CUSTOM TRUCK ONE SOURCE, INC. Throughout this section, unless otherwise noted "we," "us," "our," "Company," or "Nesco" refers toNesco Holdings, Inc. and its consolidated subsidiaries. The following discussion contains forward-looking statements. 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 herein entitled "Disclosure Regarding Forward-Looking Statements" and the section entitled "Risk Factors" in our Annual Report on Form 10-K, filed with theSEC onMarch 16, 2020 , and our Quarterly Report filed with theSEC onMay 7, 2020 .
Overview of Markets and Related Industry Performance
Nesco continued to be negatively impacted by the COVID-19 pandemic during the third quarter of 2020, particularly during July and August and began to see a normal seasonal uptick take hold starting in late August and continuing past the end of the quarter. While Nesco has not yet reached the same levels as a year ago, and remains cautious about the continuing impact of the COVID-19 pandemic, OEC on rent improved significantly from the beginning of the quarter to the end of the quarter. Nesco serves critical infrastructure sectors that have been identified by the 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. Starting in March, we saw a decline in demand from customers as planned projects were delayed in response to the uncertainty caused by the onset of the 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 and into the beginning of the third quarter. 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 late August. Nesco started to service new electric distribution projects and then benefited from a normal seasonal uptick of new electric transmission projects in August that has continued through September and October. Electric distribution and transmission customers continue to have large backlogs of projects that must be undertaken to maintain an aged grid, to reduce fire hazards, to ensure the uninterrupted supply of electricity and to meet growing electricity demands of the future tied to increased household usages 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 from March to August, we are now experiencing an increase in demand as customers work to fulfill backlogs. Like Nesco, 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 including limited headcount reductions. As part of these efforts we reduced our service costs by limiting repairs on equipment coming off-rent to levels required to meet demand. We are now beginning to pivot towards a recovery. In the near-term, this will drive service cost increases as we seek to rapidly deploy equipment to meet customer demand. As we look ahead to 2021 we are formulating a disciplined capital investment strategy that will support long term growth. At the same time, we are focused on maintaining a financial position and liquidity level that provides flexibility in the face of ongoing uncertainty. 21 -------------------------------------------------------------------------------- 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, 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 non-GAAP 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. 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. Our 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 22 -------------------------------------------------------------------------------- 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 and Nine Months EndedSeptember 30, 2020 and 2019 Three Months Three Months Nine Months Nine Months Ended September Ended September Ended September Ended September (in $000s) 30, 2020 % of revenue 30, 2019 % of revenue 30, 2020 % of revenue 30, 2019 % of revenue Rental revenue$ 46,125 66.6%$ 50,103
80.2%
5,510 8.0% 3,436 5.5% 19,585 8.9% 15,167 8.1%
Sales of new equipment 6,048 8.7% 1,246 2.0% 19,043 8.7% 8,076 4.3%
Parts sales and services 11,577 16.7% 7,657 12.3% 36,753 16.7% 19,675 10.5%
Total Revenue 69,260 100.0% 62,442 100.0% 219,484 100.0% 186,789 100.0%
Cost of revenue 34,162 49.3% 23,484 37.6% 106,833 48.7% 73,159 39.2%
Depreciation of rental
equipment 19,467 28.1% 17,694 28.3% 59,275 27.0% 51,369 27.5%
Gross Profit 15,631 22.6% 21,264 34.1% 53,376 24.3% 62,261 33.3%
Operating expenses 10,672 15,675 39,102 38,162
Operating Income 4,959 5,589 14,274 24,099
Other Expense 15,294 23,105 54,061 52,926
Loss Before Income Taxes (10,335) (17,516) (39,787) (28,827)
Income Tax Expense (Benefit) (25,508) 494 (25,841) 1,330
Net Income (Loss) $ 15,173 $ (18,010) $ (13,946) $ (30,157)
Total Revenue. Total revenue for the third quarter of 2020, increased by $6.8
million , or 10.9%, compared to the third quarter of 2019. Rental revenue for the
third quarter of 2020 decreased $4.0 million , or 7.9%, compared to the same
period in 2019. The reduction in rental revenue was primarily a result of units
coming off rent and a lack of new project starts during July and August as
customers delayed projects in response to COVID-19, leading to a decrease in
average equipment on rent of 4.1% to $464.3 million in the current quarter from
$484.3 million in the same quarter of 2019. This trend reversed beginning in
late August and equipment on rent ended the third quarter of 2020 at $489.1
million , an increase of more than 10% from the start of the quarter. Sales of
rental equipment, which can vary from quarter to quarter, increased $2.1
million , or 60.4%, as we selectively divested underutilized and aging equipment.
