ALTA EQUIPMENT GROUP INC. The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this annual report. This discussion contains "forward-looking statements" reflecting Alta's current expectations, estimates and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this annual report, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements," all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. Alta assumes no obligation to update any of these forward-looking statements.
COVID-19
The economic volatility and disruptions caused by the COVID-19 pandemic caused an adverse effect on our business and our financial results in fiscal year 2020 and early 2021. Our business activity levels, with the exception of rental utilization in certain geographies, stabilized in the third quarter of 2020 to near pre-COVID levels, and since that time have generally held at or, in certain geographies and departments, have gone beyond pre-COVID levels. Currently, our business is experiencing "recovery-related" supply-chain constraints that have affected some of our OEM equipment suppliers. Specifically, lead-times from OEMs for new equipment has been pushed beyond historic norms. While we believe our diversified cash flow streams, the breadth of our product portfolio, geographic reach and our ability to source used equipment will help mitigate the impact of the current supply-chain disruptions we are facing, an extended period or worsening of the supply chain issues our OEM equipment providers are experiencing could impact our financial results adversely. Although currently COVID-19 is not impacting our business activity levels and we believe the worst of the pandemic's effect on our business to be behind us, uncertainty remains regarding the potential future emergence of additional variant strains of COVID-19 and how those variant strains would impact the macroeconomic environment and our business. While our operations in 2021, in general, performed beyond pre-COVID levels, we will continue to monitor key performance metrics such as labor hour demand and rental utilization and, in-turn, rationalize our skilled labor and rental fleet levels to match expected demand for 2022 and through the end of the COVID-19 pandemic. We believe that the acquisitions and investments made in the calendar years 2020 and 2021 expanded our service capabilities, geographic reach, end market diversification and product offerings; each of which will ultimately strengthen our resiliency to economic shocks and will help to preserve liquidity over the long term. While we have sufficient liquidity to fund our operations currently, our Board of Directors and management team continues to monitor and evaluate the continuing impacts of the COVID-19 pandemic on our business and operations, and to the extent business conditions regress from current levels we may take additional actions to further reduce costs and/or seek additional financing to bolster our liquidity position.
Exchange of Warrants
OnApril 12, 2021 , we exchanged all 8,668,746 of our outstanding warrants into shares of our common stock at an exchange ratio of 0.263 shares of common stock per warrant, for an aggregate issuance of approximately 2,279,874 shares of common stock in the exchange.
Issuance of 5.625% Senior Secured Second Lien Notes due 2026
OnApril 1, 2021 , we completed a private offering of$315 million of 5.625% Senior Secured Second Lien Notes due 2026 (the "Notes"). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended, pursuant to a purchase agreement among the Company, the guarantors party thereto (the "Guarantors") andJ.P. Morgan Securities LLC , as representative of the initial purchasers. The Notes are guaranteed by the Guarantors (the "Guarantees" and, together with the Notes, the "Securities") on a second lien, senior secured basis. The Notes are guaranteed by each of our existing and future domestic subsidiaries that becomes a borrower or guarantor under the Credit Agreements (as defined below), amended and restated concurrently with the closing of the Notes offering. The Notes and the Guarantees are secured, subject to certain exceptions and permitted liens, by second-priority liens on substantially all of our assets and the assets of the Guarantors that secure on a first-priority basis all of the indebtedness under our ABL Facility (as defined below), the First Lien Floor Plan Facility (as defined below) and certain hedging and cash management obligations, including, but not limited to, equipment, fixtures, inventory, intangibles and capital stock of our restricted subsidiaries now owned or acquired in the future by us or the Guarantors. 20
-------------------------------------------------------------------------------- The Notes were issued pursuant to an indenture datedApril 1, 2021 (the "Indenture"), among us, theGuarantors andWilmington Trust, National Association , as trustee and as collateral agent. The Notes will bear interest at the rate of 5.625% per annum and will mature onApril 15, 2026 . Interest on the Notes is payable in cash onApril 15 andOctober 15 of each year and began onOctober 15, 2021 .
Amended and Restated Credit Arrangements
On
(i) a Sixth Amended and Restated ABL First Lien Credit Agreement, datedApril 1, 2021 , among us, our subsidiaries,JPMorgan Chase Bank, N.A ., as Administrative Agent and the lenders who are parties to the agreement (the "ABL Credit Agreement" and the facility thereunder, the "ABL Facility"); and (ii) a Sixth Amended and Restated Floor Plan First Lien Credit Agreement among us, certain of our subsidiaries,JPMorgan Chase Bank, N.A ., as Administrative Agent and the lenders who are parties to the agreement (the "Floor Plan Credit Agreement" and the facility thereunder, the "First Lien Floor Plan Facility"). The ABL Facility is an asset-based revolving loan facility that provides for borrowings of up to the lesser of$350 million or the borrowing base, in each case, less outstanding loans and letters of credit. The ABL Facility has a maturity date of the earlier of (a)April 1, 2026 , or (b)December 1, 2025 if the Notes remain outstanding onDecember 1, 2025 . The Floor Plan Facility is an asset-based revolving loan facility related to the floor plan equipment that provides for borrowings of up to$50 million . The Floor Plan Facility has an expiration date of the earlier of (a)April 1, 2026 , or (b)December 1, 2025 if the Notes remain outstanding onDecember 1, 2025 . OnDecember 20, 2021 , the Company entered into a First Amendment to the Amended and Restated Floor Plan Credit Agreement, which increased its maximum borrowing capacity to$50 million and increased its credit line borrowing capacity on all OEM floor plan facilities up to$350 million .
Business Description
The Company owns and operates one of the largest integrated equipment dealership platforms in theU.S. Through our branch network, we sell, rent, and provide parts and service support for several categories of specialized equipment, including lift trucks and aerial work platforms, earthmoving equipment, cranes, paving and asphalt equipment and other material handling and construction equipment. We engage in five principal business activities in these equipment categories: (i) new equipment sales; (ii) used equipment sales; (iii) parts sales; (iv) repair and maintenance services; and (v) equipment rentals. We have operated as an equipment dealership for over 37 years and have developed a branch network that includes 64 total locations inMichigan ,Illinois ,Indiana ,Ohio ,Massachusetts ,Maine ,Connecticut ,New Hampshire ,Vermont ,New York ,Virginia andFlorida . We offer our customers a one-stop-shop for their equipment needs by providing sales, parts, service, and rental functions under one roof. More recently, with the acquisitions ofPeakLogix, Inc. ("PeakLogix") inJune 2020 andScottTech, LLC ("ScottTech") inMarch 2021 , we have entered the automated equipment installation and system integration sector, which we believe has natural synergies with our material handling business and positions us to take advantage of the macroeconomic trend in e-commerce and logistics. Within our territories, we are the exclusive distributor of new equipment and replacement parts on behalf of our OEM partners. We enjoy long-standing relationships with leading material handling and construction equipment OEMs, including Hyster-Yale, Volvo, and JCB, among more than 30 others. We are consistently recognized by OEMs as a top dealership partner and have been identified as a nationally recognized Hyster-Yale dealer and multi-year recipient of the Volvo Dealer of the Year award.
Business Segments
We have two reportable segments: material handling and construction equipment.
