Custom Truck One Source, Inc. - Annual Report: 2021 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2021
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-38186
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CUSTOM TRUCK ONE SOURCE, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 84-2531628 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
7701 Independence Ave
Kansas City, MO 64125
(Address of principal executive offices, including zip code)
(816) 241-4888
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.0001 par value | CTOS | New York Stock Exchange | ||||||
| Redeemable warrants, exercisable for Common Stock, $0.0001 par value | CTOS.WS | New York Stock Exchange | ||||||
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | ☒ | |||||||||||
| Non-accelerated filer | o | Smaller reporting company | ☒ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of shares of common stock held by non-affiliates, computed by reference to the closing price for such common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $411.3 million.
The number of shares of common stock outstanding as of March 10, 2022 was 247,040,326.
DOCUMENTS INCORPORATED BY REFERENCE
| Document | Where Incorporated | |||||||
| Proxy Statement | Part III (Items 10, 11, 12, 13, and 14) | |||||||
Custom Truck One Source, Inc. and Subsidiaries
Form 10-K Report Index
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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. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “project,” “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 Annual Report, you should understand that these statements are not guarantees of performance or results and are subject to and involve risks, uncertainties and assumptions. You should not place undue reliance on these forward-looking statements or projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections:
•difficulty in integrating the Nesco (as defined below) and Custom Truck LP (as defined below) businesses and fully realizing the anticipated benefits of the Acquisition (as defined below), as well as significant transaction and transition costs that we will continue to incur following the Acquisition;
•material disruptions to our operation and manufacturing locations as a result of public health concerns, including COVID-19, equipment failures, natural disasters, work stoppages, power outages or other reasons;
•the cyclical nature of demand for our products and services and our vulnerability to industry, regional and national downturns, which impact, among others, our ability to manage our rental equipment;
•our inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner, and our inability to manage our rental equipment in an effective manner;
•any further increase in the cost of new equipment that we purchase for use in our rental fleet or for our sales inventory;
•disruptions in our supply chain as a result of the ongoing COVID-19 pandemic;
•aging or obsolescence of our existing equipment, and the fluctuations of market value thereof;
•our inability to recruit and retain the experienced personnel, including skilled technicians, we need to compete in our industries;
•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 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;
•potential impairment charges;
•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, the environment, government contracts, and data privacy and data security;
•the interest of our majority stockholder, which may not be consistent with the other stockholders;
•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;
•our inability to attract and retain highly skilled personnel and our inability to retain our senior management;
•our inability to generate cash, which could lead to a default;
•significant operating and financial restrictions imposed by the Indenture and the ABL Credit Agreement;
•increases in unionization rate in our workforce;
•changes in interest rates, which could increase our debt service obligations on the variable rate indebtedness and decrease our net income and cash flows; and
•the phase-out of LIBOR and uncertainty as to its replacement.
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 Part I, Item 1A of this Annual Report, for additional risks.
PART I
Item 1. Business
Company Overview
Custom Truck One Source, Inc., formerly Nesco Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries are engaged in the business of providing a range of services and products to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance, and customization services related to that equipment. Immediately following the acquisition by Nesco Holdings II, Inc. of Custom Truck One Source, L.P. (“Custom Truck LP”) as discussed in Note 3: Business Combination, on April 1, 2021 (the “Acquisition”), Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of common stock (“Common Stock”) from “NSCO” to “CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.” Terms such as, “we,” “our,” “us,” or “the Company” refer to Nesco Holdings prior to the Acquisition, and to the combined company after the Acquisition. Unless the context otherwise requires, the term “Nesco” or “Nesco Holdings” as used in these financial statements means Nesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to and on the date of the Acquisition.
We are a specialty equipment provider to the electric utility transmission and distribution, telecommunications, rail, and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks, and rail systems, as well as for lighting and signage. We rent, produce, sell, and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. Following the Acquisition, we changed our reportable segments to be consistent with how we currently manage the business, representing three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”), and Aftermarket Parts and Services (“APS”). Segment information provided within this Annual Report on Form 10-K, including Note 21: Segments, has been adjusted for all prior periods to be consistent with the current reportable segment presentation.
We operate with a differentiated “one-stop-shop” business model, offering equipment rental, new and used equipment sales, and aftermarket parts and service out of more than 37 locations across the U.S. and Canada. Customers receive additional support throughout the country from Custom Truck’s twenty-four hour, seven-day a week (“24/7”) call center, approximately 80 mobile technicians, and over 100 third-party locations. Custom Truck and its customers also benefit from its sophisticated sourcing model and large-scale integrated production and customization capabilities, which enhance the quality and diversity of its equipment offerings, reduce both cost and lead times for equipment sales and provide greater flexibility to optimize its rental fleet. These attributes, together with a strong reputation built over many years, position Custom Truck to capitalize on attractive secular growth trends across its end-markets.
Custom Truck owns one of the industry’s largest fleets of specialty rental equipment focused on electric utility T&D, rail, telecommunications, and infrastructure end-markets through our ERS segment. As of December 31, 2021, our fleet is comprised of more than 9,000 units with an average unit age of approximately 3.8 years, which is young by typical rental fleet standards and compares favorably to the long useful life of the equipment. Our rental fleet is managed on a national level, which allows the company to efficiently reposition equipment in response to shifts in regional demand and thereby sustain strong utilization levels.
As is customary among equipment rental companies, we sell used equipment out of our rental fleet to end user customers. We also offer a broad variety of new equipment for sale across our end-markets, often highly customized to meet its customers’ specific needs. Integrated production capabilities and extensive knowledge gained over a long history of selling equipment have positioned Custom Truck uniquely in the market as a trusted partner for customers seeking tailored solutions with short lead times. New and used equipment sales are done through our TES segment.
Through our APS segment, we provide our customers a total job-site solution, offering a range of products for rent or sale to fully equip their equipment and crews for activity in the field. Our comprehensive APS offering expands opportunities to serve our equipment rental and sales customers through the convenience of a single vendor for all their specialty equipment and APS needs.
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End-Market Overview
Our core end-markets include electric utility T&D, telecom, rail, and infrastructure.
General End-Market Trends
Combined annual capital expenditures in our core end-market exceeds $350 billion and grew 7.3% annually from 2001 to 2019 compared to 4.0% annual growth in U.S. GDP over the same period. Our end-markets have demonstrated limited correlation with GDP growth and resiliency through the recent economic cycle.
The North American market has, and continues, to experience a secular shift from equipment ownership to rental. Rental penetration of the broader equipment fleet in North America increased from 42% in 2009 to 57% in 2019 and is expected to reach 65% by the mid-2020s. In comparison, other developed markets recorded higher rental penetration rates in 2017, including Europe at 65%, Japan at 80%, and the U.K. at 80%, demonstrating the future potential of the North American market. We believe that customers’ growing preference for equipment rental is driven by several factors including the avoidance of significant capital outlay, improved asset utilization, reduced storage and maintenance, access to a wider range of modern productive equipment, dedicated customer care, and operational efficiencies. As we believe that the rental penetration rate in the specialty equipment market is only an estimated 20 – 25% today, and that it will continue to trend towards the levels observed in the broader market, we think there will be significant growth within our specific markets. We purchase the majority of our chassis from several dealerships across our geographic footprint. The majority of our boom and crane components are sourced from a single supplier.
On November 6th, 2021 the United States Congress passed, and the President of the United States signed, the Infrastructure Investment and Jobs Act (the “Infrastructure Act”). The Infrastructure Act allocates approximately $1 trillion in new and reallocated funds with positive impacts to each of our end-markets.
