Blue Bird Corporation - 10-Q quarterly report FY2020 Q2

Blue Bird Corporation - 10-Q quarterly report FY2020 Q2

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q



[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 4, 2020



[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ................................ to ...............................................

Commission File Number 001-36267

BLUE BIRD CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		46-3891989
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3920 Arkwright Road, 2nd Floor, Macon, Georgia 31210

(Address of principal executive offices)

(Zip Code)

(478) 822-2801

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value	BLBD	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X

At May 8, 2020, 27,027,272 shares of the registrant’s common stock, $0.0001 par value, were outstanding.

BLUE BIRD CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

BLUE BIRD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in thousands of dollars, except for share data)	April 4, 2020			September 28, 2019
Assets
Current assets
Cash and cash equivalents	$	34,086		$	70,959
Accounts receivable, net	7,082			10,537
Inventories	143,942			78,830
Other current assets	13,257			11,765
Total current assets	$	198,367		$	172,091
Property, plant and equipment, net	104,541			100,058
Goodwill	18,825			18,825
Intangible assets, net	53,176			54,720
Equity investment in affiliate	10,986			11,106
Deferred tax assets	3,891			3,600
Finance lease right-of-use assets	6,086			4,638
Other assets	228			375
Total assets	$	396,100		$	365,413
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable	$	116,007		$	102,266
Warranty	8,345			9,161
Accrued expenses	18,111			28,697
Deferred warranty income	8,545			8,632
Finance lease obligations	734			716
Other current liabilities	11,889			10,310
Current portion of long-term debt	9,900			9,900
Total current liabilities	$	173,531		$	169,682
Long-term liabilities
Revolving credit facility	$	30,000		$	—
Long-term debt	168,715			173,226
Warranty	13,053			13,182
Deferred warranty income	14,403			15,413
Deferred tax liabilities	374			168
Finance lease obligations	5,419			3,921
Other liabilities	11,862			12,108
Pension	43,806			45,524
Total long-term liabilities	$	287,632		$	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 April 4, 2020 and September 28, 2019	$	—		$	—
Common stock, $0.0001 par value, 100,000,000 shares authorized, 27,027,272 and 26,476,336 shares outstanding at April 4, 2020 and September 28, 2019, respectively	3			3
Additional paid-in capital	87,408			84,271
Accumulated deficit	(46,691		)	(45,649		)
Accumulated other comprehensive loss	(55,501		)	(56,154		)
Treasury stock, at cost, 1,782,568 shares at April 4, 2020 and September 28, 2019	(50,282		)	(50,282		)
Total stockholders' deficit	$	(65,063	)	$	(67,811	)
Total liabilities and stockholders' deficit	$	396,100		$	365,413

The accompanying notes are an integral part of these condensed consolidated financial statements.

BLUE BIRD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended						Six Months Ended
(in thousands of dollars except for share data)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Net sales	$	255,412		$	211,642		$	408,629		$	366,568
Cost of goods sold	231,243			185,688			363,160			321,504
Gross profit	$	24,169		$	25,954		$	45,469		$	45,064
Operating expenses
Selling, general and administrative expenses	19,858			22,928			40,353			40,201
Operating profit	$	4,311		$	3,026		$	5,116		$	4,863
Interest expense	(5,658		)	(3,998		)	(7,555		)	(6,872		)
Interest income	—			—			—			9
Other income (expense), net	180			(275		)	374			(624		)
Loss before income taxes	$	(1,167	)	$	(1,247	)	$	(2,065	)	$	(2,624	)
Income tax benefit	817			179			1,143			415
Equity in net (loss) income of non-consolidated affiliate	(289		)	395			(120		)	316
Net loss	$	(639	)	$	(673	)	$	(1,042	)	$	(1,893	)

Earnings per share:
Basic weighted average shares outstanding	26,866,822			26,595,280			26,667,860			26,449,072
Diluted weighted average shares outstanding	26,866,822			26,595,280			26,667,860			26,449,072
Basic loss per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.07	)
Diluted loss per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.07	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BLUE BIRD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)



	Three Months Ended						Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Net loss	$	(639	)	$	(673	)	$	(1,042	)	$	(1,893	)
Other comprehensive income, net of tax
Net change in defined benefit pension plan	326			524			653			1,048
Total other comprehensive income	$	326		$	524		$	653		$	1,048
Comprehensive loss	$	(313	)	$	(149	)	$	(389	)	$	(845	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