Our "material handling" segment has been previously reported as our "industrial"
segment. Our segments are determined based on management structure, which is
organized based on types of products sold and customer end markets, as described
in the following paragraph. The operating results for each segment are reported
separately to our Chief Executive Officer (our chief operating decision maker)
to make decisions regarding the allocation of resources, to assess our operating
performance and to make strategic decisions.
21
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The material handling segment is principally engaged in operations related to
the sale, service, and rental of lift trucks in Michigan , Illinois , Indiana , New
York , Virginia and throughout the New England states. The material handling
segment is made up of the legal entities Alta Industrial Equipment Michigan,
LLC , Alta Industrial Equipment Company, LLC , Alta Material Handling New York
State, LLC , PeakLogix, LLC , and Alta Industrial Equipment New York, LLC . The
Construction Equipment segment is principally engaged in operations related to
the sale, service, and rental of construction equipment in Michigan , Indiana ,
Illinois , Ohio , New York , Florida and throughout the New England States. The
construction equipment segment is made up of the legal entities Alta
Construction Equipment, LLC , Alta Construction Equipment Illinois, LLC , Alta
Heavy Equipment Services, LLC , Alta Construction Equipment Florida, LLC , Alta
Construction Equipment Ohio, LLC , Alta Construction Equipment New England, LLC ,
Alta Mine Services, LLC , and Alta Construction Equipment New York, LLC . Ginop
Sales, Inc. is the wholly-owned subsidiary of Alta Kubota Michigan, LLC which is
the wholly-owned subsidiary of Alta Construction Equipment, LLC . As further
explained below, NITCO, LLC , engages in operations related to both the material
handling and the construction equipment segment within a common legal entity.
Alta Equipment Group Inc. , Alta Equipment Holdings, Inc. and Alta Enterprises,
LLC (individually or as sometimes collectively referred to as "Corporate") are
the holding companies for the legal operating entities noted above that make up
each segment. In addition to being a holding companies, the Corporate entities
also hold compensation (including shared based compensation) of our directors,
corporate officers and certain members of our shared-services leadership team,
consulting and legal fees related to acquisitions and capital raising
activities, corporate governance and compliance related matters, certain
corporate development related expenses, interest expense associated with
original issue discounts and deferred financing cost related to previous capital
raises and the Company's income tax provision.
In connection with the purchase of NITCO LLC in 2019, the Company expanded its
full-service material handling and construction equipment dealer operations into
New England market. Given that the sales of the business were more heavily
weighted to material handling versus construction and that NITCO's reporting
systems made it difficult for the construction business to be observed separate
from the material handling operation, NITCO's total financial results were
historically presented within our material handling segment. On January 1, 2021 ,
with the migration of the NITCO business to the Company's main ERP system, the
Company is now able to report the results for the material handling and
construction equipment results within their respective segments for the NITCO
business unit. As such, the Company has re-casted certain prior period
segment-level results for the NITCO business unit to be consistent with the
current period presentation for appropriate period-over-period comparability.
Acquisitions
Ginop
On December 31, 2021 , the Company acquired the stock of Ginop, a privately held
compact construction and agricultural equipment distributor, for a total
purchase price of $30.2 million which includes $0.9 million of the potential
$1.5 million additional earn-out payments tied to post closing performance of
the Ginop business. Alta acquired $0.7 million of cash and $0.3 million of
estimated excess working capital in the transaction, yielding an enterprise
value of approximately $29.2 million . The acquisition strengthens our
construction product and service offerings in Northern Michigan and expands our
relationship with Kubota.
Ambrose
On December 31, 2021 , the Company acquired the assets of Ambrose, a privately
held construction equipment distributor, for a total purchase price of $13.1
million , including a $2.8 million purchase price adjustment due to working
capital. The Company acquired $0.2 million of cash and $0.6 million of estimated
working capital deficit in the transaction, yielding an enterprise value of
approximately $13.5 million . Ambrose is the Northeast's premier asphalt
equipment dealer for more than 33 years, with locations in New Hampshire and
Massachusetts .
Midwest Mine
On December 1, 2021 , the Company acquired the assets of Midwest Mine for a total
purchase price of $6.9 million . Midwest Mine fabricates and installs full
aggregate processing plants for quarries, mines, and recycling operations
throughout the United States and is well-established in the Ohio and Michigan
markets.
Gibson
On October 1, 2021 , the Company acquired the assets of Gibson , a privately held
premium equipment distributor, for a total purchase price of $10.6 million . The
acquisition included $1.2 million of floorplan-eligible new equipment inventory
and the Company assumed $4.4 million of equipment financing at closing, yielding
an enterprise value at close of approximately $13.8
22--------------------------------------------------------------------------------
million.
Baron
On
OnMarch 1, 2021 , the Company acquired the assets ofScottTech , a material handling, warehouse control software, and turn-key warehouse system integration services provider, for a total purchase price of$2.4 million . The acquisition has natural synergies with the Company's prior year acquisition ofPeakLogix and further bolsters our capabilities with customers in the warehousing and logistics, distribution, and e-commerce end-markets.
Vantage
OnDecember 31, 2020 , the Company acquired the assets of Vantage, a construction equipment dealer in Upstate New York, for a total purchase price of$24.3 million . Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$22.6 million . The acquisition expands our construction equipment segment into the Upstate New York market, scales our relationship with a major OEM and diversifies the Company's end markets.
Howell Tractor
OnOctober 30, 2020 , the Company acquired the assets of Howell Tractor, a construction equipment and crane dealer in the greater Chicagoland area, for cash consideration of$23.0 million . Additionally, the Company issued 507,143 shares of its common stock in connection with the purchase agreement, valued at$4.0 million , yielding a total purchase price of approximately$27.0 million . Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$23.7 million . This acquisition expands our presence in theNorthern Illinois andNorthwest Indiana markets adding a best-in-class product to our portfolio and additional service offerings.
OnSeptember 1, 2020 , the Company acquired the assets ofMartin , a compact equipment dealer in the greater Chicagoland area, for a total purchase price of$16.1 million . Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$10.6 million . This acquisition enhances our position in theIllinois construction market, broadens our product portfolio in the compact segment of the construction equipment market and adds valuable service capabilities in the region.
OnJuly 1, 2020 , the Company acquired the assets ofHilo , a material handling equipment dealer with three branches in theNew York City metro area, for a total purchase price, net of cash, of$17.2 million , and potential additional earn-out payments of$1.0 million tied to post closing performance of theHilo business. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$19.0 million . The acquisition aligns with our growth strategy by expanding our distribution footprint with a major OEM, giving us a strategic presence in yet another densely populated major market and strengthens our overall coverage of theNortheastern United States .
OnJune 12, 2020 , the Company acquired the assets ofPeakLogix , a warehouse design, automated equipment installation and systems integrator, for a total purchase price, net of cash, of$6.4 million , which includes$1.0 million in an unsecured one-year promissory note at 6% and earn-out payment of a minimum$2.0 million up to$3.7 million to be paid out to former owners based on meeting certain financial targets throughout the 5-year earn-out period. The acquisition represents the Company's entrance into the automated equipment installation and system integration sector, which we believe has natural synergies with our material handling business and positions us to take advantage of the macroeconomic trend in warehousing and logistics, and e-commerce. 23
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Liftech
OnFebruary 14, 2020 , the Company acquired the assets of Liftech, a material handling equipment dealer in Upstate New York, for a total purchase price of$18.4 million , which was paid out of funds from closing of the reverse recapitalization. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$15.2 million . The acquisition primarily expands our materials handling segment into the Upstate New York market, scales our relationship with a major OEM and provides an opportunity for Alta to drive market share with allied products in the region.