Electric Utility T&D End-Market
Maintaining safe and effective transmission and distribution lines is critical to national infrastructure, as they carry the electricity that powers the nation. Transmission lines carry high voltage electricity long distances, while distribution lines carry electricity from local transformers to houses and businesses. Our specialty equipment is used in the maintenance and repair of live lines and installation of new lines. Capital expenditure spend in the electric utility T&D end-market is approximately $68 billion annually. This spend is driven by a number of attractive dynamics, demonstrating that the U.S. is potentially in the very early stages of a multi-year electric utility T&D spending cycle.
Aging and Underinvested Electric Utility T&D Infrastructure - Electricity delivery in the U.S. depends on an aging and complex patchwork system of power generation facilities, transmission grids, local distribution lines, and substations. Most electric utility T&D lines were constructed in the 1950s and 1960s with a 50-year life expectancy and were not originally engineered to meet today’s load demands. Today, approximately 40% to 50% of existing electric utility T&D infrastructure is at or beyond its engineered life. Due in part to this aging infrastructure, costly electric emergency incidents and disturbances have increased more than sevenfold since 2000. Multiple costly fires have also been caused by aging and undermaintained transmission and distribution lines. As an example, in February 2019, Pacific Gas & Electric, an electric utility in California, announced that it is probable that its transmission line equipment caused the catastrophic fires in Paradise, CA three months prior. Maintenance work on the line had been delayed for several years. Pacific Gas & Electric, which filed for bankruptcy protection in January 2019, recorded a $10.5 billion charge in anticipation of damage claims. California fire investigators determined that Pacific Gas & Electric’s equipment also played a role in starting 18 blazes in 2017. The prevention of additional incidents associated with the continued operations of aging electric utility T&D infrastructure is expected to continue to drive increasing levels of maintenance and repair and replacement spend by utilities.
Changing Generation Landscape - The ongoing transition from coal to gas and renewables continues to drive changes in the generation landscape and transmission project development. Twenty-nine states and Washington, D.C. have adopted renewable portfolio standards, which mandate that a certain percentage — most states target 10% to 45% — of electricity sold by a utility must come from renewable sources. The share of new renewables in the U.S. electricity generation mix will increase from 21% in 2020 to 42% in 2050. As a result, significant spend for new transmission lines will be required to interconnect these new sources of power with the electrical grid.
Increased Focus on Decarbonization - With an increased societal focus on decarbonization, major fossil fuel driven sectors are shifting towards electrification. The electrification of vehicles, heating technology, and industrial processes is expected to drive a significant increase in electricity demand and require a transmission investment of up to $90 billion by 2030.
Increased Outsourcing by Utilities - Utilities are increasingly turning to specialized third-party contractors to fulfill construction and maintenance needs. This outsourcing trend is driven by the challenge of an aging workforce and desire to shift the management and
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responsibilities of non-core activities to external service providers. Outsourcing is a favorable trend for us, given our rental penetration among electric utility T&D contractors who prefer to rent due to lower initial capital outlay, increased flexibility, improved asset utilization and productivity, and significantly reduced storage and maintenance costs.
The Infrastructure Act includes $7.5 billion to build a national network of electric vehicle chargers and $65 billion to upgrade power infrastructure.
Telecom End-Market
Telecommunications infrastructure, including telecom cells, towers, and wirelines, are the backbone of telephonic interaction and the transportation of mobile data. We provide the specialty equipment required to maintain and install telecom cells, towers, and communication lines. Construction spend on telecommunications infrastructure is approximately $80 billion annually. This spend is expected to grow significantly throughout the next decade due largely to the advent of 5G technology.
Rapid technological advancements, including advanced digital and video service offerings, continue to increase demand for greater wireline and wireless network capacity and reliability. Data traffic is at an all-time high and is expected to substantially increase in the future. United States data traffic is expected to grow at a 21% compound annual growth rate (“CAGR”) from 2017 to 2022. In response to this demand, AT&T, Verizon, and T-Mobile (the “Big 3 U.S. Telecom Operators”) are planning to increase speed and capacity through the deployment of 5G technology.
5G technology will require the installation of numerous higher bandwidth small cells to “densify” wireless networks and enhance performance. This is because small cells only deliver coverage within approximately a quarter mile of their location, compared to approximately five miles for the existing 4G and predecessor macro cells. As a result, approximately 20 times more small cells will need to be installed in order to provide the same level of coverage as the existing macro cells.
The spend required by the Big 3 Telecom Operators to deploy 5G technology is expected to grow at a 40% CAGR from 2019 to 2023, continuing into 2030 with total 2019 to 2030 spend of approximately $240 billion. The Infrastructure Act provided an additional $65 billion to increase access to reliable high-speed internet.
Rail End-Market
Freight and commuter rail are responsible for transporting products and people across the nation. Our rail mounted equipment is used for a variety of tasks including the installation of new rail and maintenance of the existing rail lines. Hi-rail equipment is utilized in projects for both installation and repair of track, electric lines, signal crossings, and signs. The equipment is also often used for working on older infrastructure such as repairing bridges and terminals with more antiquated track and systems that are in need of upgrades with more modern systems like Positive Train Control (“PTC”) and others. The six largest public railroads spend more than $10 billion annually in capital expenditures. Such capital expenditures are expected to continue to grow as freight demands increase. In addition to freight rail, spend on active commuter rail projects is significant with a growing pipeline.
Freight Rail - Freight rail, one of the most cost-effective, energy-efficient modes of transport, carries about 40% of intercity freight as measured by ton-miles, more than any other mode of transportation. Our North American customers are principally Class I railroads and related contractors. Class I railroads operate in 44 states across the U.S. and account for 94% of freight rail revenues in North America.
Commuter Rail - Trends such as population growth, increasing urbanization, a focus on sustainability, environmental awareness, and increasing highway congestion are expected to drive continued investment in commuter rail. Furthermore, as a result of years of insufficient funding, transit systems across the U.S. are struggling to cope with aging infrastructure, creating a massive and increasing backlog. The most recent federal estimate quantifies the backlog of projects required to attain a “state of good repair,” meaning public transit is repaired to an age within its average service life, at $90 billion — projected to grow to $122 billion by 2032. In August 2018, the U.S. Senate approved a fiscal-year 2019 appropriations bill that provides $16.1 billion for public transit and intercity passenger rail. Also in 2018, the Los Angeles County Metropolitan Transportation Authority’s board adopted the Twenty-Eight by ’28 plan, which calls for completing 28 transportation projects at an estimated cost of $26 billion ahead of the 2028 Summer Olympics and Paralympics in Los Angeles.
The Infrastructure Act provides $39 billion to modernize transportation and an additional $89.9 billion in guaranteed funding for public transportation along with an additional $66 billion of funding specifically earmarked for passenger rail services.
Infrastructure End-Market
We also serve the general infrastructure end-market, which includes surface transportation, national highway performance, highway safety, metropolitan transit, and other key infrastructure systems, including residential and non-residential waste and water. According
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to FMI Research, total infrastructure capex spend annually exceeds $200 billion and the infrastructure end market outlook remains positive. We anticipate the recent change in administration and growing bipartisan support will result in additional federal funds being allocated to infrastructure investment.
We consider the waste end market as part of the general infrastructure industry. Long-term, secular growth in this market is driven by growing waste volumes generated by increasing waste generation per capita. Population and income growth drive municipal solid waste generation. Municipal solid waste revenue grew at a compounded annual growth rate of 3.5% from 2003 to 2018. Waste is generally considered to be a recession-resistant industry given the non-discretionary nature of waste collection and disposal. Ongoing consolidation amongst waste haulers results in increasing market share for large, well-capitalized companies that have the resources to invest in the latest trucks and equipment.