Sales of new equipment, which also varies from quarter to quarter, increased
$4.8 million , or more than 3.5x, compared to the same period in 2019. Parts
sales and service revenue increased $3.9 million , or 51.2%, compared to the same
period in 2019 primarily due to the acquisition of Truck Utilities .
Total revenue for the nine months ended September 30, 2020 , increased by
$32.7 million , or 17.5%, compared to the same period in 2019. Rental revenue
increased $0.2 million , or 0.2%, compared to the same period in 2019 driven by
investments made in 2019 and partially offset by delays in projects resulting
from the COVID-19 pandemic in the second and third quarters. Sales of rental
equipment increased $4.4 million , or 29.1%, and sales of new equipment increased
$11.0 million , or 135.8%, compared to the same
23
--------------------------------------------------------------------------------
period in 2019. Parts sales and service revenue increased $17.1 million , or
86.8%, compared to the same period in 2019 primarily due to the acquisition of
Truck Utilities .
Cost of Revenue. Cost of revenue, excluding depreciation of $19.5 million , for
the three months ended September 30, 2020 , increased by $10.7 million , or 45.5%,
compared to the same period in 2019 ($12.5 million , or 30.2%, including
depreciation).
Cost of revenue, excluding depreciation of $59.3 million , for the nine months
ended September 30, 2020 , increased by $33.7 million , or 46.0%, compared to the
same period in 2019 ($41.6 million , or 33.4%, including depreciation). The
majority of the increase in cost of revenue for both the three and nine months
ended September 30, 2020 is attributed to incremental costs aligned with the
increases in parts sales and service revenue and in equipment sales revenue.
Operating Expenses. Operating expenses for the three months ended September 30,
2020 decreased $5.0 million , or 31.9%, and increased $0.9 million , or 2.5%, for
the nine months ended September 30, 2020 , compared to the same periods in 2019.
The decrease in the third quarter is a result of cost reductions taken by the
Company as a result of the COVID-19 pandemic and reduced transaction expenses.
The increase for the nine month period is partially due to increased selling,
general and administrative expenses as a result of increased headcount with the
expansion of the organization and additional expenses incurred as a result of
being a public company. Offsetting the increase is a reduction in transaction
expenses of $6.3 million for the nine month period ended September 30, 2020
compared to the same period in 2019, which were directly related to the merger
with Capitol in 2019.
Other Expense. Other expense for the three months ended September 30, 2020
decreased $7.8 million , or 33.8%, and increased $1.1 million , or 2.1%, for the
nine months ended September 30,2020 , compared to the same periods in 2019. Other
expense in the three and nine months ended September 30, 2019 includes loss of
extinguishment of debt of $4.0 million directly related to the transactions with
Capitol , which closed on July 31, 2019 . Additionally, the changes in fair value
of an interest rate collar, which is an undesignated hedging instrument,
resulted in income in the current quarter of approximately $0.6 million
($6.1 million expense for the nine month period ended September 30, 2020 ). Net
interest expense in the current quarter decreased by $0.7 million .
Income Tax Expense. Income tax expense was a benefit of $25.5 million and
$25.8 million for the three and nine months ended September 30, 2020 ,
respectively. We recorded a reduction of our deferred tax valuation allowance
related to federal and state net operating loss carryforwards as well as
disallowed interest expense deduction carryforwards. Final regulations issued by
the US Treasury and Internal Revenue Service prompted a reassessment of how we
had established valuation allowances in prior interim and annual periods, which
were based on interpretations regarding the impacts of the interest limitation
rules . In our revised assessment, we estimate that we are more likely than not,
able to realize certain of our federal and state deferred tax assets within the
period that the carryforwards expire.
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, thereby reducing our costs to match our revenue. We principally
evaluate financial performance based on five measurements: Adjusted EBITDA,
equipment dollars ("OEC") on rent, fleet count, fleet utilization 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.