OnFebruary 14, 2020 , the Company acquired the assets ofFlagler , a construction equipment dealer inFlorida , for a total purchase price, net of cash, of$75.8 million , which was paid out of funds from the closing of the reverse recapitalization. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was$79.0 million . The acquisition expands our heavy equipment business into theFlorida construction market, scales our relationship with a major OEM and provides an opportunity for us to deploy our aftermarket strategies in a robust and growing construction market in the southeasternUnited States .
Financial Statement Components
Our revenues and related costs are primarily derived from sale or rental of equipment and related activities, and consist of:
New Equipment Sales. We sell new heavy construction and material handling equipment and are a leading regional distributor for over 30 nationally recognized equipment manufacturers, including Hyster,Yale , Volvo, and JCB. Our new equipment sales operation is a primary source of new customers for the rental, parts and services business. The majority of our new equipment sales is predicated on exclusive distribution agreements we have with best-in-class OEMs. The sale of new equipment to customers, while profitable, acts as a means of generating equipment field population and activity for our higher-margin aftermarket revenue streams, specifically service and parts. We also sell tangential products related to our material handling equipment offerings and, with the acquisition ofPeakLogix andScottTech , we provide warehouse design capabilities, automated equipment installation, system integration solutions and warehouse controls software. Used Equipment Sales. We sell used equipment which is typically equipment that has been taken in on trade from a customer that is purchasing new equipment, equipment coming off a third-party financing lease arrangement that we purchase from the financing company, or used equipment that is sourced for our customers in the open market by our used equipment specialists. Used equipment sales made in our territories, like new equipment sales, generate parts and services business for the Company, as well. Parts Sales. We sell replacement parts to customers and supply parts to our own rental fleet. Our in-house parts inventory is extensive such that we are able to provide timely service support to our customers. The majority of our parts inventory is made up of OEM replacement parts for those OEM's with which we have exclusive dealership agreements to sell new equipment. Service Support. We provide maintenance and repair services for customer-owned equipment, and we maintain our own rental fleet. In addition to repair and maintenance on an as needed or scheduled basis, we provide ongoing preventative maintenance services and warranty repairs for our customers. We have committed substantial resources to training our technical service employees and have a full-scale service infrastructure that we believe differentiates us from our competitors. Approximately half of our employees are skilled service technicians. Training, paid time off, and other non-billable costs of maintaining our expert technicians flow through this department in addition to the direct customer-billable labor. Equipment Rentals. We rent heavy construction, aerial, material handling, and compact equipment to our customers on a daily, weekly and monthly basis. Our rental fleet, which is well-maintained has an original acquisition cost (which we define as the cost originally paid to manufacturers plus any capitalized costs) of$451.7 million . The original acquisition cost of our rental fleet excludes the$9.7 million of assets associated with our guaranteed purchase obligations, which are assets that are not in our day-to-day operational control. In addition to being a core business, our rental business also creates cross-selling opportunities for us in our sales and product support activities. Rental Equipment Sales. We also sell rental equipment from our rental fleet. Customers often have options to purchase equipment after or before rental agreements have matured. Rental equipment sales, like new and used equipment sales, generate customer-based equipment field population within our territories and ultimately yield high-margin parts and services revenue for us. General and Administrative Expenses. These costs are comprised of three main components: personnel costs, operational costs, and occupancy costs. Personnel costs are comprised of hourly and salaried wages for administrative employees, including incentive compensation, and employee benefits, including medical benefits. Operational costs include marketing activities, costs associated with deploying, maintaining and leasing our service vehicle fleet, insurance, information technology, office and shop supplies, general corporate costs, depreciation of non-sales and rental related assets, and intangible amortization. Occupancy costs are comprised of all expenses related to our facility infrastructure, including rent, utilities, property taxes, and building insurance. 24 -------------------------------------------------------------------------------- Other Income (Expense). This section of the income statement is mostly comprised of interest expense and other miscellaneous items that result in income or expense. Interest expense is mostly driven by our OEM floorplan financing arrangements, a working capital line of credit, and our second lien secured notes. Also included in this section of the financials are non-recurring costs, in particular expenses associated with the extinguishment of debt.
Results of Operations
Year ended
Consolidated Results
Year Ended
December 31, Increase (Decrease) Percent of Revenue
2021 2020 2021 versus 2020 2021 versus 2020
Revenues:
New and used equipment
sales $ 568.8 $ 410.3 $ 158.5 38.6 % 46.9 % 47.0 %
Parts sales 178.5 129.6 48.9 37.7 % 14.7 % 14.8 %
Service revenue 165.5 128.5 37.0 28.8 % 13.7 % 14.7 %
Rental revenue 155.5 118.8 36.7 30.9 % 12.8 % 13.6 %
Rental equipment sales 144.5 86.4 58.1 67.2 % 11.9 % 9.9 %
Net revenue $ 1,212.8 $ 873.6 $ 339.2 38.8 % 100.0 % 100.0 %
Cost of revenues:
New and used equipment
sales $ 478.0 $ 356.4 $ 121.6 34.1 % 39.5 % 40.8 %
Parts sales 123.4 89.1 34.3 38.5 % 10.2 % 10.2 %
Service revenue 68.2 49.5 18.7 37.8 % 5.6 % 5.7 %
Rental revenue 20.6 20.2 0.4 2.0 % 1.7 % 2.3 %
Rental depreciation 85.3 68.4 16.9 24.7 % 7.0 % 7.8 %
Rental equipment sales 122.9 75.5 47.4 62.8 % 10.1 % 8.6 %
Cost of revenue $ 898.4 $ 659.1 $ 239.3 36.3 % 74.1 % 75.4 %
Gross profit $ 314.4 $ 214.5 $ 99.9 46.6 % 25.9 % 24.6 %
General and administrative
expenses $ 285.9 $ 216.0 $ 69.9 32.4 % 23.6 % 24.7 %
Depreciation and
amortization expense 10.5 6.6 3.9 59.1 % 0.8 % 0.8 %
Total general and
administrative expenses $ 296.4 $ 222.6 $ 73.8 33.2 % 24.4 % 25.5 %
Income (loss) from
operations $ 18.0 $ (8.1 ) $ 26.1 (322.2 )% 1.5 % (0.9 )%
Other (expense) income
Interest expense, floor
plan payable - new
equipment $ (1.7 ) $ (2.3 ) $ 0.6 (26.1 )% (0.1 )% (0.3 )%
Interest expense - other (22.3 ) (21.5 ) (0.8 ) 3.7 % (1.9 )% (2.4 )%
Other income 0.7 8.9 (8.2 ) (92.1 )% 0.1 % 1.0 %
Loss on extinguishment of
debt (11.9 ) (7.6 ) (4.3 ) 56.6 % (1.0 )% (0.9 )%
Total other (expense)
income $ (35.2 ) $ (22.5 ) $ (12.7 ) 56.4 % (2.9 )% (2.6 )%
Loss before taxes $ (17.2 ) $ (30.6 ) $ 13.4 (43.8 )% (1.4 )% (3.5 )%
Income tax provision
(benefit) 3.6 (6.6 ) 10.2 (154.5 )% 0.3 % (0.8 )%
Net loss $ (20.8 ) $ (24.0 ) $ 3.2 (13.3 )% (1.7 )% (2.7 )%
Preferred stock dividends (2.6 ) - (2.6 ) 100% (0.2 )% -
Net loss available to
common shareholders $ (23.4 ) $ (24.0 ) $ 0.6 (2.5 )% (1.9 )% (2.7 )%
