock option activity 2,043 — ( 20 ) — — — — — — ( 20 ) Share-based compensation expense — — 1,095 — — — — — — 1,095 Tender offer share repurchases — — 21 — — — — — ( 21 ) — Net income — — — — — — 14,601 — — 14,601 Other comprehensive income, net of tax — — — — — 524 — — — 524 Balance, June 29, 2019 26,460,456 $ 3 $ 83,189 — $ — $ ( 36,855 ) $ ( 57,241 ) 1,782,568 $ ( 50,282 ) $ ( 61,186 ) 6 Nine Months Ended (in thousands of dollars, except for share data) Common Stock Convertible Preferred Stock Treasury Stock Shares Par Value Additional Paid-In-Capital Shares Amount Accumulated Other Comprehensive Loss Accumulated Deficit Shares Amount Total Stockholders' Deficit Balance, September 28, 2019 26,476,336 $ 3 $ 84,271 — $ — $ ( 56,154 ) $ ( 45,649 ) 1,782,568 $ ( 50,282 ) $ ( 67,811 ) Warrant exercises 368,712 — 4,240 — — — — — — 4,240 Restricted stock activity 94,724 — ( 1,623 ) — — — — — — ( 1,623 ) Stock option activity 108,632 — ( 1,945 ) — — — — — — ( 1,945 ) Share-based compensation expense — — 3,987 — — — — — — 3,987 Net income — — — — — — 244 — — 244 Other comprehensive income, net of tax — — — — — 980 — — — 980 Balance, July 4, 2020 27,048,404 $ 3 $ 88,930 — $ — $ ( 55,174 ) $ ( 45,405 ) 1,782,568 $ ( 50,282 ) $ ( 61,928 ) Balance, September 29, 2018 27,259,262 $ 3 $ 70,023 93,000 $ 9,300 $ ( 38,427 ) $ ( 69,235 ) — $ — $ ( 28,336 ) Adoption of new revenue recognition standard (ASC 606) adjustment — — — — — — ( 714 ) — — ( 714 ) Warrant exercises 130,385 — 1,499 — — — — — — 1,499 Restricted stock activity 51,195 — ( 596 ) — — — — — — ( 596 ) Stock option activity 2,567 — ( 26 ) — — — — — — ( 26 ) Share-based compensation expense — — 3,077 — — — — — — 3,077 Tender offer share repurchases ( 1,782,568 ) — ( 52 ) ( 364 ) ( 36 ) — — 1,782,568 ( 50,282 ) ( 50,370 ) Preferred stock conversion 799,615 — 9,264 ( 92,636 ) ( 9,264 ) — — — — — Net income — — — — — — 12,708 — — 12,708 Other comprehensive income, net of tax — — — — — 1,572 — — — 1,572 Balance, June 29, 2019 26,460,456 $ 3 $ 83,189 — $ — $ ( 36,855 ) $ ( 57,241 ) 1,782,568 $ ( 50,282 ) $ ( 61,186 ) The accompanying notes are an integral part of these consolidated financial statements. 7 BLUE BIRD CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Business and Basis of Presentation Nature of Business Blue Bird Body Company, a wholly-owned subsidiary of Blue Bird Corporation, was incorporated in 1958 and has manufactured, assembled and sold school buses to a variety of municipal, federal and commercial customers since 1927. The majority of Blue Bird’s sales are made to an independent distributor network, which in turn sells buses to ultimate end users. We are headquartered in Macon, Georgia. References in these notes to financial statements to “Blue Bird”, the “Company,” “we,” “our,” or “us” refer to Blue Bird Corporation and its wholly-owned subsidiaries, unless the context specifically indicates otherwise. COVID-19 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 bus 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. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and accounts have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Article 8 of Regulation S-X. The Company’s fiscal year ends on the Saturday closest to September 30 with its quarters consisting of thirteen weeks in most years. In fiscal year 2020 , there is a total of 53 weeks. 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. In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Such adjustments consist of only those of a normal recurring nature. Operating results for any interim period are not necessarily indicative of the results that may be expected for the entire year. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Condensed Consolidated Balance Sheet data as of September 28, 2019 was derived from the Company’s audited financial statements but does not include all disclosures required by generally accepted accounting principles. For additional information, including the Company’s significant accounting policies, refer to the consolidated financial statements and related footnotes for the fiscal year ended September 28, 2019 as set forth in the Company's 2019 Form 10-K filed on December 12, 2019 . Use of Estimates and Assumptions The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions. At the date of the financial statements, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, and during the reporting period, these estimates and assumptions affect the reported amounts of revenues and expenses. For example, significant management judgments are required in determining excess, obsolete, or unsalable inventory, allowance for doubtful accounts, potential impairment of long-lived assets, goodwill and intangibles, the accounting for self-insurance reserves, warranty reserves, pension obligations, income taxes, environmental liabilities