CUSTOM TRUCK ONE SOURCE, INC. Throughout this section, unless otherwise noted "we," "us," "our" or "Company" refers toNesco Holdings, Inc. ("Nesco") and its consolidated subsidiaries prior to the acquisition ofCustom Truck One Source, L.P. ("Custom Truck") onApril 1, 2021 (the "Acquisition"), and to the combined company,Custom Truck One Source, Inc. ("CTOS Inc.") subsequent to the Acquisition. Immediately following the Acquisition,Nesco Holdings, Inc. changed its name to "Custom Truck One Source, Inc. " and also changedThe New York Stock Exchange ticker symbol for its shares of common stock ("Common Stock") from "NSCO" to "CTOS." The discussion of results of operations in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is presented on a historical basis, as of or for the three months endedMarch 31, 2021 or prior periods. Disclosure Regarding Forward-Looking Statements Any statements made in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "could," "would," "may," "will," "forecast," and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections: •difficulty in integrating Nesco and Custom Truck businesses and fully realizing the anticipated benefits of the Acquisition; •public health crisis such as the COVID-19 pandemic; •the cyclicality of demand for our products and services and our vulnerability to industry, regional and national downturns; •fluctuation of our revenue and operating results; •our inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner; •competition, which may have a material adverse effect on our business by reducing our ability to increase or maintain revenues or profitability; •any further increase in the cost of new equipment that we purchase for use in our rental fleet or for our sales inventory; •uncertainties in the success of our future acquisitions or integration of companies that we acquire; •our inability to recruit and retain the experienced personnel we need to compete in our industries; •further unionization of our workforce; •disruptions in our information technology systems or a compromise of our system security, limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, and implement strategic initiatives; •unfavorable conditions in the capital and credit markets and our inability to obtain additional capital as required; •our inability to renew our leases upon their expiration; •our failure to keep pace with technological developments; •our dependence on a limited number of manufacturers and suppliers and on third-party contractors to provide us with various services to assist us with conducting our business; 22 -------------------------------------------------------------------------------- •material disruptions to our operation and manufacturing locations as a result of public health concerns, equipment failures, natural disasters, work stoppages, power outages or other reasons; •changes to international trade agreements, tariffs, import and excise duties, taxes or other governmental rules and regulations; •our exposure to various risks related to legal proceedings or claims, and our failure to comply with relevant laws and regulations, including those related to occupational health and safety, environment and government contract; •significant transaction and transition costs that we will continue to incur following the Acquisition and related financing transactions; •the interest of our majority shareholder, which may not be consistent with the other shareholders; •our significant indebtedness, which may adversely affect our financial position, limit our available cash and our access to additional capital, prevent us from growing our business and increase our risk of default; •significant operating and financial restrictions imposed by the Indenture (as defined below) and the ABL Credit Agreement (as defined below); and •uncertainties related to our variable rate indebtedness. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. See "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and in this report, for additional risks. Overview of Markets and Related Industry Performance Beginning in lateMarch 2020 , the Company began to be negatively impacted by the COVID-19 pandemic, which continued into the second quarter of 2020. We began to see a normal seasonal uptick in demand starting in late August and our original equipment cost ("OEC") on rent also started to improve in late August. While we are encouraged by the trend, the Company's results of operations have not yet fully recovered to the same levels prior to the pandemic, and we remain cautious about the continuing impact of the COVID-19 pandemic. The Company serves critical infrastructure sectors that have been identified by theUnited States Cybersecurity and Infrastructure Security Agency ("CISA") as vital to theU.S. Accordingly, we have continued to meet the needs of our customers during the pandemic. We continue to adhere to protocols designed to maintain the health and safety of our employees and their families, as well as our customers, vendors and communities. These protocols have allowed the Company to keep all business and service locations operational throughout the pandemic with little to no disruption. In lateMarch 2020 , we saw a decline in demand from customers as planned projects were delayed in response to the uncertainty caused by the onset of the COVID-19 pandemic. These delays were most pronounced in electric distribution customers close to population centers in efforts to promote social distancing. Electric transmission customers also delayed planned new project starts. This led to a decline in OEC on rent during the second quarter of 2020 and into the beginning of the third quarter of 2020. As projects ended or were delayed, equipment was returned and there was little offsetting demand from new projects. This trend began to reverse starting in lateAugust 2020 as "shelter-in-place" restrictions were relaxed across the country. Electric distribution and transmission customers continue to have large backlogs of projects that must be undertaken to maintain an aged grid, to harden the grid against the impact of severe weather events, to ensure the uninterrupted supply of electricity and to meet growing electricity demands from increased household usage and vehicle electrification. We have experienced relative stability in the rail and telecom sectors. Telecom end-customers have announced intentions to continue to invest in 5G infrastructure and additional network enhancements designed to address deficiencies that became apparent with increased traffic during pandemic stay-at-home orders. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. However, our customers continue to reiterate record or near-record backlogs and capital investment plans. We are not aware of any significant project cancellations by our customers during the pandemic at this time. Customer projects that we are aware of were merely delayed. Many projects that were previously delayed have now been rescheduled. Following the project delays discussed above, we are now experiencing an increase in demand as customers work to fulfill backlogs. Like us, our customers have become more adept at working safely within the pandemic environment. At the onset of the pandemic, our focus was on delivering upon the needs of our customers, managing costs and cash flows, and preparing for a future recovery. We reduced our capital spending, our working capital balances and undertook cost reduction efforts 23 -------------------------------------------------------------------------------- including limited headcount reductions in 2020. As part of these efforts we reduced our service costs through most of 2020 by limiting repairs on equipment coming off-rent to those to be re-deployed based on customer orders. This will drive up service cost through second quarter 2021 as we seek to rapidly deploy equipment to meet customer demand. Acquisition ofCustom Truck One Source, L.P. OnDecember 3, 2020 , Nesco andNesco Holdings II, Inc. , a subsidiary of Nesco (the "Buyer" or the "Issuer"), entered into a Purchase and Sale Agreement (as amended, the "Purchase Agreement") with certain affiliates of The Blackstone Group ("Blackstone") and other direct and indirect equity holders (collectively, "Sellers") of Custom Truck,Blackstone Capital Partners VI-NQ L.P. , andPE One Source Holdings, LLC , an affiliate ofPlatinum Equity, LLC ("Platinum"), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom Truck. In connection with the Acquisition, Nesco and certain Sellers entered into Rollover and Contribution Agreements (the "Rollover Agreements"), pursuant to which such Sellers agreed to contribute a portion of their equity interests in Custom Truck (the "Rollovers") with an aggregate value of$100.5 million in exchange for shares of Common Stock, valued at$5.00 per share. Also onDecember 3, 2020 , Nesco entered into a Common Stock Purchase Agreement (the "Investment Agreement") with Platinum, relating to, among other things, the issuance and sale (the "Subscription") to Platinum of shares of Common Stock, for an aggregate purchase price in the range of$700 million to$763 million , with the specific amount calculated in accordance with the Investment Agreement based upon the total equity funding required to fund the consideration paid pursuant to the terms of the Purchase Agreement. The shares of Common Stock issued and sold to Platinum had a purchase price of$5.00 per share. In accordance with the Investment Agreement, onDecember 21, 2020 , Nesco entered into Subscription Agreements (the "Subscription Agreements") with certain investors (the "PIPE Investors ") to finance in part the Acquisition. Pursuant to the Subscription Agreements, concurrently with the closing of the transactions contemplated by the Investment Agreement, thePIPE Investors agreed to purchase an aggregate of 28,000,000 shares of Common Stock at$5.00 per share for an aggregate purchase price of$140 million (the "Supplemental Equity Financing"). OnApril 1, 2021 (the "Closing Date"), in connection with (i) the Rollovers, CTOS Inc. issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, CTOS Inc. issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, CTOS Inc. issued, in the aggregate, 28,000,000 shares of Common Stock to thePIPE Investors . Following the completion of these transactions, as ofApril 1, 2021 , CTOS Inc. had 245,919,383 shares of Common Stock issued and outstanding. The trading price of the Common Stock was$9.35 per share on the Closing Date. The preliminary purchase price for the Acquisition is estimated at$1.5 billion and is subject to adjustment pending the finalization of preliminary valuation estimates. On the Closing Date, the Issuer issued$920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the "2029 Secured Notes") and, together with its direct parent, and certain of its direct and indirect subsidiaries, entered into a senior secured asset based revolving credit agreement (the "ABL Credit Agreement") withBank of America, N.A ., as administrative agent and collateral agent, and certain other lenders party thereto, consisting of a$750.0 million first lien senior secured asset based revolving credit facility with a maturity of five years (the "ABL Facility," together with the offering of the 2029 Secured Notes, the Acquisition, the Rollover, the Subscription and the Supplemental Equity Financing, the "Acquisition and related financing transactions"). For more detail regarding the 2029 Secured Notes and the ABL Facility, see "Liquidity and Capital Resources" below. FINANCIAL OVERVIEW We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, our non-GAAP financial measures may not be comparable to measures used by other companies within the industry. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our results of operations and financial condition together with the consolidated financial statements and the related notes thereto also included within. Measures Related to our Fleet We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions: 24 -------------------------------------------------------------------------------- Average OEC on rent - Original equipment cost ("OEC") on rent is the original equipment cost of units rented to customers at a given point in time. Average OEC on rent is calculated as the weighted-average OEC on rent during the stated period. OEC represents the original equipment cost, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations, and is the basis for calculating certain of the measures set forth below. This adjusted measure of OEC is used by our creditors pursuant to our credit agreements, wherein this is a component of the basis for determining compliance with our financial loan covenants. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. OEC is a widely used industry metric to compare fleet dollar value independent of depreciation. Fleet utilization - Fleet utilization is defined as the total numbers of days the rental equipment was rented during a specified period of time divided by the total number of days available during the same period and weighted based on OEC. Utilization is a measure of fleet efficiency expressed as a percentage of time the fleet is on rent and is considered to be an important indicator of the revenue generating capacity of the fleet. OEC on rent yield - OEC on rent yield ("ORY") is a measure of return realized by our rental fleet during a period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the average OEC on rent for the same period. For periods less than 12 months, ORY is adjusted to an annualized basis. Gross Profit Gross profit is a financial performance measure that we use to monitor our results from operations. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial performance measure that the Company uses to monitor its results from operations, to measure performance against debt covenants and performance relative to competitors. The Company believes Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of operating performance when compared to peers, without regard to financing methods or capital structures. The Company excludes the items identified in the reconciliations of Net loss to Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, capital structures, including the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, Net loss determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. The Company's presentation of Adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. The Company's computation of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. The Company defines Adjusted EBITDA as Net loss before interest expense, income taxes, depreciation and amortization, equity-based compensation, and other items that The Company does not view as indicative of ongoing performance. Additionally, the Company's Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used equipment sold. When inventory or equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. Additionally, the pricing of rental contracts and equipment sales prices for equipment is based on OEC, and the Company measures a rate of return from rentals and sales using OEC. As indicated above, the agreements governing the Company's indebtedness define this adjustment to EBITDA, as such, this metric is an indication of the cost of equipment sales from the removal of the purchase accounting adjustments. 25 --------------------------------------------------------------------------------
Operating Results
Three Months Ended Three Months Ended
(in $000s) March 31, 2021 % of revenue March 31, 2020 % of revenue
Rental revenue $ 48,289 61.7% $ 50,994 62.4%
Sales of rental equipment 10,485 13.4% 9,093 11.1%
Sales of new equipment 7,502 9.6% 7,577 9.3%
Parts sales and services 12,023 15.4% 14,079 17.2%
Total revenue 78,299 100.0% 81,743 100.0%
Cost of revenue 40,236 51.4% 40,228 49.2%
Depreciation of rental equipment 17,844 22.8% 20,112 24.6%
Gross profit 20,219 25.8% 21,403 26.2%
Operating expenses 23,273 14,607
Operating (loss) income (3,054) 6,796
Other expense 20,763 22,035
Loss before income taxes (23,817) (15,239)
Income tax expense 4,090 730
Net loss $ (27,907) $ (15,969)
Total Revenue. Total revenue for the first quarter of 2021, decreased by $3.4
million , or 4.2%, compared to the first quarter of 2020. Rental revenue for the
first quarter of 2021 decreased $2.7 million , or 5.3%, compared to the same
period in 2020 as a result of rental fleet mix. Sales of rental equipment, which
can vary from quarter to quarter, increased $1.4 million , or 15.3%, as we
continued to selectively divest underutilized and aging equipment. Sales of new
equipment, which also varies from quarter to quarter, held flat decreasing $0.1
million , or 1%, compared to the same period in 2020. Parts sales and service
revenue decreased $2.1 million , or 14.6%, compared to the same period in 2020 as
a result of a decline in upfit work under the PTA segment.
Cost of Revenue. Cost of revenue, excluding depreciation of $17.8 million , for
the three months ended March 31, 2021 , was flat compared to the same period in
2020 ($2.3 million , or 3.7%, including depreciation).
Operating Expenses. Operating expenses for the three months ended March 31, 2021
increased $8.7 million , or 59.3%, compared to the same period in 2020. The
increase in the first quarter is a result of transaction expenses related to the
Acquisition.