25-------------------------------------------------------------------------------- Revenues: Consolidated revenues increased by$339.2 million , or 38.8%, to$1,212.8 million for the year endedDecember 31, 2021 as compared to the previous year. Drivers of this period over period increase include the favorable full period impact from the acquisitions completed in 2020, organic growth coming from the favorable business climate existing in 2021, and the relative impact COVID-19 had on the 2020 comparative period. The acquisitions completed during 2021 had some impact on the period over period revenue increase, but because the majority of these acquisitions occurred in the fourth quarter of the calendar year, the overall impact on the annual results were relatively minor in comparison to the other drivers identified In observing the consolidated results on an organic basis, thereby including only the results of the entities that appear fully in both periods, new and used equipment sales increased 7.7% over prior year as market demand for equipment rebounded in 2021, but lead time delays within the supply chain limited our ability for even greater new equipment throughput, resulting in a large sales order backlog. Organic parts and service revenues increased by 10.1% and 11.0%, respectively, over last year, as the impact of COVID-19 had a negative impact on the aftermarket revenue streams in 2020. Similarly, rental revenue exhibited growth on an organic basis of 8.7% over last year as physical utilization trends improve and rental rates have increased amidst industry-wide delays in new equipment deliveries. Lastly, rental equipment sales increased organically by 13.4% as customer demand grew in the year for lightly used equipment while lead times for new equipment have been extended amid the global supply chain issues impacting many equipment manufacturers. Importantly, despite macro-level supply chain issues, our robust parts inventory and ongoing parts availability from key OEMs has allowed us to continue to service customers and maintain profitability in our high margin product support departments. Gross profit (GP): Year Ended December 31, 2021 2020 Change Consolidated GP% GP% GP% New and used equipment sales 16.0 % 13.1 % 2.9 % Parts sales 30.9 % 31.3 % (0.4 )% Service revenue 58.8 % 61.5 % (2.7 )% Rental revenue 31.9 % 25.4 % 6.5 % Rental equipment sales 14.9 % 12.6 % 2.3 % Consolidated gross profit 25.9 % 24.6 % 1.3 % Consolidated gross profit increased by 1.3% from 24.6% in the year endedDecember 31, 2020 to 25.9% over the same period in 2021. New and used equipment sales as well as rental equipment sales margins improved in 2021 compared to last year as retail pricing levels increased and our material handling segment's design and build business, which realizes higher gross margins than traditional lift truck sales, was a larger portion of equipment sales in 2021 versus 2020. We realized an increase in rental revenue gross margin in 2021 largely as a result improved physical utilization of the rental fleet and our updated depreciation method as described in our Note 2 to the Consolidated Financial Statements. Parts sales gross margins were down modestly year-over-year primarily due to the mix of revenue being more heavily weighted to our construction segment where parts gross margins are lower when compared to our material handling segment, relatively speaking. Additionally, service gross margins reduced, in part due to a year-over-year labor cost allocation change in our material handling segment, described further in our segment-based discussion and analysis. General and Administrative expenses: Consolidated general and administrative ("G&A") expenses increased by 33.2% to$296.4 million for the year endedDecember 31, 2021 as compared to the same period last year. This increase was mainly driven by the full period impact from our 2020 acquisitions as well as an increases in certain sales-based expenses such as sales commissions and technician operating costs (i.e. vehicle leases, repairs, and fuel), benefits-related costs from a rise in employees seeking healthcare postponed from 2020 due to the COVID-19 pandemic, along with various incremental administrative and information technology costs that relate to onboarding and integrating acquired companies onto our operating platform which we believe will yield long-term operating efficiencies and benefits from a risk management perspective. Further, certain temporary cost-saving measures were in place during 2020, including but not limited to a reduction in executive-level compensation, travel and entertainment restrictions, discretionary spending freezes, and a suspension of matching contributions into the 401(k), which assisted in defraying the reductions in revenue amid the more acute phases of the COVID-19 pandemic, while such measures were not in place in 2021. Lastly, consolidated G&A includes expenses related to professional and outside services related to acquiring and then integrating our acquisition targets, and professional services related to capital raising activities, both of which are non-recurring expenses in nature. Other (expense) income: Consolidated other expense increased by$12.7 million for the year endedDecember 31, 2021 compared to the same period last year. The unfavorable change was primarily attributable to$8.0 million in key man life insurance proceeds received in 2020 as a result of the passing away of ourConstruction Group President and higher debt extinguishment costs incurred in 2021. Additionally, the year over year change was also attributable to the$11.9 million loss on debt extinguishment realized for the year endedDecember 31, 2021 compared to the same period last year. 26 -------------------------------------------------------------------------------- Provision (benefit) for income taxes: Income tax provision for the year endedDecember 31, 2021 was$3.6 million compared to$6.6 million benefit for the year endedDecember 31, 2020 . This change is due to establishing a valuation allowance in 2021 against the deferred tax assets associated with losses for which we may not realize a related tax benefit. The benefit in 2020 was the result of the level of pre-tax loss for the period fromFebruary 14, 2020 toDecember 31, 2020 . Preferred Stock Dividend: Preferred stock dividends were$2.6 million for the year endedDecember 31, 2021 . This relates to the Company's dividend payout on its Series A Preferred Stock that it issued onDecember 22, 2020 . Material Handling Results Year Ended December 31, Increase (Decrease) 2021 2020 2021 versus 2020 Revenues: New and used equipment sales$ 258.3 $ 195.1 $ 63.2 32.4 % Parts sales 65.4 55.5 9.9 17.8 % Service revenue 94.6 80.0 14.6 18.3 % Rental revenue 48.4 42.4 6.0 14.2 % Rental equipment sales 0.8 7.5 (6.7 ) (89.3 )% Net revenue$ 467.5 $ 380.5 $ 87.0 22.9 % Cost of revenues: New and used equipment sales 205.2 163.7 41.5 25.4 % Parts sales 42.5 35.2 7.3 20.7 % Service revenue 37.5 29.8 7.7 25.8 % Rental revenue 6.2 7.2 (1.0 ) (13.9 )% Rental depreciation 14.2 17.6 (3.4 ) (19.3 )% Rental equipment sales 0.7 5.6 (4.9 ) (87.5 )% Cost of revenue$ 306.3 $ 259.1 $ 47.2 18.2 % Gross profit$ 161.2 $ 121.4 $ 39.8 32.8 % General and administrative expenses 140.7 106.2 34.5 32.5 % Depreciation and amortization expense 5.1 3.5 1.6 45.7 % Total general and administrative expenses$ 145.8 $ 109.7 $ 36.1 32.9 % Income from operations$ 15.4 $ 11.7 $ 3.7 31.6 % Other (expense) income Interest expense, floor plan payable - new equipment (0.6 ) (1.1 ) 0.5 (45.5 )% Interest expense - other (7.6 ) (4.1 ) (3.5 ) 85.4 % Other income 3.0 0.6 2.4 400.0 % Total other (expense) income$ (5.2 ) $ (4.6 ) $ (0.6 ) 13.0 % Net income$ 10.2 $ 7.1 $ 3.1 43.7 % 27
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Percent of Revenue
Material Handling Year Ended December 31,
2021 2020
Revenues:
New and used equipment sales 55.2 % 51.3 %
Parts sales 14.0 % 14.6 %
Service revenue 20.2 % 21.0 %
Rental revenue 10.4 % 11.1 %
Rental equipment sales 0.2 % 2.0 %
Net revenue 100.0 % 100.0 %
Cost of revenues:
New and used equipment sales 44.0 % 43.0 %
Parts sales 9.1 % 9.3 %
Service revenue 8.0 % 7.8 %
Rental revenue 1.3 % 1.9 %
Rental depreciation 3.0 % 4.6 %
Rental equipment sales 0.1 % 1.5 %
Cost of revenue 65.5 % 68.1 %
Gross profit 34.5 % 31.9 %
Revenues: Material handling segment revenues increased by 22.9% to
$467.5 million for the year ended December 31, 2021 as compared to the same
period last year. Overall, revenue streams were up primarily from the economic
recovery from the COVID-19 pandemic that negatively influenced material handling
revenues in 2020, along with the impact of acquisitions made in both 2020 and
2021, more specifically the growth attributed to our design and build and system
integration project revenues resulting from the acquisition of PeakLogix and
ScottTech . On an organic basis, focusing only on the material handling entities
that were fully operational over both comparable timeframes of the 2020 and 2021
calendar years, and despite supply chain delays, new and used equipment sales
increased 3.1%. Aftermarket parts and service revenues increased 8.0%
organically when comparing to the same period last year. Rental revenue
increased 6.7% on an organic basis from the same period last year as a result of
improved fleet utilization and an increased rental rate environment.