The Infrastructure Act provides $55 billion to expand access to clean drinking water for households, businesses, schools, and child care centers across the United States.
Products and Services
Equipment Rental and Sales
Our equipment rental fleet consists of more than 9,000 units, which management believes is among the largest specialty equipment rental fleets in North America. Our fleet consists of more than 250 product variations to serve the specialized needs of our customers including various terrain options such as truck mounted, rail mounted, track mounted, and all-wheel drive. Our equipment can reach transmission lines and cell sites in excess of 200 feet in the air, dig to a depth of 60 feet to install telephone and power line poles, provide power line and fiber line pulling capacity of up to 40,000 pounds, and reach remote and inaccessible areas for rail maintenance. A large percentage of our fleet is insulated, which allows customers to safely work on live electric lines. Our equipment is regularly tested for safety, which includes regulation-mandated dielectric testing of all insulated units to ensure safe operations near electrical wiring. The majority of our equipment can be used across a variety of end-markets and many of our customers operate in multiple end-markets. Rental rates vary depending on product type, geography, demand, and other factors.
Examples of our rental and sales equipment include:
| Bucket Trucks | Trucks equipped with a bucket mounted on an insulated or non-insulated hydraulic lifting aerial device used to maintain and construct utility, rail, or telecommunication lines. | ||||
| Digger Derricks | Trucks equipped with a boom and auger used to dig holes and set utility, rail, and telephone poles. | ||||
| Cable placers | Equipment used to string new and re-conduct overhead utility, rail, telecom, or cable lines including pole trailers, reel handling trailers, and other material handling trailers. | ||||
| Boom Trucks | Trucks equipped with a boom mounted on an insulated or non-insulated hydraulic lifting aerial device used to maintain and construct utility, rail, or telecommunication lines. | ||||
| Rail Trucks | Trucks equipped with specialty equipment to drive on rail tracks. | ||||
| Roll-Off Trucks | Trucks equipped to transport waste containers | ||||
| Knuckleboom Trucks | Trucks equipped to lift for utility, construction, and building materials applications | ||||
| Vacuum Trucks | Trucks equipped to safely dig holes and transport materials by vacuuming materials or liquids | ||||
| Cranes | Equipment made to lift heavy objects utilized in our core markets | ||||
| Pressure Diggers | Trucks equipped with a pressure drill used to dig holes for utility poles, structure bases, and foundations through hard materials such as rock. | ||||
| Underground Equipment | Variety of equipment used to place and remove underground utility and telecom lines without disruption to the surface. | ||||
Trucks and Miscellaneous Equipment | Hi-rail equipment including hi-rail service trucks, grapples, roto-dumps, PTC trucks, etc. | ||||
Aftermarket Parts and Services
Our APS offerings include a broad parts, tools, and accessories inventory, which is a natural extension of our core equipment rental offering and can be rented or purchased on an individual basis or in packaged specialty kits.
The technical nature of certain parts, tools, and accessories requires periodic testing in a certified lab and expertise in specialized repairs, which we provide at our test and repair facilities. We provide nationwide coverage through eight locations that serve as hubs for technical test and repair as well as the rental and sale of parts, tools, and accessories.
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Examples of our aftermarket parts and services include:
| Stringing Blocks | Stringing dollies and accessories used to string powerline, telephone line (including fiber), or cable, above ground or underground in the new construction, rebuild, or maintenance of the lines. | ||||
| Augers | Tool used to dig holes for power, telephone, or cable poles and also used to dig holes for structure bases, pilings, and foundation supports. | ||||
| Insulated Tools | Extension arms, temp arms, insulated ladders, etc., used to insulate and dielectrically protect workers and temporarily reposition powerlines for safe execution of tasks while working at height in live line circumstances. | ||||
| Other PTA | Crimping tools and dies, pumps/motors, underground fiber laying tools, and various other tools used in either utility, telecom, or rail applications. | ||||
| Test and Repair Services | Regulatory requirements of not more than one year for specialized PTA including testing and inspections, design requirements, rubber testing, etc. and repair services for replacement parts. | ||||
| Upfit and Repair Services | Customizing existing heavy-duty trucks by adding features, and repair services for replacement parts. | ||||
Competitive Strengths
We believe our platform is differentiated and benefits from several significant strengths that will continue to support our leading market position and future growth. We believe that the following factors have been instrumental in our success and will position us for continued growth:
Market Leader with a Differentiated “One-Stop Shop” Platform - Our platform offers our customers a true “one-stop shop” solution for their needs across the specialty equipment market, including rentals, new and used sales, production and customization, aftermarket parts and services, and financing and asset disposal, building upon the successful business model that has been a key source of differentiation for Custom Truck historically. Our flexibility to meet customers’ capital allocation preferences allow us to develop deeper relationships with our customers and our wide variety of equipment offered enables us to meet more of our customers’ needs than our competitors. Additionally, our national platform and scale provides us the ability to serve both regional and national customers wherever they operate.
Integrated Business Model with Large-Scale Production and Customization Capabilities - We are able to provide our customers with highly tailored solutions on an expedited basis, enabled by our extensive internal production and customization operations. These capabilities allow us to deepen our relationships with customers by offering them the ability to customize equipment to meet their specific job demands. Our large-scale production further offers benefits to customers by reducing lead times for equipment and provides the ability to change and adapt mid-production should the customer need to modify its order. Maintaining inventory and shorter lead times helps us to support our own rental operation and more quickly react to changing customer demands and preferences. We are also able to quickly adapt our processes and procedures to enter into new markets and product offerings, such as dump trucks, roll-offs, and vacuum trucks, which are products that have been added over the past several years. As one of the largest consumers of vocational chassis and attachments in the United States, we have a structural cost advantage on purchasing. Our production capabilities further lower costs, while providing flexibility to pursue the highest growth portions of the market.
Attractive Long-term End-Market Dynamics - We are a leader across a diverse set of end-markets, including electric utility T&D, telecom, rail, and infrastructure, among others, many of which have attractive long-term growth dynamics. This position was established by our expansive fleets, national sales and service network, longstanding customer relationships, and operational expertise. The favorable end-market dynamics may lead to increased spend on specialty equipment by our existing customers. These end-markets are in the early years of a secular upcycle that is expected to persist for years to come. We are well positioned to benefit from this projected growth and maintain the flexibility to pivot our production and focus to any end market that is experiencing greater demand due to our deep knowledge and expertise in the production of different types of equipment.
Young, Well-Maintained Rental Fleet Comprised of In-Demand Equipment - Our rental fleet consists of more than 9,000 units and is one of the youngest in the industry, with an average age of 3.8 years as of December 31, 2021. We maintain the majority of our fleet using our own trained technicians and locations to ensure consistent repairs, best-in-class service and maintenance, and delivery of fully functioning, ready-to-work equipment to our customers. We are highly responsive, adding high-quality equipment to our fleet on an ongoing basis to meet customer demands in a changing market landscape. We focus our production capabilities on the equipment that our customers need most in the end-markets with the most growth potential. Disciplined fleet maintenance and strict focus on meeting customer and end-market requirements have resulted in over 80% utilization on average of our rental fleets since the acquisition.
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Geographical Diversity - We have a large geographic footprint that enables us to provide local service throughout North America. Our more than 40 locations are strategically located to provide access to key high-growth end markets and have sufficient geographic reach to provide a holistic solution to nationwide accounts. Our footprint is further expanded by over 100 third-party service locations. We maintain a 24/7 call center, as well as a large team of mobile technicians, ensuring that our customers can quickly access experienced technicians regardless of geography. Because our rental fleet is managed nationally, equipment can be deployed strategically across locations in periods of high regional demand. This allows us to maintain high utilization rates for our entire rental fleet while quickly responding to both equipment and service requests from customers. Our broad reach also represents a competitive advantage in serving customers with nationwide operations who may prefer the convenience of interacting with a limited number of equipment providers. Although we have an expansive national footprint already, we have identified additional attractive geographic markets for potential expansion.