BLUE BIRD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019
Cash flows from operating activities
Net loss	$	(1,042	)	$	(1,893	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	7,086			4,844
Non-cash interest expense	2,926			2,451
Share-based compensation	2,297			2,045
Equity in net loss (income) of non-consolidated affiliate	120			(316		)
(Gain) loss on disposal of fixed assets	(121		)	27
Deferred taxes	(291		)	83
Amortization of deferred actuarial pension losses	859			1,379
Foreign currency hedges	—			109
Changes in assets and liabilities:
Accounts receivable	3,455			15,795
Inventories	(65,112		)	(68,607		)
Other assets	(1,350		)	(3,992		)
Accounts payable	17,782			16,378
Accrued expenses, pension and other liabilities	(14,818		)	4,925
Total adjustments	$	(47,167	)	$	(24,879	)
Total cash used in operating activities	$	(48,209	)	$	(26,772	)
Cash flows from investing activities
Cash paid for fixed assets	$	(14,251	)	$	(22,706	)
Proceeds from sale of fixed assets	150			—
Total cash used in investing activities	$	(14,101	)	$	(22,706	)
Cash flows from financing activities
Borrowings under the revolving credit facility	$	30,000		$	20,000
Borrowings under the senior term loan	—			50,000
Repayments under the senior term loan	(4,950		)	(4,950		)
Principal payments on finance leases	(540		)	—
Cash paid for employee taxes on vested restricted shares and stock option exercises	(3,313		)	(602		)
Proceeds from exercises of warrants	4,240			740
Tender offer repurchase of common stock and preferred stock	—			(50,370		)
Total cash provided by financing activities	$	25,437		$	14,818
Change in cash and cash equivalents	(36,873		)	(34,660		)
Cash and cash equivalents, beginning of period	70,959			60,260
Cash and cash equivalents, end of period	$	34,086		$	25,600

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest paid, net of interest received	$	4,807		$	5,055
Income tax paid, net of tax refunds	327			2,325
Non-cash investing and financing activities:
Changes in accounts payable for capital additions to property, plant and equipment	$	(4,041	)	$	1,728
Cashless exercise of stock options	5,246			42
Cash receivable for warrant exercises	—			555
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.

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, January 4, 2020	26,511,641	$	3	$	84,302		—	$	—	$	(55,827	)	$	(46,052	)	1,782,568	$	(50,282	)	$	(67,856	)
Warrant exercises	336,391	—		3,868			—	—		—			—			—	—			3,868
Restricted stock activity	108,563	—		—			—	—		—			—			—	—			—
Stock option activity	70,677	—		(1,935		)	—	—		—			—			—	—			(1,935		)
Share-based compensation expense	—	—		1,173			—	—		—			—			—	—			1,173
Net loss	—	—		—			—	—		—			(639		)	—	—			(639		)
Other comprehensive income, net of tax	—	—		—			—	—		326			—			—	—			326
Balance, April 4, 2020	27,027,272	$	3	$	87,408		—	$	—	$	(55,501	)	$	(46,691	)	1,782,568	$	(50,282	)	$	(65,063	)

Balance, December 29, 2018	26,351,588	$	3	$	80,433		—	$	—	$	(38,717	)	$	(71,169	)	1,783	$	(50,261	)	$	(79,711	)
Warrant exercises	58,200	—		675			—	—		—			—			—	—			675
Restricted stock activity	30,682	—		(357		)	—	—		—			—			—	—			(357		)
Stock option activity	193	—		(2		)	—	—		—			—			—	—			(2		)
Share-based compensation expense	—	—		1,161			—	—		—			—			—	—			1,161
Tender offer share repurchases	—	—		(21		)	—	—		—			—			—	—			(21		)
Net loss	—	—		—			—	—		—			(673		)	—	—			(673		)
Other comprehensive income, net of tax	—	—		—			—	—		1,338			—			—	—			1,338
Balance, March 30, 2019	26,440,663	$	3	$	81,889		—	$	—	$	(37,379	)	$	(71,842	)	1,782,568	$	(50,261	)	$	(77,590	)



	Six 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	73,592		—		(1,368		)	—		—			—			—			—	—			(1,368		)
Stock option activity	108,632		—		(1,945		)	—		—			—			—			—	—			(1,945		)
Share-based compensation expense	—		—		2,210			—		—			—			—			—	—			2,210
Net loss	—		—		—			—		—			—			(1,042		)	—	—			(1,042		)
Other comprehensive income, net of tax	—		—		—			—		—			653			—			—	—			653
Balance, April 4, 2020	27,027,272		$	3	$	87,408		—		$	—		$	(55,501	)	$	(46,691	)	1,782,568	$	(50,282	)	$	(65,063	)

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	112,635		—		1,295			—		—			—			—			—	—			1,295
Restricted stock activity	51,195		—		(596		)	—		—			—			—			—	—			(596		)
Stock option activity	524		—		(6		)	—		—			—			—			—	—			(6		)
Share-based compensation expense	—		—		1,982			—		—			—			—			—	—			1,982
Tender offer share repurchases	(1,782,568	)	—		(73		)	(364	)	(36		)	—			—			1,782,568	(50,261		)	(50,370		)
Preferred stock conversion	799,615		—		9,264			(92,636	)	(9,264		)	—			—			—	—			—
Net loss	—		—		—			—		—			—			(1,893		)	—	—			(1,893		)
Other comprehensive income, net of tax	—		—		—			—		—			1,048			—			—	—			1,048
Balance, March 30, 2019	26,440,663		$	3	$	81,889		—		$	—		$	(37,379	)	$	(71,842	)	1,782,568	$	(50,261	)	$	(77,590	)

The accompanying notes are an integral part of these consolidated financial statements.

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 second fiscal quarter of 2020, the novel coronavirus known as "COVID-19" spread throughout the world creating a global pandemic. The COVID-19 pandemic did not materially impact our second fiscal quarter of 2020 financial condition, results of operations, or liquidity. The full extent of the future impacts of COVID-19 on the Company's operations is uncertain. A prolonged economic shutdown could have a material adverse impact on our financial results. For further discussion about COVID-19, please refer to Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.