and contingencies. Future events, including the extent and duration of COVID-19 related economic impacts, and their effects cannot be predicted with certainty, and, accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may employ outside experts to assist in the Company’s evaluations. Actual results could differ from the estimates that the Company has used. 2. Summary of Significant Accounting Policies and Recently Issued Accounting Standards The Company’s significant accounting policies are described in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019 . Our senior management has reviewed these significant accounting policies and related disclosures and determined that there were no significant changes in our critical accounting policies in the nine months ended July 4, 2020 , except as follows (and as discussed in the Recently Adopted Accounting Standards section of this Note 2 ): Amortization of Deferred Pension Losses Historically, the Company has amortized deferred losses from our frozen defined benefit pension plan accounted for under ASC 715, Compensation - Retirement Benefits, over the expected remaining employment period of the participants who remained employed with the Company. ASC 715 states that if all or almost all of a plan's participants are inactive, the average remaining life expectancy of the inactive participants shall be used to amortize the unrecognized net gain or loss instead of the average remaining service period of active plan participants. In the first quarter of 2020, the ratio of active (employed) to inactive participants in our plan declined to less than 10 % , a figure we believe meets the definition of almost all participants as inactive. Accordingly, we have changed the amortization period from approximately seven years in 2019 to approximately 23 years in 2020. Future amortization periods (remaining life expectancy) will be determined based on the participant and actuarial data at that time . Recently Adopted Accounting Standards ASU 2018-02 – In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) . This ASU provides guidance on a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the effect of the tax rate change resulting from the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act"). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We adopted this ASU, in the first quarter of fiscal 2020, and did not elect to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. We use a specific identification approach to release the income tax effects in AOCI. ASU 2019-12 – In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes , which simplifies the process for calculating interim (intraperiod) income taxes and the accounting for deferred tax liabilities for foreign equity-method investments, among other simplifications. We have early adopted this standard effective the first quarter of fiscal 2020. The impacts of adopting this standard were not material to us. Recently Issued Accounting Standards ASU 2020-04 – On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, providing temporary guidance to ease the potential burden in accounting for reference rate reform primarily resulting from the discontinuation of LIBOR, which is currently expected to occur on December 31, 2021. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. An entity may elect to apply the amendments prospectively from March 12, 2020 through December 31, 2022. Our debt and derivative agreements currently reference LIBOR. Contract language is expected to be incorporated into these agreements to address the transition to an alternative reference rate. We are currently evaluating the impact this ASU may have on our consolidated financial statements. 3. Supplemental Financial Information Inventories The following table presents the components of inventories at the dates indicated: (in thousands of dollars) July 4, 2020 September 28, 2019 Raw materials $ 108,041 $ 60,033 Work in process 29,790 16,663 Finished goods 17,886 2,134 Total inventories $ 155,717 $ 78,830 8 Product Warranties The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Balance at beginning of period $ 21,398 $ 21,520 $ 22,343 $ 22,646 Add current period accruals 1,947 3,358 6,076 7,196 Current period reductions of accrual ( 2,517 ) ( 2,358 ) ( 7,591 ) ( 7,322 ) Balance at end of period $ 20,828 $ 22,520 $ 20,828 $ 22,520 Extended Warranties The following table reflects activity in deferred warranty income (current and long-term portions combined), for the sale of extended warranties of two to five years , for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Balance at beginning of period $ 22,948 $ 22,901 $ 24,045 $ 23,191 Add current period deferred income 1,769 2,880 5,058 6,686 Current period recognition of income ( 2,672 ) ( 2,196 ) ( 7,058 ) ( 6,292 ) Balance at end of period $ 22,045 $ 