Throughout this section, unless otherwise noted "we," "us," "our," "Company," or "Nesco" refers toNesco Holdings, Inc. and its consolidated subsidiaries. The information provided below supplements, but does not form part of, our financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of Nesco's management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section entitled "Risk Factors" included herein and in our Annual Report on Form 10-K, filed with theSEC onMarch 16, 2020 .
ORGANIZATION
OnJuly 31, 2019 ,NESCO Holdings I, Inc. andNESCO Holdings, LP consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated as ofApril 7, 2019 , which was amended onJuly 10, 2019 (as amended, the "Merger Agreement") by and amongCapitol Investment Corp. IV ("Capitol"),Capitol Intermediate Holdings, LLC , aDelaware limited liability company and wholly-owned subsidiary ofCapitol ("Intermediate Holdings "), Capitol Investment Merger Sub 1, LLC, aDelaware limited liability company and wholly-owned subsidiary ofCapitol ("Merger Sub"), Capitol Investment Merger Sub 2, LLC, aDelaware limited liability company and wholly-owned subsidiary ofCapitol Investment Corp. IV ("New HoldCo"). Pursuant to the Merger Agreement, (i)Capitol domesticated as aDelaware corporation and was renamed "Nesco Holdings, Inc. " (the "Domestication"), (ii) Merger Sub merged with and into Holdings I, with Holdings I surviving as a wholly-owned subsidiary ofCapitol (the "Initial Merger"), and (iii) immediately after the Initial Merger, Holdings I merged with and into New HoldCo, with New HoldCo surviving as an indirect wholly-owned subsidiary ofCapitol (the "Subsequent Merger," and together with the Initial Merger, the "Mergers," and together with the Domestication and the other transactions contemplated by the Merger Agreement, the "Transactions"). As a result of the Transactions, Holdings I became a limited liability company and a wholly-owned subsidiary ofCapitol , with Nesco Owner becoming a securityholder ofCapitol . Upon the closing,Capitol's common stock, warrants and units ceased trading, and upon the opening of trading onAugust 1, 2019 , common stock and warrants began trading on the NYSE, respectively, under the symbols "NSCO" and "NSCO WS," respectively. For information related to our business operations, see the description of our business set forth in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onMarch 16, 2020 . COVID-19 OnMarch 11, 2020 , theWorld Health Organization ("the WHO") declared the rapid spread of the Coronavirus Disease 2019 ("COVID-19") a global health pandemic. Beginning in March, governmental authorities began imposing restrictions on non-essential activities as part of social distancing measures. These measures have adversely affected the global and North American economies. The end markets Nesco operates in have been identified by theUnited States Cybersecurity and Infrastructure Security Agency ("CISA") as a critical markets that should continue operating throughout the pandemic, appropriately modified to adhere to theU.S. Centers for Disease Control workforce and customer protection guidance. There are many uncertainties regarding the pandemic, and we are closely monitoring the impact of the pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties, we have undertaken efforts intended to maintain the health and safety of our employees and their families and to ensure the Company's continued financial and operational viability, especially in relation to our position as a supplier to those critical industries identified in the Memorandum noted above. While Nesco's business is considered critical, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. Some of our customers are delaying projects, deferring capital equipment purchases and eliminating in-person sales meetings. As a result, our business has been and will continue to be adversely impacted by the pandemic. Since the pandemic began, management has been very focused on mitigating the effects to the business. Specific actions we have taken include a reduction in planned capital expenditures and investments in inventory for the year in addition to reductions in headcount and other selling, general and administrative expenses. We are continually monitoring the situation and will take additional measures we believe are appropriate as the situation continues to develop. 18 -------------------------------------------------------------------------------- In our ERS segment, some of our end-user customers are delaying projects, deferring capital equipment purchases, and/or eliminating in-person sales meetings. In additional, trade shows, industry conventions, and product demonstrations have been canceled and are continuing to be canceled. As a result, our selling activities and our ability to convert those activities into actual sales have been and will continue to be adversely impacted by the pandemic. In our PTA segment, distribution projects are often in population centers and several municipalities have elected to postpone non-emergency distribution repair projects to limit contact with the general public. While several PTA projects have been postponed while current social distancing measures are in effect, we are not aware of any projects that have been canceled. In addition, management is focused on mitigating the effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time, energy, resources, and focus. 