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 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.

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 six months ended April 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 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)	April 4, 2020		September 28, 2019
Raw materials	$	116,386	$	60,033
Work in process	18,089		16,663
Finished goods	9,467		2,134
Total inventories	$	143,942	$	78,830

Product Warranties

The following table reflects activity in accrued warranty cost (current and long-term portions combined) for the periods presented:



	Three Months Ended						Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Balance at beginning of period	$	21,731		$	21,858		$	22,343		$	22,646
Add current period accruals	2,628			2,248			4,129			3,838
Current period reductions of accrual	(2,961		)	(2,586		)	(5,074		)	(4,964		)
Balance at end of period	$	21,398		$	21,520		$	21,398		$	21,520

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						Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Balance at beginning of period	$	22,744		$	22,532		$	24,045		$	23,191
Add current period deferred income	2,338			2,440			3,289			3,806
Current period recognition of income	(2,134		)	(2,071		)	(4,386		)	(4,096		)
Balance at end of period	$	22,948		$	22,901		$	22,948		$	22,901

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 $4.5 million of the outstanding contract liability during the remainder of fiscal 2020, $7.4 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)	April 4, 2020		September 28, 2019
Current portion	$	3,120	$	2,933
Long-term portion	1,935		1,775
Total accrued self-insurance	$	5,055	$	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 $4.1 million and $3.2 million for the three months ended April 4, 2020 and March 30, 2019, respectively, and $7.6 million and $6.5 million for the six months ended April 4, 2020 and March 30, 2019, respectively. The related cost of goods sold was $3.5 million and $2.7 million for the three months ended April 4, 2020 and March 30, 2019, respectively, and $6.6 million and $5.7 million for the six months ended April 4, 2020 and March 30, 2019, respectively.

Pension Expense

Components of net periodic pension benefit cost were as follows for the periods presented:



	Three Months Ended						Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Interest cost	$	1,237		$	1,511		$	2,474		$	3,023
Expected return on plan assets	(1,846		)	(1,904		)	(3,692		)	(3,809		)
Amortization of prior loss	429			690			859			1,379
Net periodic benefit cost	$	(180	)	$	297		$	(359	)	$	593
Amortization of prior loss, recognized in other comprehensive income	429			690			859			1,379
Total recognized in net periodic pension benefit cost and other comprehensive income	$	(609	)	$	(393	)	$	(1,218	)	$	(786	)

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.

Changes in the interest rate collar fair value are recorded in interest expense as the collar does not qualify for hedge accounting. At April 4, 2020, the fair value of the interest rate collar contract was $(3.4) 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.

4. Debt

Term debt consisted of the following at the dates indicated:



(in thousands of dollars)	April 4, 2020		September 28, 2019
2023 term loan, net of deferred financing costs of $2,685 and $3,124, respectively	$	178,615	$	183,126
Less: current portion of long-term debt	9,900		9,900
Long-term debt, net of current portion	$	168,715	$	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 April 4, 2020 and September 28, 2019, $181.3 million and $186.3 million, respectively, were outstanding on the term loans.

At April 4, 2020 and September 28, 2019, the stated interest rates on the term loans were 3.2% and 4.4%, respectively. At April 4, 2020 and September 28, 2019, the weighted-average annual effective interest rates for the term loans were 4.5% and 5.0%, respectively, which includes amortization of the deferred financing costs.

At April 4, 2020, $30.0 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 $63.1 million on the revolving line of credit.

Interest expense on all indebtedness was $5.7 million and $4.0 million for the three months ended April 4, 2020 and March 30, 2019, respectively, and $7.6 million and $6.9 million for the six months ended April 4, 2020 and March 30, 2019, respectively.

The schedule of remaining principal payments through maturity for total debt is as follows:



(in thousands of dollars)
Year	Principal Payments
2020	$	4,950
2021	9,900
2022	14,850
2023	181,600
Total remaining principal payments	$	211,300

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 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%. 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.

Six Months

The effective tax rate for the six-month period ended April 4, 2020 was 55.4% and differed from the statutory federal 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 six-month period ended March 30, 2019 was 15.8% 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 April 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 April 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 2.8 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 April 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 4.7 to 7.7 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				Six Months Ended
(in thousands of dollars)	April 4, 2020		March 30, 2019		April 4, 2020		March 30, 2019
Bus (1)	$	238,697	$	195,065	$	373,469	$	334,275
Parts (1)	16,715		16,577		35,160		32,293
Segment net sales	$	255,412	$	211,642	$	408,629	$	366,568

(1) Parts segment revenue includes $1.2 million and $0.9 million for the three months ended April 4, 2020 and March 30, 2019, respectively, and $2.4 million and $1.5 million for the six months ended April 4, 2020 and March 30, 2019, respectively, related to inter-segment sales of parts that was eliminated by the Bus segment upon consolidation.