23,585 $ 22,045 $ 23,585 The outstanding balance of deferred warranty income in the table above is considered a "contract liability", and represents a performance obligation of the Company that we satisfy over the term of the arrangement but for which we have been paid in full at the time the warranty was sold. We expect to recognize $ 2.3 million of the outstanding contract liability during the remainder of fiscal 2020 , $ 7.8 million in fiscal 2021 , and the remaining balance thereafter. Self-Insurance The following table reflects our total accrued self-insurance liability, comprised of workers' compensation and health insurance related claims, at the dates indicated: (in thousands of dollars) July 4, 2020 September 28, 2019 Current portion $ 2,732 $ 2,933 Long-term portion 1,794 1,775 Total accrued self-insurance $ 4,526 $ 4,708 The current and long-term portions of the accrued self-insurance liability are reflected in accrued expenses and other liabilities, respectively, on the Condensed Consolidated Balance Sheets. Shipping and Handling Revenues Shipping and handling revenues were $ 3.9 million and $ 6.0 million for the three months ended July 4, 2020 and June 29, 2019 , respectively, and $ 11.5 million and $ 12.5 million for the nine months ended July 4, 2020 and June 29, 2019 , respectively. The related cost of goods sold was $ 3.4 million and $ 5.3 million for the three months ended July 4, 2020 and June 29, 2019 , respectively, and $ 10.0 million and $ 11.0 million for the nine months ended July 4, 2020 and June 29, 2019 , respectively. 9 Pension Expense Components of net periodic pension benefit cost were as follows for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Interest cost $ 1,237 $ 1,512 $ 3,711 $ 4,535 Expected return on plan assets ( 1,846 ) ( 1,905 ) ( 5,538 ) ( 5,714 ) Amortization of prior loss 430 689 1,289 2,068 Net periodic benefit cost $ ( 179 ) $ 296 $ ( 538 ) $ 889 Amortization of prior loss, recognized in other comprehensive income 430 689 1,289 2,068 Total recognized in net periodic pension benefit cost and other comprehensive income $ ( 609 ) $ ( 393 ) $ ( 1,827 ) $ ( 1,179 ) Derivative Instruments We are charged variable rates of interest on our indebtedness outstanding under the Amended Credit Agreement (defined below) which exposes us to fluctuations in interest rates. On October 24, 2018, the Company entered into a four -year interest rate collar with a $ 150.0 million notional value with an effective date of November 30, 2018. The collar was entered into in order to partially mitigate our exposure to interest rate fluctuations on our variable rate debt. The collar establishes a range where we will pay the counterparty if the three-month LIBOR rate falls below the established floor rate of 1.5 % , and the counterparty will pay us if the three-month LIBOR rate exceeds the ceiling rate of 3.3 % . The collar settles quarterly through the termination date of September 30, 2022. No payments or receipts are exchanged on the interest rate collar contracts unless interest rates rise above or fall below the contracted ceiling or floor rates. During the three-months ended July 4, 2020 , the three-month LIBOR rate fell below the established floor, which required an immaterial payment to the counterparty. Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At July 4, 2020 , the fair value of the interest rate collar contract was $( 4.2 ) million and is included in "other current liabilities" on the Condensed Consolidated Balance Sheets. The fair value of the interest rate collar is a Level 2 fair value measurement, based on quoted prices of similar items in active markets. Equity Investment in Affiliate The Company holds a 50 % equity interest in Micro Bird Holdings, Inc. (“Micro Bird”), and accounts for Micro Bird under the equity method of accounting. The carrying amount of the equity method investment is adjusted for the Company’s proportionate share of net earnings and losses and any dividends received. At July 4, 2020 and September 28, 2019 , the carrying value of the Company's investment was $ 11.9 million and $ 11.1 million , respectively. In recognizing the Company’s 50 % portion of Micro Bird net income, the Company recorded $ 0.8 million and $ 1.2 million in Equity in net income of non-consolidated affiliate for the nine months ended July 4, 2020 and June 29, 2019 , respectively. Summarized unaudited financial information for these periods for Micro Bird is as follows: Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 Revenues $ 58,883 $ 86,364 Gross profit 7,318 9,961 Operating income 1,557 3,717 Net income 1,103 2,409 4. Debt 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 10 for an aggregate lender commitment of $ 41.9 million of additional revolving commitments bringing the total revolving commitments to $ 141.9 million . The revolving