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: Equipment on rent - Equipment on rent is the original equipment cost ("OEC") of units rented to customers at a given point in time. Average equipment on rent is calculated as the weighted-average equipment on rent during the stated period. OEC represents the original equipment cost by fleet type over a period of time, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations. 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 count - Fleet count represents the average or period end (defined as either) equipment units held in our rental fleet over any period. Fleet utilization - Fleet utilization, with respect to the average equipment units held in our rental fleet over any period, is defined as the total number of days the rental equipment was rented during the period divided by the total number of days such rental equipment could have been rented during the same period, assuming that each piece of equipment could have been rented every day in the period (i.e. no maintenance or planned downtime is included in the calculation). Rental rate per day - Rental rate per day for the period is calculated as total rental revenue excluding freight and billings to customers for damaged equipment divided by the total billed rental days. Fleet age - Fleet age represents the number of years from the manufacturer chassis year of the rental equipment unit through the current year end. We evaluate fleet age for each equipment type and our fleet as a whole. In order to calculate average fleet age by type and average total fleet age, we weight the fleet age by the number of units within the relevant group. Gross Profit, Income from Operations and Cash Flow from Operations Gross profit, income from operations and cash flow from operations are financial performance measures that we use to monitor our results from operations and to measure our performance against our debt covenants. Adjusted EBITDA Adjusted EBITDA is also a financial performance measure that we use to monitor our results from operations, to measure our performance against our debt covenants and in measuring our performance relative to that of our competitors. 19 -------------------------------------------------------------------------------- We believe the presentation of Adjusted EBITDA enhances an investor's understanding of our financial performance because it is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. Such items are excluded pursuant to the definition of Adjusted EBITDA in the 2019 Credit Facility and the Indenture, Adjusted EBITDA is the basis for several financial loan covenants contained in the 2019 Credit Facility. We believe that Adjusted EBITDA provides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, service debt and undertake capital expenditures. We use these financial measures for business planning purposes, for loan compliance purposes, and in measuring our performance relative to that of our competitors. Nesco's use of the terms EBITDA and Adjusted EBITDA may vary from that of others in its industry and therefore are limited in their usefulness as comparative measures. These financial measures should not be considered as alternatives to net income (loss), operating income (loss) or any other performance measures derived in accordance with GAAP as measures of operating performance, operating cash flows or as measures of liquidity. Non-GAAP financial measures should not be relied upon to the exclusion ofU.S. GAAP financial measures. We encourage investors to review our non-GAAP financial measures together with ourU.S. GAAP results and historical consolidated financial statements, and not in isolation. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies. Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of used equipment sold. When equipment is purchased in connection with a business combination, the equipment is revalued to its then current fair value for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair value of equipment as of the acquisition date, with depreciation recorded thereafter following our accounting policies; however, this may not be indicative of our actual cost to acquire new equipment that we add to our fleet apart from a business acquisition. 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. As indicated above, the agreements governing our indebtedness define this adjustment to EBITDA, as such, and we believe this metric is a better indication of our true cost of equipment sales due to the removal of the purchase accounting adjustments.