Other Expense. Other expense for the three months ended March 31, 2021 decreased
$1.3 million , or 5.8%, compared to the same period in 2020. The decrease is
attributable to the change in fair value of an interest rate collar, which is an
undesignated hedging instrument, which resulted in income in the current quarter
of approximately $1.8 million ($6.0 million expense for the first quarter ended
March 31, 2020 ), coupled with reduced interest expense as a result of lower
borrowings from the revolving credit facility (net interest expense in the
current quarter decreased by $1.1 million ). The decrease was offset by a charge
for the change in fair value of the liability for warrants of $7.6 million
during the period.
Income Tax Expense. Income tax expense was $4.1 million for the three months
ended March 31, 2021 as compared to $0.7 million for the same period of the
prior year. Income tax expense for the current period reflects the Company's
estimated overall tax rate from of the Company's estimate of full-year taxable
income arising from disallowed interest expense. The Company's effective tax
rate for the current period, (17.2)%, differs from the U.S. federal statutory
tax rate due primarily to the valuation allowance for deferred tax assets.
Net Loss. Net loss was $27.9 million for the three months ended March 31, 2021
compared to net loss of $16.0 million for the same period of the prior year. The
Company recognized transaction expenses related to the Acquisition of
approximately $10.4 million , as well as a non-cash charge of $7.6 million
related to privately placed warrants stemming from its 2019 merger with Capitol
Investment Corp. IV.
Financial Performance
We believe that our operating model, together with our highly variable cost
structure, enables us to sustain high margins, strong cash flow generation and
stable financial performance throughout various economic cycles. We are able to
generate free cash flow through our earnings, as well as sales of used
equipment. Our highly variable cost structure adjusts with the utilization of
our equipment,
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thereby reducing our costs to match our revenue. We principally evaluate
financial performance based on the following measurements: Adjusted EBITDA, OEC
on rent, fleet utilization, and OEC on rent yield. The following table
summarizes these operating metrics.
The presentation of non-GAAP financial information should not be considered in
isolation or as a substitute for, or superior to, the financial information
prepared and presented in accordance with GAAP.
Three Months Ended March 31,
(in $000s) 2021 2020 change (%)
Adjusted EBITDA(a) $ 27,531 $ 32,061 $ (4,530) (14.1) %
Average OEC on rent(b) $ 499,725 $ 499,756 $ (31) - %
Fleet utilization(c) 78.5 % 77.3 % 1.2 % 1.6 %
OEC on rent yield(d) 35.0 % 36.5 % (1.5) % (4.1) %
(a) EBITDA represents Net loss before interest, provision for income taxes,
depreciation, and amortization. Adjusted EBITDA is defined as EBITDA as further
adjusted for (1) non-cash purchase accounting impact, (2) transaction and
process improvement costs, including the effect of the cessation of operations
in Mexico , (3) major repairs, (4) share-based payments, and (5) the change in
fair value of derivative instruments. These metrics are subject to certain
limitations. See "Financial Overview - Adjusted EBITDA" and the reconciliation
of Adjusted EBITDA to U.S. GAAP Net loss below.
(b) Average OEC on rent is the average original equipment cost of units on rent
during the period. The measure provides a value dimension to the fleet
utilization statistics. This metric has been adjusted to exclude Mexico , which
the Company commenced exit activities in the third quarter of 2019.
(c) Fleet utilization for the period is calculated by dividing the amount of
time an asset is on rent by the amount of time the asset has been owned during
the period. Time on rent is weighted by original equipment cost. This metric has
been adjusted to exclude Mexico , which the Company commenced exit activities in
the third quarter of 2019.
(d) OEC on rent yield ("ORY") is a measure of return realized by our on rental
fleet during the 12-month period. ORY is calculated as rental revenue (excluding
freight recovery and ancillary fees) during the stated period divided by the
Average OEC on rent for the same period. For periods less than 12 months, the
ORY is adjusted to an annualized basis.
Adjusted EBITDA. Adjusted EBITDA decreased $4.5 million , or 14.1%, to $27.5
million for the three months ended March 31, 2021 compared to the same period in
2020. This decrease can primarily be attributed to a $3.5 million decline in
gross profit, excluding depreciation of $17.8 million , caused by lower rental
yield resulting from a slower ramp in transmission projects compared to
distribution projects and a shift in revenue mix, with sales of equipment making
up approximately 23.0% of total revenue. Reduced servicing volume in the PTA
segment also contributed to the decline in Adjusted EBITDA.
The following is a reconciliation from U.S. GAAP net loss to Adjusted EBITDA.