commitments under the Amended Credit Agreement mature on September 13, 2023, which is the fifth anniversary of the effective date of the First Amendment. The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0 % to 0.75 % . We incurred $ 0.9 million in fees related to the amendment. The fees were capitalized to other assets on the Consolidated Balance Sheets and are amortized on a straight-line basis to interest expense until maturity of the agreement. Term debt consisted of the following at the dates indicated: (in thousands of dollars) July 4, 2020 September 28, 2019 2023 term loan, net of deferred financing costs of $2,458 and $3,124, respectively $ 176,367 $ 183,126 Less: current portion of long-term debt 9,900 9,900 Long-term debt, net of current portion $ 166,467 $ 173,226 Term loans are recognized on the Condensed Consolidated Balance Sheets at the unpaid principal balance, and are not subject to fair value measurement; however, given the variable rates on the loans, the Company estimates that the unpaid principal balance approximates fair value. If measured at fair value in the financial statements, the term loans would be classified as Level 2 in the fair value hierarchy. At July 4, 2020 and September 28, 2019 , $ 178.8 million and $ 186.3 million , respectively, were outstanding on the term loans. At July 4, 2020 and September 28, 2019 , the stated interest rates on the term loans were 2.8 % and 4.4 % , respectively. At July 4, 2020 and September 28, 2019 , the weighted-average annual effective interest rates for the term loans were 4.1 % and 5.0 % , respectively, which includes amortization of the deferred financing costs. At July 4, 2020 , $ 45.0 million in borrowings were outstanding on the Revolving Credit Facility and $ 6.9 million of Letters of Credit were outstanding; therefore, the Company would have been able to borrow $ 90.0 million on the revolving line of credit. Interest expense on all indebtedness was $ 2.4 million and $ 3.4 million for the three months ended July 4, 2020 and June 29, 2019 , respectively, and $ 10.0 million and $ 10.3 million for the nine months ended July 4, 2020 and June 29, 2019 , respectively. The schedule of remaining principal payments through maturity for total debt is as follows: (in thousands of dollars) Year Principal Payments 2020 $ 2,475 2021 9,900 2022 14,850 2023 196,600 Total remaining principal payments $ 223,825 5. Income Taxes Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The effective tax rates in the periods presented are largely based upon the forecast pre-tax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business, primarily the United States. In periods where our operating income approximates or is equal to break-even, the effective tax rates for quarter-to-date and full-year periods may not be meaningful due to discrete period items. On March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law. While the CARES Act has broad income tax implications for many companies, it did not have a material impact on our reported income tax accounts. Three Months 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. 11 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. Nine Months The effective tax rate for the nine -month period ended July 4, 2020 was 38.8 % and differed from the statutory federal 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 effective tax rate for the nine -month period ended June 29, 2019 was 19.7 % and differed from the 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. 6. Guarantees, Commitments and Contingencies Litigation At July 4, 2020 , the Company had a number of product liability and other cases pending. Management believes that, considering the Company’s insurance coverage and its intention to vigorously defend its positions, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements. Environmental The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the Company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company is currently not involved in any material environmental proceedings and therefore management believes that the resolution of pending environmental matters will not have a material adverse effect on the Company’s financial statements. Guarantees In the ordinary course of business, we may provide guarantees for certain transactions entered into by our dealers. At July 4, 2020 , we had a $ 3.0 million guarantee outstanding which relates to a guarantee of indebtedness for a term loan with 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. At July 4, 2020 , $ 0.3 million was included in other current liabilities on our Condensed Consolidated Balance Sheets for the estimated fair value of the guarantee. Lease Commitments We have operating and finance leases for office and/or warehouse space and for equipment. Our leases have remaining terms of 4.4 to 7.4 years . 