Consolidated Operating Results Three Months Ended
Three Months Ended Three Months Ended (in $000s) March 31, 2020 % of revenue March 31, 2019 % of revenue Rental revenue$ 50,994 62.4% $ 45,642 74.2% Sales of rental equipment 9,093 11.1% 7,399 12.0% Sales of new equipment 7,577 9.3% 2,350 3.8% Parts sales and services 14,079 17.2% 6,101 9.9% Total Revenue 81,743 100.0% 61,492 100.0% Cost of revenue 40,228 49.2% 24,409 39.7% Depreciation of rental equipment 20,112 24.6% 16,731 27.2% Gross Profit 21,403 26.2% 20,352 33.1% Operating expenses 14,607 11,662 Operating Income 6,796 8,690 Other Expense 22,035 14,980 Loss Before Income Taxes (15,239 ) (6,290 ) Income Tax Expense 730 434 Net Loss$ (15,969 ) $ (6,724 ) Total Revenue Total revenue for the three months endedMarch 31, 2020 , increased by$20.3 million , or 32.9%, compared to the same period in 2019. Rental revenue increased$5.4 million , or 11.7%, compared to the same period in 2019. This increase is primarily a result of an increase in average equipment on rent, which grew 10.2% to$499.8 million in the first quarter 2020, compared to$453.6 million in the same quarter of 2019. Sales of rental equipment, which can vary from quarter to quarter, increased$1.7 million , or 22.9%, and sales of new 20 -------------------------------------------------------------------------------- equipment increased$5.2 million , or 222.4%, compared to the same period in 2019. Parts sales and service revenue increased$8.0 million , or 130.8%, compared to the same period in 2019 as a result of investments to expand our Parts, Tools and Accessories segment.The Truck Utilities acquisition completed inNovember 2019 contributed$12.5 million to total revenue. Total Cost of Revenue Total cost of revenue, excluding depreciation of$20.1 million , for the three months endedMarch 31, 2020 , increased by$15.8 million , or 64.8%, compared to the same period in 2019 ($19.2 million , or 46.7%, including depreciation). The increase is primarily due to a 71.0% increase in equipment sales, with$6.6 million of costs related to those sales. Additionally, the 130.8% increase in parts sales and service revenue resulted in a$6.5 million increase of costs related those sales. Operating Expenses Operating expenses for the three months endedMarch 31, 2020 increased$2.9 million , or 25.3%, compared to the same period in 2019. The increase is primarily due to an increase in selling, general and administrative expenses of$4.0 million . Selling, general and administrative expenses increased due to the combination of the acquisition ofTruck Utilities ; growth in personnel expenses necessary as a new public company in addition to other public company costs; and increased commissions as a result of higher revenue. Offsetting this increase is a reduction in transaction expenses of$1.8 million , which were directly related to the Transactions withCapitol in 2019. Other Expense Other expense for the three months endedMarch 31, 2020 increased$7.1 million , or 47.1%, compared to the same period in 2019. This is primarily a result of a change in fair value of an interest rate collar, which is an undesignated hedging instrument. The resulting expense in the current quarter related to the collar was approximately$6.0 million . In addition, net interest expense increased by$1.0 million due to the Senior Secured Notes that were issued in a private placement in the second half of 2019, as well as the amortization of associated deferred financing costs. Income Tax Expense Income tax expense was$0.7 million for the three months endedMarch 31, 2020 . Due to our valuation allowance on our net operating loss and interest deduction limitation carryforwards, we have not recognized a deferred tax benefit when we report pretax losses because we have determined the realization of tax benefits for the carryforwards to be uncertain. Our income tax expense reflects an increase in our deferred tax liabilities associated with our non-tax deductible tradename intangible asset and goodwill as well as foreign taxes incurred inCanada andMexico . 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 substantial 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, thereby reducing our costs to match our revenue. We principally evaluate financial performance based on five measurements: Adjusted EBITDA, fleet count, fleet utilization, equipment dollars ("OEC") on rent and rental rate per day. 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. 21 --------------------------------------------------------------------------------
Financial performance for the three months ended
Three Months Ended March
31,
(in $000s, except fleet count and rate per day) 2020 2019 change (%) Adjusted EBITDA (a)$ 32,061 $ 30,434 $ 1,627 5.3 %