Three Months Ended March 31,
(in $000s) 2021 2020
Net income (loss) $ (27,907) $ (15,969)
Interest expense 14,906 16,014
Income tax expense 4,090 730
Depreciation expense 18,063 20,377
Amortization expense 753 691
EBITDA 9,905 21,843
Adjustments:
Non-cash purchase accounting impact (1) 53 917
Transaction and process improvement costs (2) 10,744 2,079
Major repairs (3) 285 700
Share-based payments (4) 698 559
Change in fair value of derivative and warrants (5) 5,846 5,963
Adjusted EBITDA $ 27,531 $ 32,061
(1) Represents the non-cash impact of purchase accounting from past acquisitions
of businesses, net of accumulated depreciation, on the cost of equipment sold.
The equipment acquired received a purchase step-up in basis, which is a non-cash
adjustment to the equipment cost pursuant to our credit agreement.
(2) Represents transaction costs related to the acquisition of Custom Truck One
Source (2021) and Truck Utilities (2020) (which include post-acquisition
integration expenses incurred). These expenses are comprised of professional
consultancy, legal, tax and accounting fees. Also included are costs of startup
activities (which include training, travel, and process setup costs) associated
with the rollout of PTA locations that occurred throughout the prior year.
Finally, the expenses associated
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with the Company's closure of its Mexican operations, which closure activities
commenced in the third quarter of 2019, are included for the periods. Pursuant
to our credit agreement, the cost of undertakings to affect such cost savings,
operating expense reductions and other synergies, as well as any expenses
incurred in connection with acquisitions, are amounts to be included in the
calculation of Adjusted EBITDA.
(3) Represents the undepreciated cost of replaced vehicle chassis and components
from heavy maintenance, repair and overhaul activities associated with our
fleet, which is an adjustment pursuant to our credit agreement.
(4) Represents non-cash stock compensation expense associated with the issuance
of stock options and restricted stock units.
(5) Represents the charge to earnings for our interest rate collar (which is an
undesignated hedge) and the change in fair value of the liability for warrants
in the three months ended March 31, 2021 .
Average OEC on Rent. Average OEC on rent was $499.7 million for the three months
ended March 31, 2021 , remaining flat compared to the same period in 2020,
reflecting the slow recovery following the COVID-19 related project delays that
negatively impacted OEC on rent beginning with the second quarter of the prior
year.
Fleet Utilization. Fleet utilization was 78.5% for the three months ended
March 31, 2021 , compared to 77.3% over the same period of 2020. Both periods
were impacted by COVID-19 related customer project delays and the increase of
1.2% was primarily due to gains in rail and telecom.
OEC On Rent Yield. ORY was 35.0% for the three months ended March 31, 2021 ,
compared to 36.5% over the same period of 2020. Relatively flat ORY was driven
by the mix of equipment types on rent and rental fleet mix and lower rental
yield from a slower ramp in transmission projects as compared to distribution
projects.
Operating Results by Segment
The Company manages its operations through two business segments: rental and
sale of fleet and equipment (ERS), and the rental and sale of parts, tools, and
accessories and maintenance, repair and upfit services of new and used heavy
duty trucks and cranes (PTA). See Note 12, Segments, to our unaudited condensed
consolidated financial statements for additional information.
Equipment Rental and Sales Segment
Three Months Ended March 31,
(in $000s) 2021 2020 $ change % change
Rental revenue $ 44,730 $ 47,053 $ (2,323) (4.9) %
Sales of rental equipment 10,485 9,093 1,392 15.3 %
Sales of new equipment 7,502 7,577 (75) (1.0) %
Total revenues 62,717 63,723 (1,006) (1.6) %
Cost of revenue 29,202 27,320 1,882 6.9 %
Depreciation of rental equipment 16,885 18,976 (2,091) (11.0) %
Gross Profit $ 16,630 $ 17,427 $ (797) (4.6) %
Total Revenues. Revenue in our ERS segment represented 80.1% and 78.0% of our
consolidated revenues for the three months ended March 31, 2021 and 2020,
respectively. ERS segment revenue decreased by $1.0 million for the three months
ended March 31, 2021 compared to the same period in 2020. Rental revenue
decreased $2.3 million as a result of rental fleet mix and lower rental yield
from a slower ramp in transmission projects as compared to distribution
projects. Sales of rental and new equipment, which can vary from quarter to
quarter, increased $1.3 million due in part to the selective divestiture of
under-utilized and aging fleet equipment.
Cost of Revenue. The $1.9 million increase in cost of revenue, excluding
depreciation, for the three months ended March 31, 2021 compared to the prior
year is primarily due to costs related to increased sales of rental and new
equipment.
Depreciation. Depreciation of our rental fleet decreased by $2.1 million for the
three months ended March 31, 2021 , compared to the same period in 2020,
primarily due to sales of used equipment.