Gross profit (GP):
Year Ended December 31,
2021 2020 Change
GP% GP% GP%
New and used equipment sales 20.6 % 16.1 % 4.5 %
Parts sales 35.0 % 36.6 % (1.6 )%
Service revenue 60.4 % 62.8 % (2.4 )%
Rental revenue 57.9 % 41.5 % 16.4 %
Rental equipment sales 12.5 % 25.3 % (12.8 )%
Segment gross profit 34.5 % 31.9 % 2.6 %
Material Handling gross profit increased to 34.5% in the year ended December 31,
2021 from 31.9% compared to the same period in 2020. We realized improved new
and used equipment gross margin in 2021 when compared to the same period in 2020
as retail pricing for equipment has strengthened amid increased demand for
equipment and a dearth of new supply. Increased equipment margins are also
attributable to Peaklogix and ScottTech's influence on the segment, as their
design and build and system integration projects realize higher relative margins
than traditional lift truck sales. We also realized an increase in rental
revenue gross margin in 2021 as cost of revenues decreased, mainly due to our
updated depreciation method as described in our Note 2 to the Consolidated
Financial Statements. Service revenue gross profit margins decreased by 2.4%
while the parts sales gross profit margins decreased by 1.6% in 2021 compared to
the same period in 2020. The service margin declines in the material handling
segment can be primarily attributed to the historic allocation of technician
labor cost in our New York City -based business to general and administrative
expense versus cost of labor while they operated on their legacy accounting
system. On June 1, 2021 , the business unit was fully integrated into our ERP
platform and cost of technician labor is properly allocated since this date. A
decline in rental equipment sales gross margins was noted year over year, but as
rental equipment sales in the material handling segment represent a minor
component of the total sales volume, such volatility in margin is not unusual,
nor is it a material enough contributory factor of the segment to warrant any
concern.
28
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General and administrative expenses: Material handling general and
administrative ("G&A") expenses increased by 32.9% to $145.8 million for the
year ended December 31, 2021 as compared to the same period last year. This
change was mainly driven by the full year impact in 2021 of the Peaklogix and
Hilo acquisitions, which were June and July 2020 acquisitions, respectively, and
the ScottTech and Baron acquisitions which closed during the first and third
quarters of 2021, respectively. Also driving the incremental increase are
increases in certain variable costs like sales-based expenses such as sales
commissions and technician operating costs (i.e. vehicle leases, repairs, and
fuel) as the business scales organically. Additionally, higher employee benefit
related expenses attributable to the growing number of medical expenditures in
2021 when compared to 2020, and the impact of increased technology expenses are
also leading to year over year increases. Lastly, many cost-saving measures were
enacted in the second and third quarters of 2020 which assisted in defraying the
reductions in revenue amid the most acutely impacted periods of the COVID-19
pandemic. These measures were not in place during 2021.
Other (expense) income: Material handling other expense increased by $0.6
million to $5.2 million for the year ended December 31, 2021 as compared to the
same period last year primarily due to higher interest expense, which is largely
associated with the draws made against the ABL credit facility to support the
acquisition activities of the segment.
Construction Equipment Results
Year Ended
December 31, Increase (Decrease)
2021 2020 2021 versus 2020
Revenues:
New and used equipment sales $ 310.5 $ 215.2 $ 95.3 44.3 %
Parts sales 113.1 74.1 39.0 52.6 %
Service revenue 70.9 48.5 22.4 46.2 %
Rental revenue 107.1 76.4 30.7 40.2 %
Rental equipment sales 143.7 78.9 64.8 82.1 %
Net revenue $ 745.3 $ 493.1 $ 252.2 51.1 %
Cost of revenues:
New and used equipment sales 272.8 192.7 80.1 41.6 %
Parts sales 80.9 53.9 27.0 50.1 %
Service revenue 30.7 19.7 11.0 55.8 %
Rental revenue 14.4 13.0 1.4 10.8 %
Rental depreciation 71.1 50.8 20.3 40.0 %
Rental equipment sales 122.2 69.9 52.3 74.8 %
Cost of revenue $ 592.1 $ 400.0 $ 192.1 48.0 %
Gross profit $ 153.2 $ 93.1 $ 60.1 64.6 %
General and administrative
expenses 134.6 95.9 38.7 40.4 %
Depreciation and amortization
expense 5.4 3.1 2.3 74.2 %
Total general and administrative
expenses $ 140.0 $ 99.0 $ 41.0 41.4 %
Income (loss) from operations $ 13.2 $ (5.9 ) $ 19.1 (323.7 )%
Other (expense) income
Interest expense, floor plan
payable - new equipment (1.1 ) (1.2 ) 0.1 (8.3 )%
Interest expense - other (12.8 ) (9.9 ) (2.9 ) 29.3 %
Other (expense) income (2.2 ) 0.3 (2.5 ) (833.3 )%
Total other (expense) income $ (16.1 ) $ (10.8 ) $ (5.3 ) 49.1 %
Net loss $ (2.9 ) $ (16.7 ) $ 13.8 (82.6 )%
29--------------------------------------------------------------------------------
Percent of Revenue
Construction Equipment Year Ended December 31,
2021 2020
Revenues:
New and used equipment sales 41.6 % 43.7 %
Parts sales 15.2 % 15.0 %
Service revenue 9.5 % 9.8 %
Rental revenue 14.4 % 15.5 %
Rental equipment sales 19.3 % 16.0 %
Net revenue 100.0 % 100.0 %
Cost of revenues:
New and used equipment sales 36.6 % 39.1 %
Parts sales 10.9 % 10.9 %
Service revenue 4.1 % 4.0 %
Rental revenue 1.9 % 2.6 %
Rental depreciation and amortization 9.5 % 10.3 %
Rental equipment sales 16.4 % 14.2 %
Cost of revenue 79.4 % 81.1 %
Gross profit 20.6 % 18.9 %
Revenues: Construction equipment segment revenues increased by 51.1% to
$745.3 million for the year ended December 31, 2021 as compared to the same
period last year. This increase was mainly attributable to organic growth in the
segment and the impact of the full period results from the Flager, Martin ,
Howell Tractor, and Vantage acquisitions that occurred throughout 2020. The
Construction equipment segment, which was less operationally impacted by
COVID-19 versus our material handling segment, was also quicker to recover from
the impact of the COVID-19 pandemic and, from an equipment sales perspective,
was relatively less impacted by the supply chain constraints in 2021. On an
organic basis, new and used equipment sales increased 15.0%, and parts and
service revenues are up 16.7% when comparing to the same period last year, as
technician headcount increased on an organic basis. Rental revenue has increased
on an organic basis of 10.6%, and rental equipment sales increased 27.0% from
the same time a year ago on an organic basis. Our rental department experienced
an increase in both utilization and rate improvement, along with an increase in
the demand for customers seeking the purchase of lightly used equipment amid OEM
production shortages for new equipment. Sustaining our rental fleet size
throughout the COVID-19 pandemic has proven beneficial to our 2021 results as we
are well-positioned to secure rental and sales opportunities in a strong pricing
environment. Of further note, and although not included in the organic figures
mentioned above due to the acquisition occurring in February 2020 , our Florida
region has contributed significantly to the overall growth in the segment. If
annualizing the regional results for 2020 and comparing them to the actual 2021
results, the Florida region of the construction segment has experienced year
over year revenue growth of close to 50%, exceeding double digit growth in each
of the key revenue categories.