Strong, Diverse Client Relationships and Industry Expertise - We serve more than 3,000 customers, with the top 15 customers representing approximately 19% of Revenue and no single customer representing greater than 3% of Revenue, in each case during the year ended December 31, 2021. Of our top 20 customers, 16 of them both rent and purchase equipment. We have very strong brand recognition among our industry-leading customers. Our ability to deliver an unmatched value proposition for our customers’ most complex and technical requirements, on a tight deadline, results in long-tenured relationships with premier customers across our different end-markets. We have significant tenure with our top customers, with key relationships spanning more than 15 years. Our strong knowledge of the equipment and product requirements in our customers’ end-markets allows us to work closely with our customers to determine their specialty equipment needs while our ability to offer the optionality to either rent or purchase equipment helps meet customers’ capital allocation preferences and increases customer penetration.
Attractive Unit Economics Driving High Returns - Our integrated, “one-stop shop” business model results in both lower costs and higher equipment resale values, driving exceptional unit economics. We believe that our ability to purchase equipment components separately and assemble in-house results in a cost advantage over buying fully completed units. Additionally, our direct-to-customer sales channels drive attractive net resale values that exceed those of our competitors who typically sell used equipment through auctions.
Growth Strategy
We offer a full suite of specialty equipment services and a broad portfolio of products, which provides us with numerous channels for future growth and opportunities to deepen customer relationships. We intend to maintain our leading position and expand our market share by continuing to pursue the following strategies:
Capitalize on Favorable Trends Across a Large Addressable Market - Because of the highly fragmented industry in which we operate, we have significant runway to increase our share of the market. We estimate the addressable market to be approximately $30 billion: $15.6 billion in new sales, $9 billion in aftermarket parts and service, and $5 billion in rental and used sales. The new sales addressable market has grown from an estimated $14.4 billion in 2016 to $15.6 billion in 2019. Our differentiated cost position, North American branch network, broad product offering, and flexible distribution model position us to achieve strong growth in the future. Additionally, several end markets we serve, including electric utility T&D, telecom, infrastructure, rail, and waste disposal, are expanding and spending on capital expenditures is increasing accordingly. Our production and customization capabilities will only serve to bolster our ability to meet the growing demand and changing landscapes in these end markets as we can nimbly adapt as necessary to capitalize on opportunities as they present themselves.
Invest in Rental Fleet to Meet Growing Demand - We see continued opportunity to invest in our rental fleet to serve customer demand. We will look to drive utilization improvements via enhanced selling efforts and investments in in-demand equipment as well as drive rental penetration via continued customer education. We believe that by investing in new products and adding to our rental fleet, we can continue to satisfy the growing specialty equipment needs of our customers across end-markets. We have the resources and capital structure necessary to capture incremental demand. Lastly, a large percentage of our rental fleet is currently focused on serving the electric utility T&D and telecom industries, but we believe there is significant opportunity to continue to grow our fleet of specialty equipment tailored to serve the growing rail and infrastructure end-markets as well.
Grow Equipment Sales Across both Current and New Customers, End Markets, and Product Offerings - We will be able to leverage our national and local sales approach to achieve growth in our existing customer base and across existing and newly entered product categories. We have identified several new product categories that we plan to expand into, where our experience and expertise in production, customization, and purchasing are expected to provide favorable returns. We will look to drive volume growth via continued equipment innovations and strategic selling initiatives. We are currently well positioned to capitalize on favorable trends across end markets, including grid updates and maintenance, build-out of renewable resources, 5G roll-out, and potential significant infrastructure spend.
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Increase Penetration of Aftermarket Parts and Service - Each full-service location provides certified test and repair services and an expanded product offering of both insulated and non-insulated tools. Today, we leverage our service technicians, including those dedicated to field service, to support our existing rental fleet and select customer-owned equipment. We see an opportunity to grow the size of the internal service organization and external service provider network to increase our ability to service customer-owned equipment. Additionally, we launched our e-commerce platform in 2020 to begin to sell proprietary Load King™ equipment parts and other targeted specialty equipment parts.
Continue to Pursue Domestic Geographic Expansion - We operate more than 37 locations; however, broad sections of the United States and Canada are still outside of our primary operating area. In the past, we have expanded into new geographical markets through both strategic acquisitions and through internal growth. There is an opportunity for future expansion across the United States to support growth. Custom Truck has successfully opened five locations in geographic areas where there were no attractive acquisition targets, exemplifying the ability to expand our reach without the use of acquisitions. In addition to organic geographic expansion, we may opportunistically pursue acquisitions to expand our product and service offering and accelerate growth.
Sales and Marketing
Sales
We operate with a nationwide direct sales team to address the specialized needs of its customer base and cultivate strategic partnerships with key customers in the industry. The more than 100-member sales organization is led by members of the senior management team including Presidents and Regional Vice Presidents. The average years of experience in the industry of our sales personnel is more than 20 years. Our field sales organization and 24-hour support center have developed “first-call” relationships with several of our largest customers while providing significant expertise in the technical nature of the equipment and projects.
For key national or regional accounts, we employ a top to bottom sales approach with a focus on building partnerships at all levels within these key accounts and securing commitments to use us as a preferred supplier. Strategic Account Managers are responsible for establishing and managing these relationships along with direct involvement from senior leadership to create more contact and touch points between the key decision makers and CTOS.
We divide the remainder of its sales organization into regional go-to market teams for the TES, ERS, and APS segments consisting of Territory Managers supported by Inside Rental Representatives and Assistants. Territory Managers are responsible for developing new relationships and maintaining communication with key decision makers at customer organizations and working with employees at both the corporate office and on individual job sites to ensure customer satisfaction. After a rental opportunity is generated, Inside Rental Representatives and Assistants serve in a support role by working directly with customers to finalize orders, schedule delivery, coordinate payment and handle inbound requests. This direct communication helps expedite future orders on rental equipment availability and rate quotes.
Marketing
We utilize targeted advertising, tradeshows, focused email distributions, a comprehensive equipment catalog, and a company website for marketing our products and services. The rental catalog contains detailed technical information and diagrams for all our products, while the website offers easy access to equipment specifications and rental listings. We supplement these materials with ten to twelve major marketing publications annually. In addition to print and online publications, we participate in national and select regional trade shows, which represent important customer touch points for the sales team to both approach new customers and maintain strong relationships with existing customers.
Facilities
We are headquartered in Kansas City, Missouri where we house executive management, accounting, finance, information technology, human resources, marketing, and procurement professionals. We maintain a diverse geographic footprint in the U.S. and Canada, with 50 leased facilities and 6 owned facilities.
Intellectual Property
We do not own or license any patents, patent applications, or registered copyrights. We own a number of trademarks and domain names important to the business. Its material trademarks are registered or pending applications for registrations in the U.S. Patent and Trademark Office and various non-U.S. jurisdictions. The Company uses “Custom Truck One Source,” “Nesco” and “Truck Utilities” as unregistered trademarks and “Load King,” “Nesco Specialty Rentals,” “Nesco Rentals” and “Bethea” as registered trademarks. See further discussion regarding Nesco trademarks in Note 11: Goodwill and Intangible Assets. Additionally, pursuant to an agreement with Terex, we have a revocable, royalty-free, limited license to use certain Terex trademarks to promote the sale and servicing of
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Terex products, subject to certain conditions of use. We believe we own or license, or could obtain on reasonable terms, any intellectual property rights needed to conduct its business.