24
--------------------------------------------------------------------------------
Financial performance for the three and nine months ended September 30, 2020 and
2019:
Three Months Ended September 30, Nine Months Ended September 30,
(in $000s, except fleet
count and rate per day) 2020 2019 change (%) 2020 2019 change (%)
Adjusted EBITDA (a) $28,020 $30,654 $(2,634) (8.6) $86,249 $91,900 $(5,651) (6.1)
Average equipment on rent
(b) $464,302 $484,305 $(20,003) (4.1) $475,038 $467,178 $7,860 1.7
Average fleet count 4,542 4,221 321 7.6 4,595 4,075 520 12.8
Average fleet utilization
(c) 72.1% 79.1% (7.0)% (8.8) 73.1% 80.4% (7.3)% (9.1)
Average rental rate per
day (d) $137.16 $138.11 $(0.95) (0.7) $137.23 $137.42 $(0.19) (0.1)
(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 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 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 exclude Mexico , 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 exclude Mexico , 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 exclude Mexico , which the
Company commenced exit activities in the third quarter of 2019.
Adjusted EBITDA. Adjusted EBITDA decreased $2.6 million , or 8.6%, to $28.0
million for the three months ended September 30, 2020 compared to the same
period in 2019. This decrease can primarily be attributed to a $3.9 million
decline in gross profit, excluding depreciation of $19.5 million , partially
offset by a decrease in operating expenses.
Adjusted EBITDA decreased $5.7 million , or 6.1%, to $86.2 million for the nine
months ended September 30, 2020 compared to the same period in 2019. This
decrease is primarily due to the increase in selling, general and administrative
expenses, partially offset by a $1.0 million decrease in gross profit, excluding
depreciation of $59.3 million .
The following is a reconciliation from
Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 2020 2019
Net income (loss) $ 15,173 $ (18,010) $ (13,946) $ (30,157)
Interest expense 15,853 16,533 47,816 46,376
Income tax expense (benefit) (25,508) 494 (25,841) 1,330
Depreciation expense 19,711 17,928 60,080 52,104
Amortization expense 771 724 2,233 2,172
EBITDA 26,000 17,669 70,342 71,825
Adjustments:
Non-cash purchase accounting impact
(1) 390 126 1,485 862
Transaction and process improvement
costs (2) 1,380 9,648 5,098 14,676
Major repairs (3) 211 376 1,506 1,522
Share-based payments (4) 657 283 1,669 463
Change in fair value of derivative (5) (618) 2,552 6,149 2,552
Adjusted EBITDA $ 28,020 $ 30,654 $ 86,249 $ 91,900
25--------------------------------------------------------------------------------
The following is a reconciliation from Adjusted EBITDA to net cash flow from
operating activities for the nine months ended
Nine Months Ended September 30,
(in $000s) 2020 2019
Adjusted EBITDA $ 86,249 $ 91,900
Adjustments:
Change in fair value of derivative (5) (6,149) (2,552)
Share-based payments (4) (1,669) (463)
Major repairs (3) (1,506) (1,522)
Transaction and process improvement costs (2) (5,098) (14,676)
Non-cash purchase accounting impact (1) (1,485) (862)
EBITDA 70,342 71,825
Add:
Interest expense (47,816) (46,376)
Income tax benefit (expense) 25,841 (1,330)
Amortization - financing costs 2,188 2,099
Share-based payments 1,669 463
Loss (gain) on sale of rental equipment and parts (4,231) (3,930)
Gain on insurance proceeds - damaged equipment (714) (570)
Major repair disposal 1,506 1,522
Loss on extinguishment of debt - 4,005
Change in fair value of derivative 6,149 2,552
Asset impairment - 657
Deferred tax (benefit) expense (24,417) 816
Provision for losses on accounts receivable 1,813 3,472
Changes in assets and liabilities:
Accounts receivable 9,258 (13,728)
Inventory (3,797) (13,742)
Prepaid expenses and other (953) (2,211)
Accounts payable (8,920) 4,792
Accrued expenses (11,782) (4,770)
Deferred rental income (1,270) (4,832)
Net cash flow from operating activities $ 14,866 $ 714
Notes to EBITDA and Adjusted EBITDA reconciliations: (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 Nesco's acquisition ofTruck Utilities (which include post-acquisition integration expenses incurred during the current quarterly and nine month periods); 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 periods. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are included for the current quarterly and nine month periods. Pursuant to Nesco's 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) in the three and nine months endedSeptember 30, 2020 . 