Gross profit (GP):
Year Ended December 31,
2021 2020 Change
GP% GP% GP%
New and used equipment sales 12.1 % 10.5 % 1.6 %
Parts sales 28.5 % 27.3 % 1.2 %
Service revenue 56.7 % 59.4 % (2.7 )%
Rental revenue 20.2 % 16.5 % 3.7 %
Rental equipment sales 15.0 % 11.4 % 3.6 %
Segment gross profit 20.6 % 18.9 % 1.7 %
Construction equipment gross profit increased by 1.7% to 20.6% for the year
ended December 31, 2021 , from 18.9% compared to the same period in 2020. New and
used equipment sales margins as well as parts margins improved compared to the
same period in 2020 amidst a supply-constrained marketplace causing retail
prices to rise. An increase in rental revenue and rental equipment sales gross
margins were the main drivers in the overall improved margin. Rental margins
increased primarily due to improved utilization and a rising rental rate
environment in 2021 when compared to the COVID-19 impacted 2020. Service gross
margins decreased modestly year-over-year, primarily as a result of the
compressed margins on warranty work.
30
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General and Administrative expenses: Construction equipment general and
administrative (G&A) expenses increased by 41.4% to $140.0 million for the year
ended December 31, 2021 as compared to the same period last year. The year over
year increase was mainly attributable to the full period G&A impact as a result
of the construction segment acquisitions of Flagler , Martin , Howell Tractor, and
Vantage throughout 2020. Also driving the incremental increase are increases in
certain variable costs like sales-based expenses such as sales commissions and
technician operating costs (i.e. vehicle leases, repairs, and fuel) as the
business scales organically. Additionally, higher employee benefit related
expenses attributable to the growing number of medical expenditures in 2021 when
compared to 2020, and the impact of increased technology expenses are also
leading to year over year increases.
Other (expense) income: Construction equipment other expense increased to $16.1
million for the year ended December 31, 2021 as compared to the same period last
year. The year over year increase was mainly due to the interest expense
respective to the 2020 acquisitions as assets were financed through our line of
credit and floorplan financing facilities.
Liquidity and Capital Resources
Year ended
Cash Flow from Operating Activities. Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. For the year endedDecember 31, 2021 , operating activities resulted in net cash used in operations of$30.7 million . Our reported net loss of$20.8 million , when adjusted for non-cash income and expense items, such as depreciation and amortization, former debt extinguishment, provision for losses on accounts receivable, and the share-based payments, provided net cash inflows of$77.3 million . Changes in working capital included a$154.1 million increase in inventories,$14.6 million in net payments on manufacturer floor plans, and a$51.4 million increase in accounts receivable and prepaid expenses and other assets. Cash flows from operating activities were favorably impacted by$144.5 million due to proceeds from sale of rental equipment, and a$29.0 million favorable change in accounts payable, accrued expenses, customer deposits, leases and other liabilities. For the year endedDecember 31, 2020 , operating activities resulted in net cash used in operations of$35.0 million . Our reported net loss of$24.0 million , when adjusted for non-cash income and expense items, such as depreciation and amortization, former debt extinguishment, provision for losses on accounts receivable, and the share-based payments, provided net cash inflows of$43.8 million . Changes in working capital included a$136.5 million increase in inventories,$38.0 million in net payments on manufacturer floor plans, and a$6.8 million increase in accounts receivable and prepaid expenses and other assets. Cash flows from operating activities were favorably impacted by$86.4 million due to proceeds from sale of rental equipment, and a$16.1 million favorable change in accounts payable, accrued expenses, customer deposits, leases and other liabilities. Cash Flow from Investing Activities. For the year endedDecember 31, 2021 , our cash used in investing activities was$113.4 million . This was mainly due to$63.4 million use of cash as a result of the recent acquisitions and$50.0 million purchases of rental equipment, non-rental property and equipment, and equipment contracted under guaranteed purchase obligations offset by proceeds from the sale of assets. For the year endedDecember 31, 2020 , our cash used in investing activities was$227.9 million . This was mainly due to$180.0 million use of cash as a result of the 2020 acquisitions and$47.9 million purchases of rental equipment, non-rental property and equipment, and equipment contracted under guaranteed purchase obligations offset by proceeds from the sale of assets. Cash Flow from Financing Activities. For the year endedDecember 31, 2021 , cash provided by financing activities was$83.8 million . Net proceeds under our lines of credits and floor plans with an unaffiliated source (i.e. a non-vendor) were$59.4 million and$4.8 million , respectively. Net proceeds from issuance of notes amounted to$310.2 million . This was partially offset by payments related to the extinguishment of former debt which totaled$153.1 million , expenditures of debt issuance costs of$1.7 million ,$3.8 million of payments on long term debt and finance lease obligations, and promissory note and dividend payments totaling$3.60 million . For the year endedDecember 31, 2020 , cash provided by financing activities was$264.1 million . The favorable impact was mainly due to$175.7 million proceeds from the completion of the reverse recapitalization. Net proceeds under our lines of credits and floor plans with an unaffiliated source (i.e. a non-vendor) were$166.1 million and$6.8 million , respectively. Net proceeds under long-term debt amounted to$149.4 million . Additionally, we had cash inflows as a result of proceeds from issuance of common stock and preferred stock of$32.2 million and disgorgement of short swing profits of$1.6 million . This was partially offset by payments related to the extinguishment of former debt, a line of credit and redemption of former shareholders' notes payable all of which totaled$221.6 million , an extinguishment of a warrant liability of$29.6 million , expenditures of debt issuance costs of$2.7 million , repurchases of common stock of$5.9 million , a$7.9 million payment on long term debt and finance lease obligations.