Average equipment on rent (b)
10.5 % Average fleet count 4,627 3,913 714 18.2 % Average fleet utilization (c) 75.9 % 82.2 %
(6.3 )% (7.7 )%
Average rental rate per day (d)
0.2 % (a) EBITDA represents net income (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 inMexico , (3) major repairs, (4) share-based payments, (5) other non-recurring items, and (6) 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 toU.S. GAAP net income (loss) below. (b) Average equipment 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 excludeMexico , which the Company commenced exit activities in the third quarter of 2019. (c) Average fleet utilization for the period is calculated as the total number of invoiced days divided by the total number of available equipment days. This metric has been adjusted to excludeMexico , which the Company commenced exit activities in the third quarter of 2019. (d) Average rental rate per day for the period is calculated as total rental revenue excluding freight and damaged billings divided by the total rental days, which represents the number of billable days in the period aggregated across all units in the fleet. This metric has been adjusted to excludeMexico , which the Company commenced exit activities in the third quarter of 2019. Adjusted EBITDA Adjusted EBITDA increased$1.6 million , or 5.3%, from$30.4 million for the three months endedMarch 31, 2019 to$32.1 million for the three months endedMarch 31, 2020 . This increase can be primarily attributed to a$4.4 million increase in gross profit, excluding depreciation of$20.1 million , for the three months endedMarch 31, 2020 as compared to the same period in 2019, driven by growth across all revenue streams. Core rental gross profit was the main driver of gross profit growth in the first quarter, contributing$37.2 million of gross profit excluding depreciation of$20.1 million , a$2.6 million or 7.6% year over year increase. The following is a reconciliation fromU.S. GAAP net loss to Adjusted EBITDA for the three months endedMarch 31, 2020 and 2019 and a reconciliation from Adjusted EBITDA toU.S. GAAP net cash from operating activities for the three months endedMarch 31, 2020 and 2019. Three Months Ended March 31, (in $000s) 2020 2019 Net loss$ (15,969 ) $ (6,724 ) Interest expense 16,014 14,993 Income tax expense 730 434 Depreciation expense 20,377 16,996 Amortization expense 691 724 EBITDA 21,843 26,423 Adjustments: Non-cash purchase accounting impact (1) 917
611
Transaction and process improvement costs (2) 2,079 2,510 Major repairs (3) 700 762 Share-based payments (4) 559 128 Change in fair value of derivative (5) 5,963 - Adjusted EBITDA$ 32,061 $ 30,434 22
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Three Months Ended March 31, (in $000s) 2020 2019 Adjusted EBITDA$ 32,061 $ 30,434 Adjustments: Change in fair value of derivative (5) (5,963 ) - Share-based payments (4) (559 ) (128 ) Major repairs (3) (700 ) (762 ) Transaction and process improvement costs (2) (2,079 ) (2,510 ) Non-cash purchase accounting impact (1) (917 ) (611 ) EBITDA 21,843 26,423 Add: Interest expense (16,014 ) (14,993 ) Income tax benefit (expense) (730 ) (434 ) Amortization - financing costs 711
677
Share-based payments 559
128
Loss (gain) on sale of rental equipment and parts (2,213 )
(1,977 ) Gain on insurance proceeds - damaged equipment (120 ) (452 ) Major repair disposal 700
762
Change in fair value of derivative 5,963
-
Deferred tax (benefit) expense 652
271
Bad debt expense, net of recoveries 777
692
Changes in assets and liabilities: Accounts receivable 1,207 1,823 Inventory 176 (4,299 ) Prepaid expenses and other (34 ) (3,413 ) Accounts payable (3,352 ) 10,297 Accrued expenses (12,427 ) (8,163 ) Deferred rental income (517 ) (3,437 ) Net cash from operating activities$ (2,819 ) $
3,905
(1) Represents the non-cash impact of purchase accounting, 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) 2020: Represents transaction costs related to our acquisition ofTruck Utilities (which include post-acquisition integration expenses incurred during the current quarterly period); 2019: Represents transaction expenses related to merger activities associated with the Transaction withCapitol that was consummated onJuly 31, 2019 . 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 new PTA locations that occurred throughout the prior year into the current quarterly period. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are also included. Pursuant to our credit agreement, the cost of undertakings to effect 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) in the three months endedMarch 31, 2020 . 