Gross Profit. Gross profit for the three months ended March 31, 2021 , excluding
depreciation of $16.9 million , decreased by $2.9 million compared to the same
period in 2020 as a result of the greater mix of equipment sales.
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Three Months Ended March 31,
(in $000s) 2021 2020 $ change % change
Rental revenue $ 3,559 $ 3,941 $ (382) (9.7) %
Parts sales and services 12,023 14,079 (2,056) (14.6) %
Total revenues 15,582 18,020 (2,438) (13.5) %
Cost of revenue 11,034 12,908 (1,874) (14.5) %
Depreciation of rental equipment 959 1,136 (177) (15.6) %
Gross Profit $ 3,589 $ 3,976 $ (387) (9.7) %
Total Revenues. PTA segment revenue decreased $2.4 million or 13.5% for the
three months ended March 31, 2021 compared to same period in 2020. The PTA
segment continued to experience some headwinds from COVID-19 in the first
quarter of 2021. Also contributing to the decline was a reduction in service and
upfit volumes at the segment's Truck Utilities division.
Cost of Revenue. Cost of revenue, excluding depreciation, in the PTA segment
decreased $1.9 million for the three months ended March 31, 2021 as a result of
increased repair costs as a result of deferred maintenance in response to
COVID-19 during 2020.
Gross Profit. PTA gross profit, excluding $1.0 million of depreciation,
decreased $0.6 million , or 11.0%, for the three months ended March 31, 2021 ,
compared to the same period in 2020 as a result of lower rental revenue and
higher repair costs.
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Liquidity and Capital Resources
Historical Liquidity
Our principal sources of liquidity include cash generated by operating
activities and borrowings under revolving credit facilities. We believe that our
liquidity sources and operating cash flows are sufficient to address our
operating, debt service and capital requirements over the next 12 months;
however, we are continuing to monitor the impact of COVID-19 on our business and
the financial markets. As of March 31, 2021 , we had $3.2 million in cash
compared to $3.4 million as of December 31, 2020 . As of March 31, 2021 , we had
$260.0 million of outstanding borrowings under our 2019 Credit Facility compared
to $251.0 million of outstanding borrowing under the 2019 Credit Facility as of
December 31, 2020 . In connection with the Acquisition, our debt structure
changed significantly. Our debt structure effective as of April 1, 2021 is
described below.
ABL Facility
In connection with the Acquisition that closed on April 1, 2021 (the "Closing
Date"), Nesco Holdings II, Inc. , the buyer, as borrower, and the ABL Guarantors
(as defined in the ABL Credit Agreement) entered into the ABL Credit Agreement.
The ABL Facility provides for revolving loans, in an amount equal to the lesser
of the then-current borrowing base (described below) and the committed maximum
borrowing capacity of $750.0 million , with a $75.0 million swingline sublimit,
and letters of credit in an amount equal to the lesser of (a) $50.0 million and
(b) the aggregate unused amount of commitments under the ABL Facility then in
effect. The ABL Facility permits Buyer to incur additional capacity under the
ABL Facility in an aggregate amount equal to the greater of (x) $200.0 million
and (y) 60.0% of Consolidated EBITDA (as defined in the ABL Credit Agreement) in
additional commitments. As of the Closing Date, Buyer will have no commitments
from any lender to provide incremental commitments.
Borrowings under the ABL Facility will be limited by a borrowing base
calculation based on the sum of, without duplication:
(a) 90.0% of book value of eligible accounts of Buyer and certain ABL
Guarantors; plus
(b) the lesser of (i) 75.0% of book value of eligible parts inventory of Buyer
and certain ABL Guarantors (subject to certain exceptions) and (ii) 90.0% of the
net orderly liquidation value of eligible parts inventory of Buyer and certain
ABL Guarantors; plus
(c) the sum of (i) 95.0% of the net book value of the eligible fleet inventory
of Buyer and certain ABL Guarantors that has not been appraised and (ii) 85.0%
of the net orderly liquidation value of the eligible fleet inventory of Buyer
and certain ABL Guarantors that has been appraised; plus
(d) 100.0% of eligible cash of Buyer and certain ABL Guarantors; minus
(e) any reserves established by the administrative agent from time to time.