Governmental Regulation
We are subject to various governmental, including environmental, laws and regulations. Regulations affecting our operations principally relate to the licensing, permitting and inspection requirements for vehicles in our rental fleet. Additionally, we are subject to environmental regulations governing the discharge of pollutants into the air or water, the management, storage and disposal of, or exposure to, hazardous substances and wastes, the responsibility to investigate and clean up contamination, and occupational health and safety. The Company is not aware of any material instances of non-compliance with respect to the foregoing regulations.
We are subject to federal, state, and local environmental laws and regulations with respect to the ownership and operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor and waste oils. If leakage or a spill occurs, it is possible that the resulting costs of cleanup, investigation and remediation, as well as any resulting fines could adversely affect our business. The U.S. Congress and other federal and state legislative and regulatory authorities in the U.S. and internationally have considered, and will likely continue to consider, numerous measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for our services could be affected, our vehicle, and/or other, costs could increase, and our business could be adversely affected.
Human Capital
Our people are a critical component to our success. Our deep knowledge of, experience with, and responsiveness to the specialized needs of our customers sets us apart. To nurture our human capital, we create a safe, collaborative, and positive environment for our team members, and are a positive force in the communities in which we operate.
As of December 31, 2021, the Company had more than 1,800 employees. Approximately 3% of our employees are covered by a collective bargaining agreement, and management believes its relationship with our employees is good.
We track recordable injuries and have an incident management system to investigate safety incidents and, after investigation, our safety team implements process and procedures to prevent recurrences and remediate known hazards.
During the COVID-19 pandemic, Custom Truck implemented a series of safety and health protocols, which included contact tracing, social distancing and paid time off to get vaccinations. For those employees where it was possible, we enable remote working. Additionally, we provided a special category of sick pay for employees that tested positive for COVID-19 so that employees did not have to use vacation or sick time while in quarantine protocols.
The Company provides training in technical, operational, and managerial skills, and places special emphasis on safety, effective communications, customer service, and employee development. Additionally, the Company offers employees 401K programs, with a Company matching component, training and free tele-medicine for all employees and certain members of their family, regardless of whether they are enrolled in our health insurance program. The Board of Directors receives regular updates from senior management on matters relating to the Company’s strategy for the recruitment, retention, and development of the Company’s employees.
Legal Proceedings and Insurance
From time to time, we are subject to various lawsuits, claims and legal proceedings, the vast majority of which arise out of the ordinary course of business. The nature of our business is such that disputes related to vehicles and accidents occasionally arise. We assess these matters on a case-by-case basis as they arise and it establishes reserves as and if required, based on its assessment of exposure. We have insurance policies to cover general liability, product, and workers’ compensation related claims. Management believes that none of the existing legal matters will have a material adverse effect on our business or financial condition.
Available information
This Annual Report on Form 10-K, as well as future quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on our Internet website (https://www.customtruck.com) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The contents of our website are not incorporated by reference in this Annual Report. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by us at www.sec.gov.
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Item 1A. Risk Factors
In addition to the other information contained in this Annual Report on Form 10-K, the risk factors discussed herein should be considered carefully in evaluating the Company. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Effective management of our rental equipment is vital to our business and inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner would adversely affect our ability to manufacture and market our products.
Our rental equipment has a long economic life, and managing this equipment is a critical element to our business. We must successfully maintain and repair our equipment in a cost-effective manner to maximize the economic life of our products and the level of proceeds from the sale of such products. As the needs of our customers change, we may need to incur costs to relocate or remanufacture our assets to better meet shifts in demand. If the distribution of our assets is not aligned with regional demand, we may be unable to take advantage of opportunities despite excess inventory in other regions. If we are not able to successfully manage our assets, our business, results of operations and financial condition may be materially adversely affected.
We purchase raw materials, component parts and finished goods to be used in the manufacturing and sale of our products. In addition, we may incorporate vehicle chassis provided directly by our customers in our production process. Although the vast majority of our raw materials and component parts are sourced domestically, certain of our suppliers are based overseas, and certain of our domestic suppliers may source subcomponents from overseas. Outbreaks of communicable diseases have been known to occur in certain of these international regions, resulting in public health crises. Changes in our relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to our suppliers or customers, could have a material adverse effect on our ability to timely manufacture and market products. Increases in the costs of shipping and transportation, purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts or finished goods increase and we are unable to pass on those increases to our customers.
A small portion of our workforce is unionized, and more of our workforce could become unionized in the future, which could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages.
Our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union, and unions may conduct organizing activities in this regard. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different from our current compensation and job assignment arrangements with our employees, these arrangements could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages. In addition, even if our managed operations remain primarily non-union, our business may still be adversely affected by work stoppages at any of our suppliers that are unionized. The stoppage of work for a prolonged period of time at one, or several, of our principal manufacturing facilities resulting from union or non-union matters, could materially adversely affect our business.
As a small portion of our workforce is unionized, we are subject to risk of work stoppages and other labor relations matters. As of December 31, 2021, approximately 3% of the U.S. hourly workers of the Company were represented by a labor union and were covered by a collective bargaining agreement. Any strikes, threats of strikes or other organized disruptions in connection with the negotiation of new labor agreements or other negotiations could materially adversely affect our business as well as impair our ability to implement further measures to reduce costs and improve production efficiencies.
We may not be able to attract and retain skilled technicians, which could have a material adverse effect on our ability to meet customer demand.
Competition for skilled technicians in our industry, especially during periods of low unemployment or periods of high demand, could increase our labor costs and hinder our ability to meet customer demand, which could have a material adverse effect on our results of operations.
A number of key personnel are critical to the success of our business.
Our success is dependent on our ability to attract and retain highly skilled personnel. Competition within our industry and the business world for high-performing management talent is substantial. We have senior executives and other management level employees with extensive industry experience. We rely on this knowledge and experience in our strategic planning and in our day-to-day business operations. Our success depends in large part upon our ability to retain our senior management, the loss of one or more of whom could
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have a material adverse effect on our business. Additionally, due to our legacy as a combination of several family operated businesses, a number of our key employees have family relationships within our organization and our inability to retain those individuals could have a negative impact on our business. Competition for experienced managers and skilled technicians in our industry can be intense. If we fail to retain and recruit the necessary personnel, our business and our ability to retain customers and provide acceptable levels of customer service could suffer.
A material disruption to our operation and manufacturing locations could adversely affect our ability to generate revenue.
We have several significant production and manufacturing locations. If operations at any of these production and manufacturing locations were disrupted as a result of public health concerns, equipment failures, natural disasters, work stoppages, power outages or other reasons, our business, financial condition and results of operations could be adversely affected. Interruptions in production could increase costs and delay delivery of units in production. Production capacity limits could cause us to reduce or delay sales efforts until production capacity is available.
We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a material negative effect on our financial condition and results of operations and contribute to negative market perceptions about the Company or its securities, which could cause you to lose some or all of your investment.
The cost of new equipment that we purchase for use in our rental fleet or for our sales inventory may increase, and the aging or obsolescence of our existing equipment, and the fluctuation of the market value thereof, could have a material adverse affect on our results of operations.
The cost of new equipment from manufacturers that we purchase for use in our rental fleet may increase as a result of factors beyond our control, such as inflation, higher interest rates and increased raw material costs, including increases in the cost of steel, which is a primary material used in most of the equipment we use. Such increases could materially impact our financial condition or results of operations in future periods if we are not able to pass such cost increases through to our customers in the form of higher prices. In addition, based on changing demands of our customers, the types of equipment we rent to our customers may become obsolete resulting in a negative impact on our financial condition based on the increased capital expenditures required to replace the obsolete equipment, and our potential inability to sell the obsolete equipment in the used equipment market. In addition, we may incur losses upon dispositions of our rental fleet due to residual value risk.