7. Segment Information We manage our business in two operating segments: (i) the Bus segment, which includes the manufacturing and assembly of buses to be sold to a variety of customers across the United States, Canada and in international markets; and (ii) the Parts segment, which consists primarily of the purchase of parts from third parties to be sold to dealers within the Company’s network. The tables below present segment net sales and gross profit for the periods presented: Net sales Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Bus (1) $ 180,592 $ 292,166 $ 554,061 $ 626,441 Parts (1) 8,589 16,608 43,749 48,901 Segment net sales $ 189,181 $ 308,774 $ 597,810 $ 675,342 (1) Parts segment revenue includes $ 0.8 million and $ 1.0 million for the three months ended July 4, 2020 and June 29, 2019 , respectively, and $ 3.2 million and $ 2.5 million for the nine months ended July 4, 2020 and June 29, 2019 , respectively, related to inter-segment sales of parts that was eliminated by the Bus segment upon consolidation. Gross profit Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Bus $ 18,079 $ 35,996 $ 50,884 $ 69,653 Parts 3,003 5,786 15,667 17,193 Segment gross profit $ 21,082 $ 41,782 $ 66,551 $ 86,846 12 The following table is a reconciliation of segment gross profit to consolidated income (loss) before income taxes for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Segment gross profit $ 21,082 $ 41,782 $ 66,551 $ 86,846 Adjustments: Selling, general and administrative expenses ( 17,793 ) ( 20,996 ) ( 58,146 ) ( 61,197 ) Interest expense ( 2,406 ) ( 3,369 ) ( 9,961 ) ( 10,241 ) Interest income 27 — 27 9 Other income (expense), net 181 ( 410 ) 555 ( 1,034 ) Income (loss) before income taxes $ 1,091 $ 17,007 $ ( 974 ) $ 14,383 Sales are attributable to geographic areas based on customer location and were as follows for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 United States $ 175,433 $ 286,499 $ 544,176 $ 629,668 Canada 13,429 21,639 49,331 43,499 Rest of world 319 636 4,303 2,175 Total net sales $ 189,181 $ 308,774 $ 597,810 $ 675,342 8. Revenue The following table disaggregates revenue by product category for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Diesel buses $ 88,299 $ 135,246 $ 278,698 $ 335,553 Alternative fuel buses (1) 80,975 141,939 245,766 260,340 Other (2) 11,583 15,486 30,931 32,061 Parts 8,324 16,103 42,415 47,388 Net sales $ 189,181 $ 308,774 $ 597,810 $ 675,342 (1) Includes buses sold with any fuel source other than diesel (e.g. gasoline, propane, CNG, electric). (2) Includes shipping and handling revenue, extended warranty income, surcharges, chassis, and bus shell sales . 13 9. Earnings Per Share The following table presents the earnings per share computation for the periods presented: Three Months Ended Nine Months Ended (in thousands except for share data) July 4, 2020 June 29, 2019 July 4, 2020 June 29, 2019 Numerator: Net income $ 1,286 $ 14,601 $ 244 $ 12,708 Denominator: Weighted-average common shares outstanding 27,027,731 26,451,107 26,784,404 26,449,751 Weighted-average dilutive securities, restricted stock 50,769 94 135,792 29,149 Weighted-average dilutive securities, warrants — 150,292 — 178,290 Weighted-average dilutive securities, stock options 1,515 118,617 60,284 131,116 Weighted-average shares and dilutive potential common shares 27,080,015 26,720,110 26,980,480 26,788,306 Earnings per share: Basic earnings per share $ 0.05 $ 0.55 $ 0.01 $ 0.48 Diluted earnings per share $ 0.05 $ 0.55 $ 0.01 $ 0.47 (1) Potentially dilutive securities representing 0.4 million and 0.3 million shares of common stock were excluded from the computation of diluted earnings per share for the three and nine months ended July 4, 2020 , respectively, as their effect would have been anti-dilutive. 10. Accumulated Other Comprehensive Loss The following table provides information on changes in accumulated other comprehensive loss for the periods presented: Three Months Ended Nine Months Ended (in thousands of dollars) Defined Benefit Pension Plan Total Defined Benefit Pension Plan Total July 4, 2020 Beginning Balance $ ( 55,501 ) $ ( 55,501 ) $ ( 56,154 ) $ ( 56,154 ) Amounts reclassified from other comprehensive loss and included in earnings 430 430 1,289 1,289 Total other comprehensive income, before taxes 430 430 1,289 1,289 Income tax expense ( 103 ) ( 103 ) ( 309 ) ( 309 ) Ending Balance July 4, 2020 $ ( 55,174 ) $ ( 55,174 ) $ ( 55,174 ) $ ( 55,174 ) June 29, 2019 Beginning Balance $ ( 37,379 ) $ ( 37,379 ) $ ( 38,427 ) $ ( 38,427 ) Amounts reclassified from other comprehensive loss and included in earnings 689 689 2,068 2,068 Total other comprehensive income, before taxes 689 689 2,068 2,068 Income tax expense ( 165 ) ( 165 ) ( 496 ) ( 496 ) Ending Balance June 29, 2019 $ ( 36,855 ) $ ( 36,855 ) $ ( 36,855 ) $ ( 36,855 ) 14