Gross profit



	Three Months Ended				Six Months Ended
(in thousands of dollars)	April 4, 2020		March 30, 2019		April 4, 2020		March 30, 2019
Bus	$	17,938	$	20,142	$	32,805	$	33,657
Parts	6,231		5,812		12,664		11,407
Segment gross profit	$	24,169	$	25,954	$	45,469	$	45,064

The following table is a reconciliation of segment gross profit to consolidated loss before income taxes for the periods presented:



	Three Months Ended						Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Segment gross profit	$	24,169		$	25,954		$	45,469		$	45,064
Adjustments:
Selling, general and administrative expenses	(19,858		)	(22,928		)	(40,353		)	(40,201		)
Interest expense	(5,658		)	(3,998		)	(7,555		)	(6,872		)
Interest income	—			—			—			9
Other income (expense), net	180			(275		)	374			(624		)
Loss before income taxes	$	(1,167	)	$	(1,247	)	$	(2,065	)	$	(2,624	)

Sales are attributable to geographic areas based on customer location and were as follows for the periods presented:



	Three Months Ended				Six Months Ended
(in thousands of dollars)	April 4, 2020		March 30, 2019		April 4, 2020		March 30, 2019
United States	$	232,477	$	191,684	$	368,743	$	343,169
Canada	22,746		18,784		35,902		21,860
Rest of world	189		1,174		3,984		1,539
Total net sales	$	255,412	$	211,642	$	408,629	$	366,568

8. Revenue

The following table disaggregates revenue by product category for the periods presented:



	Three Months Ended				Six Months Ended
(in thousands of dollars)	April 4, 2020		March 30, 2019		April 4, 2020		March 30, 2019
Diesel buses	$	113,649	$	110,487	$	190,399	$	200,307
Alternative fuel buses (1)	113,057		75,320		164,791		118,401
Other (2)	12,505		9,773		19,348		16,575
Parts	16,201		16,062		34,091		31,285
Net sales	$	255,412	$	211,642	$	408,629	$	366,568

(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.

9. Earnings Per Share

The following table presents the earnings per share computation for the periods presented:



	Three Months Ended						Six Months Ended
(in thousands except for share data)	April 4, 2020			March 30, 2019			April 4, 2020			March 30, 2019
Numerator:
Net loss	$	(639	)	$	(673	)	$	(1,042	)	$	(1,893	)

Denominator:
Weighted-average common shares outstanding	26,866,822			26,595,280			26,667,860			26,449,072
Effect of dilutive securities (1)	—			—			—			—
Weighted-average shares and dilutive potential common shares	26,866,822			26,595,280			26,667,860			26,449,072

Earnings per share:
Basic loss per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.07	)
Diluted loss per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.07	)

(1) Potentially dilutive securities representing 0.5 million and 1.4 million shares of common stock were excluded from the computation of diluted earnings per share for April 4, 2020 and March 30, 2019, respectively, as their effect would have been antidilutive.

10. Accumulated Other Comprehensive Loss

The following table provides information on changes in accumulated other comprehensive loss for the periods presented:



	Three Months Ended						Six Months Ended
(in thousands of dollars)	Defined Benefit Pension Plan			Total			Defined Benefit Pension Plan			Total
April 4, 2020
Beginning Balance	$	(55,827	)	$	(55,827	)	$	(56,154	)	$	(56,154	)
Amounts reclassified from other comprehensive loss and included in earnings	429			429			859			859
Total other comprehensive income, before taxes	429			429			859			859
Income tax expense	(103		)	(103		)	(206		)	(206		)
Ending Balance April 4, 2020	$	(55,501	)	$	(55,501	)	$	(55,501	)	$	(55,501	)

March 30, 2019
Beginning Balance	$	(37,903	)	$	(37,903	)	$	(38,427	)	$	(38,427	)
Amounts reclassified from other comprehensive loss and included in earnings	690			690			1,379			1,379
Total other comprehensive income, before taxes	690			690			1,379			1,379
Income tax expense	(166		)	(166		)	(331		)	(331		)
Ending Balance March 30, 2019	$	(37,379	)	$	(37,379	)	$	(37,379	)	$	(37,379	)

11. Subsequent Event

Second Amendment to the Credit Agreement

As reported in our May 8, 2020 Current Report on Form 8-K, 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. 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. The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0% to 0.75%. Approximately $0.9 million in fees were incurred related to the amendment and are expected to be capitalized.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the Company’s unaudited 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. Our actual results may not be indicative of future performance. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those discussed or incorporated by reference in the sections of this Report titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Certain monetary amounts, percentages and other figures included in this Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.

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.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) of Blue Bird Corporation (“Blue Bird” or the “Company”) contains forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Except as otherwise indicated by the context, references in this Report to “we,” “us” and “our” are to the consolidated business of the Company. All statements in this Report, including those made by the management of the Company, other than statements of historical fact, are forward-looking statements. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “estimate,” “project,” “forecast,” “seek,” “target,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding the Company’s future financial results, research and development results, regulatory approvals, operating results, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, and industry trends. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:


•	the future financial performance of the Company;


•	negative changes in the market for Blue Bird products;


•	expansion plans and opportunities;


•	challenges or unexpected costs related to manufacturing;


•	future impacts from the novel coronavirus pandemic known as "COVID-19", and any other pandemics, public health crises, or epidemics, on capital markets, manufacturing and supply chain abilities, consumer and customer demand, school system operations, workplace conditions, and any other unexpected impacts, which could include, among other effects:


◦	disruption in global financial and credit markets;


◦	supply shortages and supplier financial risk, especially from our single-source suppliers impacted by the pandemic;


◦	negative impacts to manufacturing operations or the supply chain from shutdowns or other disruptions in operations;


◦	negative impacts on capacity and/or production in response to changes in demand due to the pandemic, including possible cost containment actions;


◦	financial difficulties of our customers impacted by the pandemic;


◦	reductions in market demand for our products due to the pandemic; and


◦	potential negative impacts of various actions taken by federal, state and/or local governments in response to the pandemic.