23 -------------------------------------------------------------------------------- Equipment on rent Average equipment on rent was$499.8 million for the three months endedMarch 31, 2020 , an increase of$46.1 million or 10.2% over the same period in 2019. The increase is due to increased fleet size, including the equipment acquired in connection with our acquisition ofTruck Utilities , and continued demand from our equipment rental customers. Fleet count Average fleet count was 4,627 for the three months endedMarch 31, 2020 , an increase of 714 units from an average fleet count of 3,913 over the same period in 2019. Bucket trucks represented the largest category of our capital expenditures for the three months endedMarch 31, 2020 , driven by demand in transmission and distribution, telecom and rail end-markets. Fleet utilization Fleet utilization was 75.9% for the three months endedMarch 31, 2020 , compared to 82.2% in the same period of 2019. Every product category saw an increase in rented days year over year. First quarter utilization is typically lower than other quarters due to seasonality, absent any unusual activity such as theCalifornia fire recovery work in the first quarter of 2019. This quarter followed typical patterns, however, was further impacted by COVID-19 and equipment recently added to the fleet that has not yet gone on rent. Rental rate per day Average rental rate per day was$137.8 for the three months endedMarch 31, 2020 , a 0.2% increase from$137.5 for the same period in 2019. Consolidated rate remained steady year over year. Fleet age We use fleet age by type to assist in our decision to sell and purchase a particular fleet category to ensure our fleet age remains competitive. Our overall average fleet age was 3.4 years as ofMarch 31, 2020 , compared to 3.7 years atMarch 31, 2019 . We believe the current age of our fleet is young and gives us flexibility from a capital allocation and sales perspective. Fleet composition We own a diverse selection of equipment in order to meet the needs of our customers. Bucket trucks, digger derricks, line equipment and rail-mounted equipment make up a significant percentage of our fleet portfolio. We also carry cranes, pressure diggers, underground equipment, and other miscellaneous fleet items, making us a full service specialty equipment provider. All of our equipment is available for rent and our used equipment sales and new equipment purchases are partially driven by our desire to keep an optimal product mix and maintain a competitive fleet age. The OEC of our ERS fleet was$644.6 million as ofMarch 31, 2020 , a$7.3 million , or 1.1%, increase from$637.3 million atDecember 31, 2019 . The bucket trucks category represented the largest increase for the three months endedMarch 31, 2020 . Operating Results by Segment - Three Months EndedMarch 31, 2020 and 2019 The Company manages its operations through two business segments: rental and sale of fleet and equipment along with repair and maintenance related to those assets (ERS), and the rental and sale of parts, tools, and accessories (PTA). See Note 3, Segments, to our unaudited condensed consolidated financial statements for additional information. 24 --------------------------------------------------------------------------------
Equipment Rental and Sales Segment
Three Months Ended March 31, (in $000s) 2020 2019 $ change % change Rental revenue$ 47,053 $ 42,896 $ 4,157 9.7 % Sales of rental equipment 9,093 7,399 1,694 22.9 % Sales of new equipment 7,577 2,350 5,227 222.4 % Total revenues 63,723 52,645 11,078 21.0 % Cost of revenue 27,320 18,654 8,666 46.5 % Depreciation of rental equipment 18,976 15,661 3,315 21.2 % Gross Profit$ 17,427 $ 18,330 $ (903 ) (4.9 )% Revenue in our ERS segment represented 78.0% and 85.6% of Nesco's consolidated revenues for the three months endedMarch 31, 2020 and 2019, respectively. Total revenue increased by$11.1 million for the three months endedMarch 31, 2020 compared to the same period in 2019.Truck Utilities generated$4.5 million of revenue within the ERS segment. Rental revenue increased$4.2 million as a result of increased demand in the end-markets we serve coupled with increased fleet investment over the past year to meet that demand. Sales of rental equipment, which can vary from quarter to quarter, increased$6.9 million with a focus on disposing of certain older fleet units in the first quarter of 2020, helping result in a decline in the average age of our fleet from 3.6 years atDecember 31, 2019 to 3.4 years atMarch 31, 2020 . The$8.7 million increase in cost of revenue (excluding the increase in depreciation expense of$3.3 million ) for the three months endedMarch 31, 2020 compared to the prior year is primarily due to a$6.6 million increase in cost of sales of rental and new equipment. Depreciation of our rental fleet increased by$3.3 million for the three months endedMarch 31, 2020 , compared to the same