26 -------------------------------------------------------------------------------- Equipment on Rent. Average equipment on rent was$464.3 million for the three months endedSeptember 30, 2020 , a decrease of$20.0 million or 4.1% over the same period in 2019. The decrease is primarily due to COVID-19 related customer project delays during the second and third quarters. This trend began to reverse in lateAugust 2020 and equipment on rent was$489.1 million onSeptember 30, 2020 . Average equipment on rent for the nine months endedSeptember 20, 2020 was$475.0 million up from$467.2 million for the same period in 2019. The increase is due to fleet investments made in 2019 and continued demand from customers during the first quarter, offset by project delays related to COVID-19 in the second and third quarters. Fleet Count. Average fleet count was 4,542 for the three months endedSeptember 30, 2020 , an increase of 321 units from an average fleet count of 4,221 over the same period in 2019. Sequentially, our fleet count declined by 73 units from the second quarter of 2020 as a result of the selective sale of under-utilized and aging assets, which were not offset by the acquisition of new equipment due to COVID-related capital investment curtailments. Average fleet count for the nine months endedSeptember 30, 2020 was 4,595, an increase of 520 from an average fleet count of 4,075 over the same period in 2019. Bucket trucks represented the largest category of our year over year capital expenditures for the three and nine months endedSeptember 30, 2020 , driven by strong demand in 2019 and the first quarter of 2020 that has been offset by project delays resulting from the COVID-19 pandemic. Fleet Utilization. Fleet utilization was 72.1% for the three months endedSeptember 30, 2020 , compared to 79.1% the same period of 2019. Fleet utilization was 73.1% for the nine months endedSeptember 30, 2020 , compared to 80.4% the same period of 2019. The decrease in both periods is primarily due to COVID-19 related customer project delays. Rental Rate Per Day. Average rental rate per day was$137.16 for the three months endedSeptember 30, 2020 , a decrease of 0.7% from$138.11 for the same period in 2019. Average rental rate per day was$137.23 for the nine months endedSeptember 30, 2020 , a 0.1% decrease from$137.42 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 or purchase a fleet category to ensure our fleet age remains competitive. Our overall average fleet age was 3.9 years as ofSeptember 30, 2020 , compared to 3.6 years atSeptember 30, 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$638.3 million as ofSeptember 30, 2020 , a$44.6 million , or 7.5%, increase from$593.7 million atSeptember 30, 2019 . 27 -------------------------------------------------------------------------------- Operating Results by Segment - Three and Nine Months EndedSeptember 30, 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. Equipment Rental and Sales Segment Three Months Ended September 30, Nine Months Ended September 30, (in $000s) 2020 2019 $ change % change 2020 2019 $ change % change Rental revenue$ 42,615 $ 46,922 $ (4,307) (9.2) %$ 132,693 $ 134,684 $ (1,991) (1.5) % Sales of rental equipment 5,510 3,436 2,074 60.4 % 19,585 15,167 4,418 29.1 % Sales of new equipment 6,048 1,246 4,802 385.4 % 19,043 8,076 10,967 135.8 % Total revenues 54,173 51,604 2,569 5.0 % 171,321 157,927 13,394 8.5 % Cost of revenue 23,342 17,091 6,251 36.6 % 72,211 55,306 16,905 30.6 % Depreciation of rental equipment 18,530 16,636 1,894 11.4 % 56,065 48,186 7,879 16.4 % Gross Profit$ 12,301 $ 17,877 $ (5,576) (31.2) %$ 43,045 $ 54,435 $ (11,390) (20.9) % Total Revenues. Revenue in our ERS segment represented 78.2% and 82.6% of our consolidated revenues for the three months endedSeptember 30, 2020 and 2019, respectively. ERS segment revenue increased by$2.6 million for the three months endedSeptember 30, 2020 compared to the same period in 2019. Rental revenue decreased$4.3 million primarily as a result of COVID-19 project delays. Sales of rental and new equipment, which can vary from quarter to quarter, increased$6.9 million due in part to the selective divestiture of under-utilized and aging fleet equipment. ERS segment revenue increased by$13.4 million or 8.5%, for the nine months endedSeptember 30, 2020 compared to the same period last year. Rental revenue decreased by$2.0 million over the prior period primarily due to pandemic-related project delays in the second and third quarters. New equipment sales increased by$11.0 million , or 135.8%, compared to the same period in 2019. Used equipment sales increased by$4.4 million due in part to disposals of aged and under-utilized units. Cost of Revenue. The$6.3 million increase in cost of revenue, excluding depreciation, for the three months endedSeptember 30, 2020 compared to the prior year is primarily due to costs related to increased sales of rental and new equipment. Cost of revenue, excluding depreciation, increased by$16.9 million year over year for the nine months endingSeptember 30, 2020 , primarily due to an increase in cost of sales of new and rental equipment. Depreciation. Depreciation of our rental fleet increased by$1.9 million and$7.9 million for the three and nine months endedSeptember 30, 2020 , compared to the same periods in 2019, primarily due to growth in fleet equipment value. Gross Profit. Gross profit for the three months endedSeptember 30, 2020 , excluding depreciation of$18.5 million , decreased by$3.7 million compared to the same period in 2019. Gross profit for the nine months endedSeptember 30, 2020 , excluding depreciation of$56.1 million decreased by$3.5 million in the first three quarters of 2020 compared to the first three quarters of 2019. The decrease in both the three and nine month periods endedSeptember 30, 2020 was due primarily to a reduction in high margin rental revenue. 