If the average age of our fleet of rental equipment were to increase, the cost of maintaining our equipment, if not replaced within a certain period of time, will likely increase. If our operating costs increase as our rental equipment fleet ages and we are unable to pass along such costs, our earnings will decrease. As of December 31, 2021, the average age of our rental equipment fleet was less than five years. The costs of maintenance may materially increase in the future. Any significant increase in such costs could have a material adverse effect on our business, financial condition or results of operations.
In addition, the market value of any given piece of rental equipment could be less than its book value at the time of sale. The market value of used rental equipment depends on several factors, including:
•the market price for new equipment of a like kind;
•wear and tear on the equipment relative to its age;
•the time of year that it is sold (prices are generally higher during the construction seasons);
•worldwide and domestic demand for used equipment;
•the supply of used equipment on the market; and
•general economic conditions.
We include in operating income the difference between the sales price and the book value of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gains or losses realized upon disposal of equipment. We cannot assure you that used equipment selling prices will not decline. Any significant decline in the selling prices for used equipment could have a material adverse effect on our business, financial condition or results of operations.
Our business is highly dependent on the timely and sufficient delivery of finished goods, such as commercial vehicles, from our suppliers.
The COVID-19 pandemic continues to negatively impact the supply chains of the commercial vehicle manufacturers and dealers on which we depend. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business
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and financial performance. The ensuing economic impacts from restrictions put in place around the globe to address the COVID-19 pandemic, including shutdowns and workplace changes, have led to issues, broadly, in the global flow of goods and services (the “supply chain”). The Company continues to monitor the impact of the COVID-19 pandemic and related restrictions on our supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in our production and manufacturing processes. Supply chain disruptions, such as the ongoing semiconductor shortage, could potentially limit the ability of these manufacturers to meet demand in future periods. Disruptions in the supply chains of these manufacturers and dealers, such as pandemic-related plant and production shutdowns, semiconductor chip shortages, labor and equipment shortages, and transportation delays could significantly impact our ability to meet customer demand and generate revenue, which could have a material adverse effect on our financial condition and results of operations.
Integration of the Nesco and the Custom Truck LP businesses may be difficult, costly and time-consuming, and the anticipated benefits and cost savings of the Acquisition may not be realized or may be less than expected.
Our ability to realize the anticipated benefits of the Acquisition will depend, to a large extent, on our ability to integrate the two businesses. The combination of two independent businesses is a complex, costly and time-consuming process, and we cannot assure you that we will be able to successfully integrate Nesco and Custom Truck LP or, if the integration is successfully accomplished, that the integration will not be more costly or take longer than presently contemplated. If we cannot successfully integrate and manage the two businesses within a reasonable time following the Acquisition, we may not be able to realize the potential and anticipated benefits of the Acquisition, which could have a material adverse effect on our business, financial condition and operating results.
Our ability to realize the expected synergies and benefits of the Acquisition is subject to a number of risks and uncertainties, many of which are outside of our control. These risks and uncertainties could adversely impact our business, financial condition and operating results, and include, among other things:
•our ability to complete the timely integration of operations and systems, organizations, standards, controls, procedures, policies and technologies, as well as the harmonization of differences in the business cultures of Nesco and Custom Truck LP;
•our ability to minimize the diversion of management attention from ongoing business concerns during the integration process;
•our ability to retain the service of key management and other key personnel;
•our ability to preserve customer, supplier and other important relationships and resolve potential conflicts that may arise;
•the risk that certain customers and suppliers will opt to discontinue business with the combined company or exercise their right to terminate their agreements as a result of the Acquisition pursuant to change of control provisions in their agreements or otherwise;
•the risk that Custom Truck LP may have liabilities that we failed to discover or fully appreciate in the course of performing due diligence;
•difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the combination; and
•difficulties in managing the expanded operations of a significantly larger and more complex combined company.
We may encounter additional integration-related costs, fail to realize all of the benefits anticipated in the Acquisition or be subject to other factors that adversely affect preliminary estimates. In addition, even if the operations of the two businesses are integrated successfully, the full benefits of the Acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that we expect. The occurrence of any of these events, individually or in combination, could have a material adverse effect on our financial condition and operating results.
We expect to achieve pro forma cost synergies totaling approximately $50 million within two years of the Closing Date. We also expect to incur integration and restructuring costs of approximately $50 million to achieve these synergies, with $40 million of these costs incurred in the first two years following the Closing Date. The anticipated synergies are based upon assumptions about our ability to implement integration measures in a timely fashion and within certain cost parameters. Our ability to achieve the planned synergies is dependent upon a significant number of factors, many of which are beyond our control, such as our ability to integrate businesses that we acquire (including the integration of Nesco and Custom Truck LP), operating difficulties, increased operating costs, delays in implementing initiatives and general economic, competitive or industry conditions. For example, we may be unable to eliminate duplicative costs in a timely fashion or at all. Additionally, achieving these benefits may require certain related one-time costs, charges and expenses, which may be material. We can provide no assurance that we will be successful in generating growth,
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maintaining or increasing our cash flows or profitability or achieving cost savings and revenue enhancements, and our inability to do so could have a material adverse effect on our business, cash flows, results of operations and financial position.
The assumptions and estimates underlying the pro forma cost synergies are inherently uncertain and, although considered reasonable by our management as of the date of this report, are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the financial projections, including, among others, risks and uncertainties due to general business, economic, regulatory, market and financial conditions, as well as changes in the combined company’s businesses, financial condition or results of operations, and other risks and uncertainties included in this “Risk Factors” section.
Platinum owns the majority of our equity, and its interests may not be aligned with yours.
Platinum owns the majority of our fully diluted shares and, therefore, has the power to control our affairs and policies. Platinum also controls, to a large degree, the election of directors, the appointment of management, the entry into mergers, sales of substantially all of our assets, and other extraordinary transactions. The directors so elected have authority, subject to the terms of our indebtedness, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. The interests of Platinum could conflict with your interests. For example, Platinum is in the business of making investments in companies and, from time to time in the future, may acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Platinum may also pursue acquisition opportunities that may be complementary to our business and, as a result, these acquisition opportunities may not be available to us.
We have, and may incur, significant indebtedness and may be unable to service our debt. This indebtedness could adversely affect our financial position, limit our available cash and our access to additional capital and prevent us from growing our business.
We have a significant amount of indebtedness and may incur additional indebtedness in the future, including in connection with our growth capital expenditure plan. As of December 31, 2021, our total indebtedness was $1,356.7 million, consisting of $920.0 million in aggregate principal amount of the 2029 Secured Notes, $394.9 million of borrowings under our Asset Based Lending (“ABL”) Facility and capital lease and other debt obligations of $41.8 million (excluding approximately $238.0 million of indebtedness under our floorplan financing agreements). Although the Indenture and the ABL Credit Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant exceptions and qualifications, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Moreover, the Indenture does not impose any limitation on our incurrence of certain liabilities or obligations that are not considered “Indebtedness” under the Indenture (such as operating leases), nor does it impose any limitation on the amount of liabilities incurred by our subsidiaries, if any, that might be designated as “unrestricted subsidiaries” under such Indenture. Similarly, the ABL Credit Agreement does not impose any limitation on our incurrence of certain liabilities or obligations that are not considered “Indebtedness” under the agreement (such as operating leases).