period in 2019, primarily due to the 13.5% growth in fleet count. Gross profit for the three months endedMarch 31, 2020 , excluding depreciation of$19.0 million , increased by$2.4 million compared to the same period in 2019. Margins on equipment sales declined in the first quarter relative to the same period in 2019 due to a combination of an increase in the disposal of older rental units, which typically generate lower margins and a significant supplier rebate offered on the sale of new equipment in 2019 but not repeating in 2020. Parts, Tools, and Accessories Segment Three Months Ended March 31, (in $000s) 2020 2019 $ change % change Rental revenue $ 3,941$ 2,746 $ 1,195 43.5 % Parts sales and services 14,079 6,101 7,978 130.8 % Total revenues 18,020 8,847 9,173 103.7 % Cost of revenue 12,908 5,755 7,153 124.3 % Depreciation of rental equipment 1,136 1,070 66 6.2 % Gross Profit $ 3,976$ 2,022 $ 1,954 96.6 % PTA segment revenue increased$9.2 million or 103.7% for the three months endedMarch 31, 2020 compared to same period in the prior year.Truck Utilities contributed$7.9 million in PTA revenue during the quarter. The PTA segment experienced headwinds from COVID-19 social distancing measures in late February and March as a result of a slowdown in new projects. Cost of revenue in the PTA increased as a direct result of the increase in volume, as well as the expansion of operations from two PTA locations to seven over the course of the last year. 25 --------------------------------------------------------------------------------
PTA gross profit, excluding
26 -------------------------------------------------------------------------------- Liquidity and Capital Resources Historical Liquidity Our principal sources of liquidity include cash generated by operating activities and borrowings under our 2019 Credit Facility. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements over the next twelve months, however, we are continuing to monitor the impact of COVID-19 on our business and the financial markets. We have reduced our planned 2020 net capital expenditures (which we define to be purchases of rental and other property and equipment, net of proceeds from disposals of such assets) to approximately half of 2019 net capital expenditures to help manage liquidity and optimize utilization. As ofMarch 31, 2020 , we had$10.2 million in cash compared to$6.3 million as ofDecember 31, 2019 . As ofMarch 31, 2020 , we had$285.7 million of outstanding borrowings under our 2019 Credit Facility with an additional$75.4 million in availability (subject to a borrowing base) compared to$250.0 million of outstanding borrowing under the 2019 Credit Facility as ofDecember 31, 2019 . 2019 Credit Facility OnJuly 31, 2019 , we entered into the 2019 Credit Facilty, which provides us with$350.0 million in aggregate principal amount of commitments pursuant to a first lien senior secured asset based revolving credit facility. OnMarch 10, 2020 , we entered into an agreement (the "Incremental Agreement") that amended the syndicate of banks for a new participant that increased the maximum amount of the 2019 Credit Facility by$35.0 million to a total of$385.0 million . The new 2019 Credit Facility has a five-year term and a floating rate of interest based on either the federal funds rate plus a margin ranging between 50 and 100 basis points or LIBOR plus a margin ranging between 150 and 200 basis points, in each case, depending on excess availability under the facility. Our availability under the 2019 Credit Facility is a percentage of the value of our accounts receivable, our parts inventory, our fleet inventory, and our cash, in each case, subject to certain eligibility criteria and periodic collateral evaluations. A portion of the 2019 Credit Facility may be used for the issuance of letters of credit. The 2019 Credit Facility is guaranteed by our wholly owned domestic subsidiaries, subject to customary exceptions, and is secured by substantially all assets of Nesco and the guarantors. We can reduce the aggregate commitments under the 2019 Credit Facility without premium or penalty. The 2019 Credit Facility contains covenants which, among other things, limit the incurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens. In addition, the 2019 Credit Facility requires the Company to comply with a financial maintenance covenant requiring the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00; provided that this covenant shall only be tested if availability under the 2019 Credit Facility is less than the greater of (i) 10% of the Line Cap and (ii)$30 million , and shall be tested until availability is no longer less than such amounts for 20 consecutive calendar days. Senior Secured Notes due 2024 In connection with the closing