These forward-looking statements are based on information available as of the date of this Report (or, in the case of forward-looking statements incorporated herein by reference, as of the date of the applicable filed document), and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown 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 (the “SEC”), specifically the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019. Other risks and uncertainties are and will be disclosed in the Company’s prior and future SEC filings. The following information should be read in conjunction with the financial statements included in the Company’s 2019 Form 10-K, filed with the SEC on December 12, 2019.

Available Information

We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and as a result are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We make these filings available free of charge on our website (http://www.blue-bird.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.

Executive Overview

Blue Bird is the leading independent designer and manufacturer of school buses. Our longevity and reputation in the school bus industry have made Blue Bird an iconic American brand. We distinguish ourselves from our principal competitors by dedicating our focus to the design, engineering, manufacture and sale of school buses, and related parts. As the only principal manufacturer of chassis and body production specifically designed for school bus applications, 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 to diesel fuel applications with its propane-powered, gasoline-powered, compressed natural gas (“CNG”)-powered, and all-electric-powered school buses.

Blue Bird sells its buses and parts through an extensive network of United States and Canadian dealers that, in their territories, are exclusive to Blue Bird on Type C and Type D school buses. Blue Bird also sells directly to major fleet operators, the United States Government, state governments, and authorized dealers in a number of foreign countries.

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. 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. 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. 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. 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. For further details and discussion about our liquidity, refer to the following "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.

Critical Accounting Policies and Estimates, Recent Accounting Pronouncements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Blue Bird evaluates its estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Application of these accounting policies 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 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:

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 years will be determined based on the participant data at that time.

Recent Accounting Pronouncements

See Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report for a discussion of new and recently adopted accounting pronouncements.

Factors Affecting Our Revenues

Our revenues are driven primarily by the following factors:


•	Property tax revenues. Property tax revenues are one of the major sources of funding for school districts, and therefore new school buses. Property tax revenues are a function of land and building prices, relying on assessments of property value by state or county assessors and millage rates voted by the local electorate.


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


•	Revenue mix. We are able to charge more for certain of our products (e.g., Type C propane-powered school buses, Type D buses, and buses with higher option content) than other products. The mix of products sold in any fiscal period can directly impact our revenues for the period.

•

Strength of the dealer network. We rely on our dealers, as well as a small number of major fleet operators, to be the direct point of contact with school districts and their purchasing agents. An effective dealer is capable of expanding revenues within a given school district by matching that district’s needs to our capabilities, offering options that would not otherwise be provided to the district.

•

Pricing. Our products are sold to school districts throughout the United States and Canada. Each state and each Canadian province has its own set of regulations that governs the purchase of products, including school buses, by their school districts. We and our dealers must navigate these regulations, purchasing procedures, and the districts’ specifications in order to reach mutually acceptable price terms. Pricing may or may not be favorable to us, depending upon a number of factors impacting purchasing decisions.


•	Buying patterns of major fleets. Major fleets regularly compete against one another for existing accounts. Fleets are also continuously trying to win the business of school districts that operate their own transportation services. These activities can

have either a positive or negative impact on our sales, depending on the brand preference of the fleet that wins the business. Major fleets also periodically review their fleet sizes and replacement patterns due to funding availability as well as the profitability of existing routes. These actions can impact total purchases by fleets in a given year.

•

Seasonality. 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.

Factors Affecting Our Expenses and Other Items

Our expenses and other line items on our unaudited Condensed Consolidated Statements of Operations are principally driven by the following factors:

•

Cost of goods sold. The components of our cost of goods sold consist of material costs (principally powertrain components, steel and rubber, as well as aluminum and copper), labor expense, and overhead. Our cost of goods sold may vary from period to period due to changes in sales volume, efforts by certain suppliers to pass through the economics associated with key commodities, design changes with respect to specific components, design changes with respect to specific bus models, wage increases for plant labor, productivity of plant labor, delays in receiving materials and other logistical problems, and the impact of overhead items such as utilities.

•

Selling, general and administrative expenses. Our selling, general and administrative expenses include costs associated with our selling and marketing efforts, engineering, centralized finance, human resources, purchasing, information technology services, and other administrative matters and functions. In most instances, other than direct costs associated with sales and marketing programs, the principal component of these costs is salary expense. Changes from period to period are typically driven by the number of our employees, as well as by merit increases provided to experienced personnel.


•	Interest expense. Our interest expense relates to costs associated with our debt instruments and reflects both the amount of indebtedness and the interest rate that we are required to pay on our debt. Interest expense also includes unrealized gains or losses from interest rate hedges, if any, as well as expenses related to debt guarantees, if any.