The level of our indebtedness could have important consequences, including:
•a portion of our cash flow from operations is dedicated to debt service and may not be available for other purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•limiting our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes, including acquisitions, and potentially impeding our ability to secure favorable lease terms;
•exposing us to the risk of increased interest rates as borrowings under our ABL Facility are subject to variable rates of interest;
•making us more vulnerable to economic downturns and industry conditions and possibly limiting our ability to withstand competitive pressures;
•placing us at a competitive disadvantage compared to our competitors with less indebtedness;
•making it more difficult for us to satisfy our obligations with respect to our debt; and
•increasing our cost of borrowing.
If new debt is added to our current debt levels, the risks that we now face would intensify.
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To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors, some of which are beyond our control. An inability to service our indebtedness could lead to a default under the Indenture or ABL Credit Agreement, which may result in an acceleration of our indebtedness.
To service our indebtedness, we will require a significant amount of cash. Our ability to pay interest and principal in the future on our indebtedness and to fund our capital expenditures and acquisitions will depend upon our future operating performance and the availability of refinancing options, which will be affected by prevailing economic conditions, the availability of capital, as well as financial, business and other factors, some of which are beyond our control.
Our future cash flow may not be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. These actions may not be effected on a timely basis or on satisfactory terms or at all, and these actions may not enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Indenture and the ABL Credit Agreement, contain, or future debt agreements may contain, restrictive covenants prohibiting us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.
The Indenture and the ABL Credit Agreement impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities.
The Indenture and the ABL Credit Agreement impose significant operating and financial restrictions on us. These restrictions will limit our ability, among other things, to:
•incur additional indebtedness;
•pay dividends or certain other distributions on our capital stock or repurchase our capital stock;
•make certain investments or other restricted payments;
•place restrictions on the ability of subsidiaries to pay dividends or make other payments to us;
•engage in transactions with stockholders or affiliates;
•sell certain assets or merge with or into other companies, reorganize our companies, or suspend or dispose of a substantial portion of our business;
•prepay or modify the terms of our other indebtedness;
•guarantee indebtedness; and
•create liens.
There are limitations on our ability to incur the full $750.0 million of commitments under the ABL Facility. Availability will be limited to the lesser of a borrowing base and $750.0 million. The borrowing base is calculated on a monthly (or more frequent under certain circumstances) valuation of our parts inventory, fleet inventory accounts receivable and unrestricted cash (in each case, subject to customary reserves). As a result, our access to credit under the ABL Facility is potentially subject to significant fluctuations, depending on the value of the borrowing base-eligible assets as of any measurement date. With respect to the ABL Facility, on any date when Availability (as such term shall be defined in the ABL Credit Agreement) is less than the greater of (i) 10% of the lesser of (A) the aggregate revolving commitments under the ABL Facility at such time and (B) the borrowing base at such time (such lesser amount, the “Line Cap”) and (ii) $60 million, we will also be required by a springing covenant to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00, tested for the four fiscal quarter period ending on the last day of the most recently ended fiscal quarter for which financials have been delivered, and at the end of each succeeding fiscal quarter thereafter until the date on which Availability has been equal to or greater than the greater of (x) 10% of the Line Cap, and (y) $56 million for five consecutive business days. Our ability to meet the financial covenant could be affected by events beyond our control. The inability to borrow under the ABL Facility may adversely affect our liquidity, financial position and results of operations.
These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. A failure to comply with the restrictions in the Indenture and the ABL Credit Agreement could result in an event of default under such instruments or credit agreement. Our future operating results may not be sufficient to enable compliance with the covenants in the Indenture or ABL Credit Agreement or to remedy any such default. In addition, in the event of
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an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any accelerated payments, including those under the Indenture and under our ABL Facility. If we default on our indebtedness, our business, financial condition or results of operations could be materially and adversely affected. If we fail to maintain compliance with these covenants in the future, we cannot assure you that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our ABL Facility are at variable rates of interest and will expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. As of December 31, 2021, we have variable rate debt, consisting of $394.9 million outstanding under the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on the ABL Facility by approximately $0.5 million per year. This amount does not reflect the impact of the interest rate collar currently in place. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to any of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.
The phase-out of LIBOR, and uncertainty as to its replacement, may adversely affect our business.
On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR after 2021 after which time it can no longer guarantee its availability. In March 2021, the ICE Benchmark Administration Limited, the administrator of LIBOR, extended the transition dates of certain LIBOR tenors to June 30, 2023, after which LIBOR reference rates will cease to be provided. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. Dollar LIBOR should be entered into after December 31, 2021. It is unknown whether any banks will continue to voluntarily submit rates for the calculation of LIBOR, or whether LIBOR will continue to be published by its administrator based on these submissions, or on any other basis, after such dates. Although alternative reference rates have been proposed, it is unknown at this point which of these alternative reference rates will attain market acceptance as replacements for LIBOR.
Certain of our agreements, including derivative agreements, also make reference to LIBOR. To prepare for the phase out of LIBOR, we may need to renegotiate these agreements and may not be able to do so on terms that are favorable to us. It is also currently unknown what impact any contract modification will have on our financial statements. Further, the financial markets may be disrupted as a result of the phase out of LIBOR if banks fail to execute a smooth transition to an alternate rate.
Disruption in the financial markets or the inability to renegotiate our agreements to remove and replace LIBOR on favorable terms, or a negative impact from any contract modifications, could have an adverse effect on our business, financial position, and results of operations.
Disruptions or security compromises affecting our information technology systems or those of our critical service providers could adversely affect our operating results by subjecting us to liability, and limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, or implement strategic initiatives.
The security and integrity of our information technology systems and assets are critical to our business and ability to monitor and control our operations, deliver our products and services, and adjust to changing market conditions. While we own certain of our information technology systems, we also engage third parties across an array of software, systems and technologies (including cloud-based) and functions (e.g., HR, finance, communications, compliance), which enable us to conduct, monitor and/or protect our business, operations, systems and data assets. In addition, in the ordinary course of business, we and/or our service providers collect, process and store sensitive data, including intellectual property, our proprietary business data and that of our customers, suppliers and business partners, as well as personally identifiable information.
We and our service providers experience constant threats to our data and systems, and despite various security controls and measures, we remain vulnerable to cyberattacks and security incidents resulting from malware (e.g., ransomware), computer viruses, malfeasance by external or internal actors, and/or incidents attributable to human error (e.g., due to social engineering or phishing). The White House, SEC and other regulators have accordingly increased their focus on companies’ cybersecurity vulnerabilities and risks. We have also observed a global increase in cybersecurity threats and more sophisticated cyber-attacks and threat actors. Such attacks and threats are unpredictable as to their timing, nature and scope. As a result, we may be unable to anticipate or prevent future attacks, particularly as the methodologies utilized by attackers change frequently or are not recognized until launched, and we may be unable to investigate or remediate incidents due to the increased use by threat actors of tools and techniques that are designed to
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circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. The COVID-19 pandemic has presented additional operational and cybersecurity risks due to work-from-home arrangements at the Company and our providers.
Any successful cyberattack, compromise, breach, or disruption involving our or our critical service providers’ information technology systems, or the failure of any of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. Further, any compromise or breach of such systems could result in adverse publicity, harm our reputation, lead to claims against us and affect our relationships with our customers and employees, any of which could have a material adverse effect on our business. Certain of our software applications are also utilized by third parties who provide outsourced administrative functions, which may increase the risk of a cybersecurity incident. In addition, because our systems may contain sensitive data information about individuals and businesses, our failure to maintain the security, integrity or confidentiality of the data we hold, whether the result of our own error or the malfeasance or errors of others, could harm our reputation or give rise to legal liabilities leading to lower revenues, increased costs for compliance and systems remediation, increased costs of liability for litigation and regulatory proceedings as well as fines and penalties, result in the misuse of our systems and networks, manipulation and destruction of data, misappropriation of assets or production stoppages and supply shortages, and other potential material adverse effects on our results of operations. Our failure to appropriately maintain the security of the data we hold could also violate applicable privacy, data security and other laws and subject us to lawsuits, fines and other means of regulatory enforcement. Global data privacy and cybersecurity rules, regulations and industry standards are rapidly evolving, including laws like the California Consumer Privacy Act, which provides for a private right of action for certain types of data breaches. Complying with any new or changing legal and regulatory requirements could force us to incur substantial expenses or require us to change our business practices in a manner that could harm our business. If any security attacks, breaches or incidents are not detected or deflected by our current security measures, we could also be required to expend additional capital and other resources, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.