28 --------------------------------------------------------------------------------
Parts, Tools, and Accessories Segment
Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 $ change % change 2020 2019 $ change % change
Rental revenue $ 3,510 $ 3,181 $ 329 10.3 % $ 11,410 $ 9,187 $ 2,223 24.2 %
Parts sales and services 11,577 7,657 3,920 51.2 % 36,753 19,675 17,078 86.8 %
Total revenues 15,087 10,838 4,249 39.2 % 48,163 28,862 19,301 66.9 %
Cost of revenue 10,820 6,393 4,427 69.2 % 34,622 17,853 16,769 93.9 %
Depreciation of rental
equipment 937 1,058 (121) (11.4) % 3,210 3,183 27 0.8 %
Gross Profit $ 3,330 $ 3,387 $ (57) (1.7) % $ 10,331 $ 7,826 $ 2,505 32.0 %
Total Revenues. PTA segment revenue increased $4.2 million or 39.2% for the
three months ended September 30, 2020 compared to same period in 2019. For the
nine months ended September 30, 2020 , PTA segment revenue increased by $19.3
million , or 66.9%. The increases in revenue are primarily due to the acquisition
of Truck Utilities . The PTA segment experienced headwinds from COVID-19 social
distancing measures in the last part of the first quarter and throughout the
second and third quarters as a result of new project delays. Similar to ERS, PTA
began to see a positive increase in sales and services revenue starting late in
the third quarter.
Cost of Revenue. Cost of revenue, excluding depreciation, in the PTA segment
increased $4.4 million and $16.8 million for the three and nine months ended
September 30, 2020 , respectively. As a direct result of the increase in parts
sales volume, as well as the expansion of operations from two PTA locations to
seven over the course of 2019 with an eighth location partially opening during
the second quarter of 2020. This expanded footprint was designed to service
growth that has not yet eventuated due to COVID-19. Similar to ERS, as a
recovery takes hold, we have significant capacity in place within the PTA
segment to support growth with limited new investments.
Gross Profit. PTA gross profit, excluding $0.9 million and $3.2 million of
depreciation, decreased $0.2 million , or 4.0%, and increased $2.5 million , or
23.0%, for the three and nine months ended September 30, 2020 , respectively,
compared to the same periods in 2019. The changes in gross profit were driven by
higher revenue in the segment, but offset by higher costs as a result of
expanded geographic footprint.
29
--------------------------------------------------------------------------------
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 proactively 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 help manage
liquidity and optimize utilization. As of September 30, 2020 , we had
$1.6 million in cash compared to $6.3 million as of December 31, 2019 . As of
September 30, 2020 , we had $269.0 million of outstanding borrowings under our
2019 Credit Facility with an additional $67.4 million in availability (subject
to a borrowing base) compared to $250.0 million of outstanding borrowing under
the 2019 Credit Facility as of December 31, 2019 .
2019 Credit Facility
On July 31, 2019 , we entered into the 2019 Credit Facility, 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. On March 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 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 of our assets 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
occurrence 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 merger and related transactions, on July
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, on February 1 and August 1 of each year, commencing on
February 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") by
Capitol 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 of our assets 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.
30--------------------------------------------------------------------------------
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 ofSeptember 30, 2020 , 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 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 our sources and uses of cash for the nine months endedSeptember 30, 2020 and 2019:
© Edgar Online, source