•	Income taxes. We make estimates of the amounts to recognize for income taxes in each tax jurisdiction in which we operate. In addition, provisions are established for withholding taxes related to the transfer of cash between jurisdictions and for uncertain tax positions taken.


•	Other income (expense), net. This includes periodic pension expense as well as gains or losses on foreign currency, if any. Other immaterial amounts not associated with operating expenses may also be included here.


•	Equity in net (loss) 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.

Key Non-GAAP Financial Measures We Use to Evaluate Our Performance

This filing includes the following non-GAAP financial measures: “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; (ii) transaction related costs; (iii) discrete expenses related to major cost cutting initiatives; or (iv) costs directly attributed to the COVID-19 pandemic. We believe these expenses and non-recurring charges are not considered an indicator of ongoing company performance. We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA and Adjusted EBITDA margin are not measures of performance defined in accordance with GAAP. The measures are used as a supplement to GAAP results in evaluating certain aspects of our business, as described below.

We believe that Adjusted EBITDA and Adjusted EBITDA margin are useful to investors in evaluating our performance because the measures consider the performance of our operations, excluding decisions made with respect to capital investment, financing, and other non-recurring charges as outlined in the preceding paragraph. We believe the non-GAAP metrics offer additional financial metrics that, when coupled with the GAAP results and the reconciliation to GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business.

Adjusted EBITDA and Adjusted EBITDA margin should not be considered as alternatives to net income as an indicator of our performance or as alternatives to any other measure prescribed by GAAP as there are limitations to using such non-GAAP measures. Although we believe that Adjusted EBITDA and Adjusted EBITDA margin may enhance an evaluation of our operating performance based on recent revenue generation and product/overhead cost control because they exclude the impact of prior decisions made about capital investment, financing, and other expenses, (i) other companies in Blue Bird’s industry may define Adjusted EBITDA and Adjusted EBITDA margin differently than we do and, as a result, they may not be comparable to similarly titled measures used by other companies in Blue Bird’s industry, and (ii) Adjusted EBITDA and Adjusted EBITDA margin exclude certain financial information that some may consider important in evaluating our performance.

We compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and GAAP results, including providing a reconciliation to GAAP results, to enable investors to perform their own analysis of our operating results.

Our measure of “Free Cash Flow” is used in addition to and in conjunction with results presented in accordance with GAAP and free cash flow should not be relied upon to the exclusion of GAAP financial measures. Free cash flow reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

We define free cash flow as total cash provided by/used in operating activities minus cash paid for fixed assets and acquired intangible assets. We use free cash flow, and ratios based on the 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. In limited circumstances in which proceeds from sales of fixed or intangible assets exceed purchases, free cash flow would exceed cash flow from operations. However, since we do not anticipate being a net seller of fixed or intangible assets, we expect free cash flow to be less than operating cash flows.

Our Segments

We manage our business in two operating segments, which are also our reportable segments: (i) the Bus segment, which involves the design, engineering, manufacture and sales of school buses and extended warranties; and (ii) the Parts segment, which includes the sales of replacement bus parts. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) in evaluating segment performance and deciding how to allocate resources to segments. The President and Chief Executive Officer of the Company has been identified as the CODM. Management evaluates the segments based primarily upon revenues and gross profit.

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



	Three Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019
Net sales	$	255,412		$	211,642
Cost of goods sold	231,243			185,688
Gross profit	$	24,169		$	25,954
Operating expenses
Selling, general and administrative expenses	19,858			22,928
Operating profit	$	4,311		$	3,026
Interest expense	(5,658		)	(3,998		)
Other income (expense), net	180			(275		)
Loss before income taxes	$	(1,167	)	$	(1,247	)
Income tax benefit	817			179
Equity in net (loss) income non-consolidated affiliate	(289		)	395
Net loss	$	(639	)	$	(673	)
Other financial data:
Adjusted EBITDA	$	12,705		$	12,202
Adjusted EBITDA margin	5.0		%	5.8		%

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



(in thousands of dollars)	Three Months Ended
Net Sales by Segment	April 4, 2020		March 30, 2019
Bus	$	238,697	$	195,065
Parts	16,715		16,577
Total	$	255,412	$	211,642

Gross Profit by Segment
Bus	$	17,938	$	20,142
Parts	6,231		5,812
Total	$	24,169	$	25,954

Net sales. 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. 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.

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. As a percentage of net sales, total cost of goods sold increased from 87.7% to 90.5%.

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.

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.

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.

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.