of the Transactions, onJuly 31, 2019 we completed a private offering for Senior Secured Second Lien Notes due 2024 (the "Senior Secured Notes") issued by Capitol Investment Merger Sub 2, LLC, our wholly owned and indirect subsidiary (the "Issuer"). The aggregate principal amount of the Senior Secured Notes was$475.0 million . The Senior Secured Notes bear interest at a rate of 10.0% per annum payable semi-annually, in cash in arrears, onFebruary 1 andAugust 1 of each year, commencing onFebruary 1, 2020 . The Senior Secured Notes do not have registration rights. A summary of the key provisions are as follows: Guarantors - The Senior Secured Notes are guaranteed (the "Guarantees") byCapitol Intermediate Holdings, LLC , our wholly owned subsidiary ("Holdings") and the wholly owned domestic subsidiaries of the Issuer (together, "Guarantors") that guarantee obligations under the 2019 Credit Facility or any future debt of Nesco or any other Guarantors. Security - The Senior Secured Notes and the Guarantees are secured on a second-priority basis by all assets of Nesco and the Guarantors that secure our obligations under the 2019 Credit Facility. Ranking - The Senior Secured Notes and the Guarantees are general senior secured obligations. The Senior Secured Notes rank equally in right of payment with all of our existing and future senior debt and rank senior in right of payment to all of our future subordinated obligations. The Guarantees rank equally in right of payment with all of the Guarantors' existing and future senior obligations and rank senior in right of payment to all of the Guarantors' existing and future subordinated obligations. The Senior Secured Notes and the Guarantees rank effectively subordinated to all of the Guarantors' and our first-priority secured debt, including borrowings under the 2019 Credit Facility. 27
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Redemption and Repurchase - The Senior Secured Notes are redeemable, in whole or in part, at any time on or after the Closing Date at specified redemption prices. At any time prior toAugust 1, 2021 , we may redeem all or part of the notes at a redemption price equal to 100.0% of the principal amount, plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem some or all of the notes: fromAugust 1, 2021 , but beforeJuly 31, 2022 , at a redemption price of 105.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; fromAugust 1, 2022 , but beforeJuly 31, 2023 , at a redemption price of 102.5% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; and afterAugust 1, 2023 , at a redemption price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 40.0% of the Senior Secured Notes untilAugust 1, 2021 , at a redemption price of 110.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from one or more equity offerings. In addition, we may be required to make an offer to purchase the Senior Secured Notes upon the sale of certain assets and upon a change of control. Covenants - The Senior Secured Notes contain various restrictive covenants. As ofMarch 31, 2020 , we believe we were in compliance with all of the covenants and other provisions of the 2019 Credit Facility and the indenture governing the Senior Secured Notes disclosed above. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations. Due to the condition and relatively young age of our fleet, we have the ability to significantly reduce or suspend capital expenditures during difficult economic times, to generate additional cash flow during these periods. We believe that our cash generated by our rental operations and cash received from the sale of equipment, as well as funds available under the 2019 Credit Facility will be adequate to meet our operating, investing and financing needs for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be changes in governmental regulations for the electric utility transmission and distribution industry, weather, and our customers' ability to secure materials. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. We expect to continually assess our performance, the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures. We may, from time to time, refinance, reprice, extend, retire or otherwise modify our outstanding debt to lower our interest payments, reduce our debt or otherwise improve our financial position. These actions may include repricing amendments, extensions, and/or opportunistic refinancing of debt. The amount of debt that may be refinanced, re-priced, extended, retired or otherwise modified, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Historical Cash Flows The following table summarizes Nesco's sources and uses of cash for the three months endedMarch 31, 2020 and 2019:
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