Borrowings under the ABL Facility will bear interest at a floating rate, which,
at Buyer's election, will be (a) in the case of U.S. dollar denominated loans,
either (i) LIBOR plus an applicable margin or (ii) the base rate plus an
applicable margin or (b) in the case of Canadian dollar denominated loans, the
CDOR rate plus an applicable margin. The applicable margin varies based on
Average Availability (as defined in the ABL Credit Agreement) from (x) with
respect to base rate loans, 0.50% to 1.00% and (y) with respect to LIBOR loans
and CDOR rate loans, 1.50% to 2.00%. The ability to draw under the ABL Facility
or issue letters of credit thereunder is conditioned upon, among other things,
delivery of prior written notice of a borrowing or issuance, as applicable, the
ability to reaffirm the representations and warranties contained in the ABL
Credit Agreement and the absence of any default or event of default under the
ABL Facility.
Buyer is required to pay a commitment fee to the lenders under the ABL Facility
in respect of the unutilized commitments thereunder at a rate equal to 0.375%
per annum, which may be reduced following the first full fiscal quarter to
0.250% per annum based on average daily usage. Buyer must also pay customary
letter of credit and agency fees.
The balance outstanding under the ABL Facility will be due and payable on April
1, 2026 . Buyer may at any time and from time to time prepay, without premium or
penalty, any borrowing under the ABL Facility and terminate, or from time to
time reduce, the commitments under the ABL Facility.
The obligations under the ABL Facility are guaranteed by Capitol Investment
Merger Sub 2, LLC, Buyer and each of Buyer's existing and future direct and
indirect wholly owned domestic restricted subsidiaries, subject to certain
exceptions, as well as certain of Buyer's material Canadian subsidiaries (the
"ABL Guarantors"). The obligations under the ABL Facility and the guarantees of
those obligations are secured by (subject to certain exceptions): (i) a first
priority pledge by each ABL Guarantor of all of the equity interests of
restricted subsidiaries directly owned by such ABL Guarantors (limited to 65% of
voting capital stock in the case of foreign
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subsidiaries owned directly by a U.S. subsidiary and subject to certain other
exceptions and subject to certain exceptions in the case of non-wholly owned
subsidiaries) and (ii) a first priority security interest in substantially all
of the ABL Guarantors' present and after-acquired assets (subject to certain
exceptions).
The ABL Facility contains customary negative covenants for transactions of this
type, including covenants that, among other things, limit Buyer's and its
restricted subsidiaries' ability to: incur additional indebtedness; pay
dividends, redeem stock or make other distributions; repurchase, prepay or
redeem subordinated indebtedness; make investments; create restrictions on the
ability of Buyer's restricted subsidiaries to pay dividends to Buyer; create
liens; transfer or sell assets; consolidate, merge, sell or otherwise dispose of
all or substantially all of Buyer's assets; enter into certain transactions with
Buyer's affiliates; and designate subsidiaries as unrestricted subsidiaries, in
each case subject to certain exceptions, as well as a restrictive covenant
applicable to each Specified Floor Plan Company (as defined in the ABL Credit
Agreement) limiting its ability to own certain assets and engage in certain
lines of business. In addition, the ABL Facility contains a springing financial
covenant that requires Buyer and its restricted subsidiaries to maintain a
Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Credit
Agreement) of at least 1.00 to 1.00; provided that the financial covenant shall
only be tested when Specified Excess Availability (as defined in the ABL Credit
Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the
Line Cap (as defined in the ABL Credit Agreement) and (ii) $60.0 million (the
"FCCR Test Amount"), in which case it shall be tested at the end of each
succeeding fiscal quarter thereafter until the date on which Specified Excess
Availability (as defined in the ABL Credit Agreement) has exceeded the FCCR Test
Amount for 30 consecutive calendar days.
The ABL Facility provides for a number of customary events of default,
including, among others, and in each case subject to an applicable grace period:
payment defaults to the lenders; covenant defaults; material inaccuracies of
representations and warranties; failure to pay certain other indebtedness after
final maturity or acceleration of other indebtedness exceeding a specified
amount; voluntary and involuntary bankruptcy proceedings; material judgments for
payment of money exceeding a specified amount; and certain change of control
events. The occurrence of an event of default could result in the acceleration
of obligations and the termination of revolving commitments under the ABL
Facility.
2029 Secured Notes
On the Closing Date, the Issuer issued $920.0 million in aggregate principal
amount of 5.50% senior secured second lien notes due 2029. The 2029 Secured
Notes were issued pursuant to an indenture, dated as of April 1, 2021 , between
the Issuer, Wilmington Trust, National Association , as trustee and the
guarantors party thereto (the "Indenture"). The Issuer will pay interest on the
2029 Secured Notes semi-annually in arrears on April 15 and October 15 of each
year, commencing on October 15, 2021 . Unless earlier redeemed, the 2029 Secured
Notes will mature on April 15, 2029 .