Sources of Liquidity
The Company reported
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On April 1, 2021 , the Company completed a private offering of $315 million of
its 5.625% Senior Secured Second Lien Notes due 2026 (the "Notes"). The Notes
were sold in a private placement in reliance on Rule 144A and Regulation S under
the Securities Act of 1933, as amended, pursuant to a purchase agreement among
the Company, the guarantors party thereto and J.P. Morgan Securities LLC , as
representative of the initial purchasers. The Notes are guaranteed by the
guarantors on a second lien, senior secured basis. The Notes were issued
pursuant to an indenture dated April 1, 2021 among the Company, the guarantors
and Wilmington Trust, National Association , as trustee and as collateral agent.
The Notes mature on April 15, 2026 . Interest on the Notes is payable in cash on
April 15 and October 15 of each year, beginning on October 15, 2021 .
Effective April 1, 2021 , the Company amended and restated its credit facility
with its first lien lender by entering into the Sixth Amended and Restated ABL
First Lien Credit Agreement ("Amended and Restated Credit Agreement" and the
facility thereunder, the "ABL Facility") by and among Alta Equipment Group Inc.
and the other credit parties named therein, the lenders named therein, JP Morgan
Chase Bank, N.A. , as Administrative Agent, and the syndication agents and
documentation agent named therein. Subject to the borrowing base limitation in
the Amended and Restated Credit Agreement, the ABL Facility provides borrowings
of up to $350 million and matures on the earlier of April 1, 2026 or December 1,
2025 if any of the Notes remain outstanding as of December 1, 2025 .
In connection with the offering of the Notes and the Amended and Restated Credit
Agreement, the Company amended and restated its floor plan facility with its
first lien lender by entering into the Sixth Amended and Restated Floor Plan
First Lien Credit Agreement ("Floor Plan Credit Agreement") by and among Alta
Equipment Group Inc. and the other credit parties named therein, and the lender
JP Morgan Chase Bank, N.A. , as Administrative Agent. The Floor Plan Credit
Agreement is an asset-based revolving loan facility related to the floor plan
equipment that provides for borrowings of up to the lesser of $50 million , as a
result of the December 20, 2021 First Amendment to the Amended and Restated
Floor Plan Credit Agreement, or the borrowing base. The Floor Plan Facility has
an expiration date of the earlier of (a) April 1, 2026 , or (b) December 1, 2025
if the Notes remain outstanding on December 1, 2025 .
Line of Credit and Floor Plan First
The Company has a revolving line of credit with its first lien holder with advances on the line being supported by eligible accounts receivable, parts, and otherwise unencumbered new and used equipment inventory and rental equipment. The revolving line of credit has a maximum borrowing capacity of$350 million and interest cost is the Secured Overnight Financing Rate ("SOFR") plus an applicable margin or the CB Floating Rate, depending on the borrowing. As ofDecember 31, 2021 , the Company had an outstanding revolving line of credit balance of$100.7 million , excluding unamortized debt issuance costs. The Company has a First Lien Floor Plan Facility with its first lien lender to primarily finance new inventory. This First Lien Floor Plan Facility has a maximum borrowing capacity of$50 million . The interest cost for the First Lien Floor Plan Facility is SOFR plus an applicable margin. The First Lien Floor Plan Facility is collateralized by substantially all assets of the Company. As ofDecember 31, 2021 , the Company had an outstanding balance on their First Lien Floor Plan Facility of$30.6 million , excluding unamortized debt issuance costs.
Original Equipment Manufacturer ("OEM") Captive Lenders and Suppliers' Floor Plans
OEM captive lender and suppliers' floor plans payable are financing arrangements for new and used inventory and rental equipment. We have such arrangements with several OEM captive lenders and suppliers each with borrowing capacities ranging from$2.0 million to$102.0 million . Certain floor plans provide for a five to twelve-month interest only or deferred payment period. In addition, these floor plan agreements provide for interest or principal free terms at the supplier's discretion. The Company routinely sells equipment that is financed under OEM captive lender floor plans prior to the original maturity date of the financing agreement. The related OEM captive lender floor plans payable is then due and payable at the time the equipment being financed is sold. Maximum borrowings under the floor plans and the revolving line of credit are limited to$750 million . The total amount outstanding as ofDecember 31, 2021 andDecember 31, 2020 was$255.6 million and$316.6 million , exclusive of debt issuance and deferred financings costs of$2.4 million and$1.5 million , respectively
Senior Secured Second Lien Notes
As ofDecember 31, 2021 , outstanding borrowings under the Senior Secured Second Lien Notes were$310.0 million , which included$5.0 million deferred financing costs and original issue discounts. As ofDecember 31, 2021 , the effective interest rate on the Notes, taking into account the original issue discount, is 5.93%. 32
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Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by our service-related operations and the sales of new, used and rental fleet equipment along with rentals of such equipment, proceeds from the issuance of debt, and borrowings available under our lines of credit and floor plans. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under lines of credit and flooring plans payable, fund acquisitions, and meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the uses described above encompass the principal demands on our cash and availability under our lines of credit in the future. The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the period endedDecember 31, 2021 was approximately$207.6 million , including$165.3 million of transfers from new and used inventory to rental fleet. This gross rental fleet capital expenditure was offset by sales proceeds of rental equipment of approximately$144.5 million for the period endedDecember 31, 2021 as our business model is to sell lightly used inventory to customers from our rental fleet to increase field population in our geographies. In response to changing economic conditions, we have the flexibility to modify our capital expenditures, especially as it relates to rental fleet. To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness, will depend upon our future operating performance and the availability of borrowings under the lines of credit and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash, and available borrowings under the lines of credit will be adequate to meet our future liquidity needs for the foreseeable future. As ofDecember 31, 2021 , we had$385.2 million of available borrowings under the revolving line of credit and floor plans. We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations, or seeking to raise additional debt or equity capital. Given current economic and market conditions, including the volatility in the global capital markets, we cannot assure investors that any of these actions could be affected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt. The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on the Company. As ofDecember 31, 2021 , there was$3.4 million in outstanding letters of credits issued in the normal course of business. Critical Accounting Policies In the preparation of consolidated financial statements prepared in conformity withU.S. generally accepted accounting principles ("GAAP"), we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. Our management, on an ongoing basis, reviews these estimates and assumptions. While we believe the estimates and judgments we use in preparing our consolidated financial statements are appropriate, they are subject to future events and uncertainties regarding their outcome and, therefore, actual results may materially differ from these estimates. We consider the following items in the consolidated financial statements to require significant estimation or judgment. See Note 2 to our consolidated financial statements for the year endedDecember 31, 2021 for a summary of our significant accounting policies.
Revenue Recognition
Revenues are recognized when control of promised goods or services is
transferred to customers in an amount that reflects the consideration the
business expects to be entitled to in exchange for those goods or services.