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:



	Three Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019
Net loss	$	(639	)	$	(673	)
Adjustments:
Interest expense, net (1)	5,754			4,102
Income tax benefit	(817		)	(179		)
Depreciation, amortization, and disposals (2)	3,816			2,833
Operational transformation initiatives	2,198			3,270
Share-based compensation	1,204			1,193
Product redesign initiatives	1,082			1,652
Costs directly attributed to the COVID-19 pandemic	107			—
Other	—			4
Adjusted EBITDA	$	12,705		$	12,202
Adjusted EBITDA margin (percentage of net sales)	5.0		%	5.8		%

(1) Includes $0.1 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 $0.2 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
(in thousands of dollars)	April 4, 2020			March 30, 2019
Net sales	$	408,629		$	366,568
Cost of goods sold	363,160			321,504
Gross profit	$	45,469		$	45,064
Operating expenses
Selling, general and administrative expenses	40,353			40,201
Operating profit	$	5,116		$	4,863
Interest expense	(7,555		)	(6,872		)
Interest income	—			9
Other income (expense), net	374			(624		)
Loss before income taxes	$	(2,065	)	$	(2,624	)
Income tax benefit	1,143			415
Equity in net (loss) income non-consolidated affiliate	(120		)	316
Net loss	$	(1,042	)	$	(1,893	)
Other financial data:
Adjusted EBITDA	$	20,730		$	19,418
Adjusted EBITDA margin	5.1		%	5.3		%

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



(in thousands of dollars)	Six Months Ended
Net Sales by Segment	April 4, 2020		March 30, 2019
Bus	$	373,469	$	334,275
Parts	35,160		32,293
Total	$	408,629	$	366,568

Gross Profit by Segment
Bus	$	32,805	$	33,657
Parts	12,664		11,407
Total	$	45,469	$	45,064

Net sales. 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. 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.

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. As a percentage of net sales, total cost of goods sold increased from 87.7% 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.

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.

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. 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.

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 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 six-month period ended March 30, 2019 was 15.8% and significantly 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
(in thousands of dollars)	April 4, 2020			March 30, 2019
Net loss	$	(1,042	)	$	(1,893	)
Adjustments:
Interest expense, net (1)	7,747			7,070
Income tax benefit	(1,143		)	(415		)
Depreciation, amortization, and disposals (2)	7,354			5,240
Operational transformation initiatives	3,312			3,514
Foreign currency hedges	—			109
Share-based compensation	2,297			2,045
Product redesign initiatives	2,092			3,801
Costs directly attributed to the COVID-19 pandemic	107			—
Other	6			(53		)
Adjusted EBITDA	$	20,730		$	19,418
Adjusted EBITDA margin (percentage of net sales)	5.1		%	5.3		%

(1) Includes $0.2 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.

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. 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. 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. The interest rate pricing grid remained unchanged, but the LIBOR floor was amended from 0% to 0.75%.

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.

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. 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.

On March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law. The CARES Act, among other things, includes provisions related to the deferment of employer-side social security payments (the Employer Payroll Tax Payment Deferral Provision). We have elected to defer these payments that would otherwise be due and payable through December 31, 2020. 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 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.

Seasonality

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.

Cash Flows

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



	Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019
Cash and cash equivalents at beginning of period	$	70,959		$	60,260
Total cash used in operating activities	(48,209		)	(26,772		)
Total cash used in investing activities	(14,101		)	(22,706		)
Total cash provided by financing activities	25,437			14,818
Change in cash and cash equivalents	$	(36,873	)	$	(34,660	)
Cash and cash equivalents at end of period	$	34,086		$	25,600

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.

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.

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.

Free cash flow

Management believes the non-GAAP measurement of free cash flow, defined as net cash used in operating activities less cash paid for fixed 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 Measures We Use to Evaluate Our Performance”. The following table sets forth the calculation of free cash flow for the periods presented:



	Six Months Ended
(in thousands of dollars)	April 4, 2020			March 30, 2019
Net cash used in operating activities	$	(48,209	)	$	(26,772	)
Cash paid for fixed assets	(14,251		)	(22,706		)
Free cash flow	$	(62,460	)	$	(49,478	)

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.

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. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have not been any material changes to our interest rate risks, commodity risks or currency risks previously disclosed in Part II, Item 7A of the Company’s 2019 Form 10-K.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including, as appropriate, the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on their evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of April 4, 2020.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ended April 4, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Items required under Part II not specifically shown below are not applicable.

Item 1. Legal Proceedings.

Blue Bird is engaged in legal proceedings in the ordinary course of its business. Although no assurances can be given about the final outcome of pending legal proceedings, at the present time management does not believe that the resolution or outcome of any of Blue Bird’s pending legal proceedings will have a material adverse effect on its financial condition, liquidity or results of operations.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors discussed in Part I, Item 1A of the Company's 2019 Form 10-K. Such risk factors are expressly incorporated herein by reference, and could materially adversely affect our business, financial condition, cash flows or future results. The risks described in the 2019 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, cash flows and/or operating results.

The risk factor below is an update to our 2019 Form 10-K.

The current COVID-19 pandemic, other public health crises, epidemics, or pandemics, could have a material adverse effect on our results of operations, financial condition and cash flows, particularly if we experience supply chain disruptions, reductions in demand for our products, disruptions impacting our workforce or workplace conditions, and/or reduced access to capital markets.

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, among other impacts:


•	triggered a significant downturn in capital markets;


•	caused significant disruptions in global supply chains;


•	significantly altered global consumer demand;


•	halted global manufacturing operations resulting from plant shut-downs; and


•	changed global workplace conditions resulting from "shelter-in-place" orders.