Ranking and Security
The 2029 Secured Notes are jointly and severally guaranteed on a senior secured
basis by Capitol Investment Merger Sub 2, LLC and, subject to certain
exceptions, each of the Issuer's existing and future wholly owned domestic
restricted subsidiaries that is an obligor under the ABL Credit Agreement or
certain other capital markets indebtedness. Under the terms of the Indenture,
the 2029 Secured Notes and the related guarantees rank senior in right of
payment to all of the Issuer's and the guarantors' subordinated indebtedness and
are effectively senior to all of the Issuer's and the guarantors' unsecured
indebtedness and indebtedness secured by liens junior to the liens securing the
2029 Secured Notes, in each case, to the extent of the value of the collateral
securing the 2029 Secured Notes. The 2029 Secured Notes and the related
guarantees rank equally in right of payment with all of the Issuer's and the
guarantors' senior indebtedness, without giving effect to collateral
arrangements, and effectively equal to all of the Issuer's and the guarantors'
senior indebtedness secured on the same priority basis as the 2029 Secured
Notes. The 2029 Secured Notes and the related guarantees are effectively
subordinated to any of the Issuer's and the guarantors' indebtedness that is
secured by assets that do not constitute collateral for the 2029 Secured Notes
to the extent of the value of the assets securing such indebtedness, and
indebtedness that is secured by a senior-priority lien, including the ABL Credit
Agreement to the extent of the value of the collateral securing such
indebtedness, and are structurally subordinated to the liabilities of the
Issuer's non-guarantor subsidiaries.
Optional Redemption Provisions and Repurchase Rights
At any time, upon not less than 10 nor more than 60 days' notice, the 2029
Secured Notes are redeemable at the Issuer's option, in whole or in part, at a
price equal to 100% of the principal amount of the 2029 Secured Notes redeemed,
plus a make-whole premium as set forth in the Indenture, plus accrued and unpaid
interest, if any, to, but not including, the applicable redemption date.
Beginning April 15, 2024 , the Issuer may redeem the 2029 Secured Notes, at its
option, in whole or in part, at any time, subject to the payment of a redemption
price together with accrued and unpaid interest, if any, to, but not including,
the applicable redemption date. The redemption price includes a call premium
that varies (from 2.750% to 0%) depending on the year of redemption.
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In addition, at any time prior toApril 15, 2024 , the Issuer may redeem up to 40% of the aggregate principal amount of the 2029 Secured Notes, at a redemption price equal to 105.5% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date, with the net cash proceeds of sales of one or more equity offerings by the Issuer or any direct or indirect parent of the Issuer, subject to certain exceptions. In addition, at any time prior toApril 15, 2024 , the Issuer may redeem during each calendar year up to 10% of the aggregate principal amount of the 2029 Secured Notes at a redemption price equal to 103% of the aggregate principal amount of the 2029 Secured Notes to be redeemed, together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date; provided that in any given calendar year, any amount not previously utilized in any calendar year may be carried forward to subsequent calendar years. Subject to certain exceptions, the holders of the 2029 Secured Notes also have the right to require the Issuer to repurchase their 2029 Secured Notes upon the occurrence of a change in control, as defined in the Indenture, at an offer price equal to 101% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. In addition, if the Issuer or any of its restricted subsidiaries sells assets, under certain circumstances, the Issuer is required to use the net proceeds to make an offer to purchase the 2029 Secured Notes at an offer price in cash equal to 100% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest to, but not including, the repurchase date. In connection with any offer to purchase all or any of the 2029 Secured Notes (including a change of control offer and any tender offer), if holders of no less than 90% of the aggregate principal amount of the 2029 Secured Notes validly tender their 2029 Secured Notes, the Issuer or a third party is entitled to redeem any remaining 2029 Secured Notes at the price offered to each holder. Restrictive Covenants The Indenture contains covenants that limit the Issuer's (and certain of its subsidiaries') ability to, among other things: (i) incur additional debt or issue certain preferred stock; (ii) pay dividends, redeem stock or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Issuer to the Issuer's restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Issuer's subsidiaries as unrestricted subsidiaries. Events of Default The Indenture provides for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Indenture and certain events of bankruptcy or insolvency. If an event of default occurs and continues with respect to the 2029 Secured Notes, the trustee or the holders of at least 30% in aggregate principal amount of the outstanding 2029 Secured Notes of such series may declare the entire principal amount of all the 2029 Secured Notes to be due and payable immediately (except that if such event of default is caused by certain events of bankruptcy or insolvency, the entire principal of the 2029 Secured Notes will become due and payable immediately without further action or notice). Historical Cash Flows The following table summarizes our sources and uses of cash:
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