Control is transferred when the customer has the ability to direct the use of
and obtain the benefits from the goods or services. The majority of our sales
agreements contain performance obligations satisfied at a point in time when
control is transferred to the customer. For agreements with multiple performance
obligations, which are infrequent, judgment is required to determine whether
performance obligations specified in these agreements are distinct and should be
accounted for as separate revenue transactions for recognition purposes. In
these types of agreements, we generally allocate sales price to each distinct
performance obligation based on the observable selling price.
We enter into various equipment sale transactions with certain customers,
whereby customers purchase equipment from us and then lease the equipment to a
third party. In some cases, we provide a guarantee to repurchase the equipment
back at the end of the lease term between the customer and third-party lessee at
a set residual amount set forth in the initial sales contract or pay the
33
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customer for the deficiency, if any, between the sale proceeds received for the
equipment and the guaranteed minimum resale value. We are precluded from
recognizing a sale of equipment if we guarantee to repurchase the sold equipment
back or guarantee the resale value of the equipment. Rather, these transactions
are accounted for in accordance with ASC 840, Leases ("ASC 840") in 2020 and ASC
842, Leases ("ASC 842") in 2021.
Deferred revenue, with respect to the aforementioned sale transactions, represents the net proceeds upon the equipment's initial transfer. These amounts, excluding the guaranteed residual value, are recognized into rental revenue on a pro-rata basis over the leased contract period up to the first exercise date of the guarantee.
We also enter into various rental agreements whereby owned equipment is rented
to customers. Revenue from the majority of rental agreements is recognized over
the term of the agreement in accordance with ASC 840 in 2020 and ASC 842 in
2021. A rental contract includes rates for daily, weekly or monthly use, and
rental revenues are earned on a daily basis as rental contracts remain
outstanding. Because the rental contracts can extend across multiple reporting
periods, the Company records unbilled rental revenues and deferred rental
revenues at the end of each reporting period. Unbilled rental revenues are
included as a component of "Accounts receivable" on the Consolidated Balance
Sheets. Rental equipment is also purchased by customers outright ("rental
conversions"). Rental revenue and revenue attributable to rental conversions,
are recognized in "Rental revenue" and "Rental equipment sales" on the
Consolidated Statements of Operations, respectively.
Periodic and ad-hoc maintenance service revenue is recognized upon completion of
the service and the agreement of terms with the customer. Revenue from
guaranteed maintenance contracts is recognized over the contract period in
proportion to the costs expected to be incurred in performing services under the
contract, typically three to five years.
We also enter into contracts with customers where we provide automated equipment
installation and system integration services, or project-based revenues. These
project-based revenues are recognized over time as the performance obligation is
satisfied, determined using the cost-to-cost input method, based on contract
costs incurred to date to total estimated contract costs.
Payment terms vary by the type and location of the customer and the products or
services offered. Generally, the time between when revenue is recognized, and
payment is due is not significant. We do not evaluate whether the selling price
includes a financing interest component for contracts that are less than a year,
or if payment is expected to be received less than a year after the good or
service has been provided. Sales and other taxes collected from customers and
remitted to government authorities are accounted for on a net basis and,
therefore, excluded from revenue. Shipping and handling costs are treated as
fulfillment costs and are included in cost of revenue.
Useful Lives of Rental Equipment and Property and Equipment
We depreciate rental equipment and property and equipment over their estimated useful lives. The useful life of rental equipment is determined based on our estimate of the period the asset will generate revenues. The principal methods of depreciation used are straight-line basis over the estimated useful lives or percentage of rental revenue based on the unit of activity method. We periodically review the assumptions used in calculating rates of depreciation. We may be required to change these estimates based on changes in our industry or changes in other circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets. The amount of depreciation expense we record is highly dependent upon the estimated useful lives assigned to each category of equipment and the utilization of equipment where the unit of activity method is applied.
Generally, we assign the following useful lives to the below categories of Property and Equipment:
Estimated
Useful Life
Transportation equipment (autos and trucks) 2 - 5 years
Machinery and equipment including rental fleet 3 - 20 years
Office equipment 5 - 7 years
Computer equipment 2 - 5 years
Leasehold improvements 3 - 15 years
The useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate.
Evaluation of Useful Lives of Intangible Assets
During the 4th quarter of 2021, the Company reassessed the useful lives of our
intangible assets acquired from recent acquisitions. Given our recent rebranding
efforts, the Company shortened the remaining useful lives of some tradename
intangible assets resulting in accelerated amortization in the 4th quarter of
2021 and beyond.
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Evaluation of Goodwill Impairment
Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; determination of the fair value of each reporting unit; and an assumption as to the form of the transaction in which the reporting unit would be acquired by a market participant (either a taxable or nontaxable transaction). We estimate the fair value of our reporting units (which are our reportable segments) using a discounted cash flow methodology under an income approach, corroborating the results with a market approach based guideline-company methodology which analyzes the enterprise value (market capitalization plus interest-bearing liabilities) and operating metrics (e.g., EBITDA) of companies engaged in the same or similar line of business and compares those metrics to those of the Company. We believe the combination of these valuation approaches, yields the most appropriate evidence of fair value. A decrease in our EBITDA could materially affect the determination of the fair value and could result in an impairment charge to reduce the carrying value of goodwill, which could be material to our financial position and results of operations. We review goodwill for impairment utilizing a one-step process in which we compare the fair value of each of our reporting units' net assets to the respective carrying value of net assets. If the carrying value of a reporting unit's net assets is less than its fair value, then we do not recognize an impairment. If the carrying amount of a reporting unit's net assets is greater than its fair value, we recognize a goodwill impairment for the amount of the excess of the net assets over the fair value.Financial Accounting Standards Board ("FASB") guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. While the Company does not believe a qualitative assessment would have triggered the required quantitative assessment, quantitative assessments were performed atSeptember 30, 2021 andSeptember 30, 2020 , nonetheless. As such, we estimated the fair values of our reporting units based on financial information of companies that we deemed were comparable to our business. We made judgments regarding the comparability of publicly traded companies engaged in similar businesses and based our judgments on factors such as size, growth rates, profitability, business model and risk. Our annual goodwill impairment testing conducted as ofSeptember 30, 2021 andSeptember 30, 2020 indicated that all of our reporting units had estimated fair values which exceeded their respective carrying amounts.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts. These allowances reflect our
estimate of the amount of our receivables that we will be unable to collect
based on historical write-off experience, current conditions and reasonable
assumptions with specific customers that we believe affect collectability. Our
estimate could require change based on changing circumstances, including changes
in the economy or in the credit conditions of individual customers. Accordingly,
we may be required to increase or decrease our allowances. Write-offs of such
receivables require management approval based on specified dollar thresholds.
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Off Balance Sheet Transactions
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on the Company. As ofDecember 31, 2021 , andDecember 31, 2020 respectively, there was$3.4 million and$1.4 million in outstanding letters of credit issued in the normal course of business. The Company was also party to certain contracts in which it guarantees the performance of lease agreements between various third-party leasing companies. The estimated exposure related to these guarantees was$1.7 million and$2.4 million atDecember 31, 2021 andDecember 31, 2020 , respectively. It is anticipated that the third parties will have the ability to repay the debt without the Company having to honor the guarantee; therefore, no amount has been accrued on the Consolidated Balance Sheets atDecember 31, 2021 andDecember 31, 2020 , respectively.
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