The pandemic did not materially impact our second quarter fiscal 2020 results, but could have a material adverse effect on our future results of operations, financial condition and cash flows. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on our business, financial condition, results of operations, or liquidity, but we have already experienced reduced orders and enacted a manufacturing plant shut-down for the first two weeks of our third quarter in fiscal 2020. At the present time, we consider the following areas to be the most significant material risks to our business resulting from the pandemic:

Supply Chain Disruptions

We rely on specialist suppliers, some of which are single-source suppliers, for critical components (including but not limited to engines, transmissions and axles) and replacement of any of these components with like parts from another supplier normally requires engineering and testing resources, which entail costs and take time. We also currently rely on a limited number of single-source suppliers and/or have limited alternatives for important bus parts such as diesel engines and emission components, propane and gasoline engines including powertrains, control modules, steering systems, seats, specialty resins, and other key components. In addition to protecting our employees' health, our plant shut-down was partially due to the potential for an inability to obtain critical components from our suppliers due to COVID-19. Delays or interruptions in the supply chain due to the COVID-19 pandemic exposes us to the following risks that if materialized could significantly increase our costs and/or impact our ability to meet customer demand:


•	we or our third-party suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly, and delivery or shipment of our products;


•	we or our third-party suppliers may not be able to respond to unanticipated changes in customer orders;


•	we or our suppliers may have excess or inadequate inventory of materials and components;


•	we or our third-party suppliers may be subject to price fluctuations due to the pandemic and a lack of long-term supply arrangements for key components;


•	we may experience delays in delivery by our third-party suppliers due to changes in demand from us or their other customers;


•	fluctuations in demand for products that our third-party suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner;


•	we may not be able to find new or alternative components or reconfigure our products and manufacturing processes in a timely manner if the necessary components become unavailable; and


•	our third-party suppliers may encounter financial hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

Reductions in demand for buses and bus parts

The school bus market is predominantly driven by long-term trends in the level of spending by states, municipalities, and independent contractors. Demand for school buses is further influenced by overall acquisition priorities of municipalities, availability of school bus financing, student population changes, school district busing policies, price and other competitive factors, fuel prices and environmental regulations. In response to the pandemic, many school systems in North America canceled in-person schooling for the remainder of the 2019-2020 school year. There remains uncertainty as to when traditional in-person schooling will resume. A reduction in bus usage will likely reduce the demand for maintenance and replacement parts, which would negatively impact revenues in our Parts segment. Uncertainty in the form of learning (e.g. a reduction of in-person to more remote arrangements) may lead to a reduction in bus orders until a degree of normalcy returns to the manner in which K-12 education is provided. In addition, a delay in the start of the 2020-2021 school year may also impact the near-term demand for our buses. Reductions in bus orders would negatively impact revenues in our Bus segment.

Disruptions impacting our workforce or workplace conditions

Almost all U.S. states, including Georgia where our headquarters and manufacturing facilities are located, have issued “shelter-in-place” orders, quarantines, executive orders and similar government orders, restrictions and recommendations for their residents to control the spread of COVID-19. Orders could be re-issued at or after their expiration and future orders may introduce broader restrictions. Such orders, restrictions and recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread closures of businesses not deemed “essential,” work stoppages, interruptions, slowdowns and delays, work-from-home policies and travel restrictions. While our business has been deemed essential by the State of Georgia, we have employed remote work policies when and where possible to be responsive to the health risks that may impact our employees. Given the nature of our business, we do not have the ability to manufacture a bus without our on-site manufacturing personnel. 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 a temporary halt in production. Any extended production halt or diminution in production capacity would likely have a negative impact on our ability to fulfill orders and on our revenues.

Possible reduced access to capital or credit markets

The COVID-19 pandemic has adversely impacted global commercial activity and has contributed to significant volatility in financial markets. The pandemic may have a continued adverse impact on economic and market conditions and trigger an extended period of global economic slowdown and may result in significant disruptions in global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.

Item 6. Exhibits.

The following Exhibits are filed with this Report:

Exhibit No. Description


3.1	The registrant’s Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K, filed by the registrant with the SEC on February 26, 2015).


3.2	Bylaws of Blue Bird Corporation (incorporated by reference to the Company’s Form S-1, filed with the SEC on December 20, 2013).


31.1*	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.


31.2*	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.


32.1*	Chief Executive Officer and Chief Financial Officer joint Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


101.INS*^	XBRL Instance Document.


101.SCH*^	XBRL Taxonomy Extension Schema Document.


101.CAL*^	XBRL Taxonomy Extension Calculation Linkbase Document.


101.DEF*^	XBRL Taxonomy Extension Definition Linkbase Document.


101.LAB*^	XBRL Taxonomy Extension Label Linkbase Document.


101.PRE*^	XBRL Taxonomy Extension Presentation Linkbase Document.


*	Filed herewith.


††	Management contract or compensatory plan or arrangement.

In accordance with Regulation S-T, XBRL (Extensible Business Reporting Language) related information in Exhibit No. 101 to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Blue Bird Corporation


Dated:	May 14, 2020	/s/ Philip Horlock
		Philip Horlock
		Chief Executive Officer

Dated:	May 14, 2020	/s/ Phillip Tighe
		Phillip Tighe
		Chief Financial Officer

Large accelerated filer

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Non-accelerated filer

Smaller reporting company

Emerging growth company