Although we maintain insurance coverage for various cybersecurity risks and liabilities, there can be no guarantee that any or all costs or losses incurred will be partially or fully insured.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are in Kansas City, Missouri where we house executive management, accounting, finance, information technology, human resources, marketing and procurement professionals. Kansas City, Missouri is also home to our mega-center which performs the majority of our production and manufacturing. We maintain a diverse geographic footprint in the U.S. and Canada, with more than 37 equipment rental and service locations. These facilities are typically service centers for the maintenance and support of our equipment, and depending on the location, may include separate areas for displaying and storage of equipment and parts. Our one-stop shop approach focuses on providing the products and services offered by each of our segments at each of our locations.
| Location | Type | ||||
| 7701 Independence Avenue, Kansas City, MO | Owned | ||||
| 6714 Inverness Way, Fort Wayne, IN | Leased | ||||
| 9230 51 St SE Calgary, AB Canada | Leased | ||||
| 4045 Hwy 5 Cabot, AR United States | Leased | ||||
| 2665 South Rockwood Cabot, AR United States | Leased | ||||
| 655 E 20Th St Yuma, AZ United States | Leased | ||||
| 4500 State Rd Bakersfield, CA United States | Leased | ||||
| 1032 Black Gold Rd Bakersfield, CA United States | Leased | ||||
| 14670 Randall Ave Fontana, CA United States | Leased | ||||
| 10808 Weaver Ave South El Monte, CA United States | Leased | ||||
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| 5455 E 52Nd Ave Commerce City, CO United States | Leased | ||||
| 705 W 62Nd Ave Denver, CO United States | Leased | ||||
| 4729 Capital Cir Nw Tallahassee, FL United States | Leased | ||||
| 4755D1 Capital Cir Nw Tallahassee, FL United States | Leased | ||||
| 9879 Us Hwy 301 N Tampa, FL United States | Leased | ||||
| 7906 Baseline Ct Tampa, FL United States | Leased | ||||
| 8949 Maislin Rd Tampa, FL United States | Leased | ||||
| 9725 Industrial Dr Bridgeview, IL United States | Leased | ||||
| 3112 E State Rd 124 Bluffton, IN United States | Leased | ||||
| 7413 Sr 930 E Fort Wayne/New Haven, IN United States | Leased | ||||
| 5323 Kansas Ave Kansas City, KS United States | Leased | ||||
| 9230 Cedar Knoll Dr Grass Lake, MI United States | Leased | ||||
| 2370 English St Maplewood, MN United States | Leased | ||||
| 2384 English St Maplewood, MN United States | Leased | ||||
| 2109 Manchester Trafficway Kansas City, MO United States | Leased | ||||
| 7000 Winner Rd Kansas City, MO United States | Leased | ||||
| 7401 E 24 Hwy Kansas City, MO United States | Leased | ||||
| 2770 5Th Ave S Fargo, ND United States | Leased | ||||
| 6 Sutton Cir Hooksett, NH United States | Leased | ||||
| Unit 2 Sutton Cir Condominium Hooksett, NH United States | Leased | ||||
| 1400 Union Lndg Rd Cinnaminson, NJ United States | Leased | ||||
| 1850 Union Lndg Rd Cinnaminson, NJ United States | Leased | ||||
| 1920 Rowland Cinnaminson, NJ United States | Leased | ||||
| 6708 Townline Rd Syracuse, NY United States | Leased | ||||
| 3522 Middlebranch Rd NE Canton, OH United States | Leased | ||||
| 3205 Davinion Rd El Reno, OK United States | Leased | ||||
| 300 Johnson St Wilkes Barre, PA United States | Leased | ||||
| 370 Johnson St Wilkes Barre, PA United States | Leased | ||||
| 1400 E Hwy 67 Alvarado, TX United States | Leased | ||||
| 7200 Jack Newell Blvd S Fort Worth, TX United States | Leased | ||||
| 7525 Pebble Dr Bldg 24 Fort Worth, TX United States | Leased | ||||
| 18725 Mckay Blvd Humble, TX United States | Leased | ||||
| 12519 W I-20 Odessa, TX United States | Leased | ||||
| 9775 E Lynchburg Salem Tpke Forest, VA United States | Leased | ||||
| 622 Huntington Blvd NE Roanoke, VA United States | Leased | ||||
| 26109 & 26119 United Rd NE Kingston, WA United States | Leased | ||||
| 5734 Minder Rd Ste A-1 Poulsbo, WA United States | Leased | ||||
| 11139 W Becher St West Allis, WI United States | Leased | ||||
| 2900 Rissler Rd Sedalia, MO United States | Owned | ||||
| 4334 Snapfinger Woods Dr Atlanta, GA United States | Owned | ||||
| 1700 Leider Dr Union Grove , WI United States | Owned | ||||
| 12660 E Lycshburg Salem Turnpike Lynchburgh, VA United States | Owned | ||||
| 702 East Rose St Elk Point, SD United States | Owned | ||||
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Total square footage under lease is approximately 1,241,550 with expiration dates through 2039. We believe that all of our properties are in good operating condition and are suitable to adequately meet our current needs.
Item 3. Legal Proceedings
We may, at any given time, be named as a defendant in certain lawsuits, investigations and claims arising in the ordinary course of business. While the outcome of these potential lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. In the opinion of management, there are no pending litigations, disputes or claims against the Company that, if decided adversely, would have a material adverse effect on its consolidated financial condition, cash flows or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Custom Truck One Source, Inc.’s common stock and warrants trade on the New York Stock Exchange under the symbol “CTOS” and “CTOS.WS,” respectively. As of March 10, 2022, there were approximately 103 holders of record of our common stock and 14 holders of record of warrants.
Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
On April 1, 2021, the Company issued 176,600,000 shares of Common Stock, in the aggregate, to the parties to the Rollover Agreements, Platinum and the PIPE Investors. Such shares of Common Stock were issued at a price of $5.00 per share, for $883.0 million in the aggregate. This issuance was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and/or Rule 506(c) of Regulation D of the Securities Act. The issuance was completed to finance the Acquisition.
Equity Compensation Plans
For information regarding equity compensation plans see Item 11, Executive Compensation, of this Annual Report on Form 10-K and Note 13: Equity to the consolidated financial statements included in this Annual Report.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our shares of common stock in the foreseeable future. It is presently intended that we will retain our earnings for use in business operations and, accordingly, it is not anticipated that our board of directors will declare dividends in the foreseeable future. In addition, the terms of our ABL and the Indenture include restrictions on our ability to issue dividends.
Issuer Purchases of Equity Securities
We purchased and held in treasury 1,640 shares for tax withholding purposes related to our equity compensation plans during the fourth quarter of 2021.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | ||||||||||||
| October 1, 2021 to October 31, 2021 | 407 | $ | 8.54 | |||||||||||
| November 1, 2021 to November 30, 2021 | — | — | ||||||||||||
| December 1, 2021 to December 31, 2021 | 1,233 | 7.42 | ||||||||||||
| 1,640 | $ | 7.70 | ||||||||||||
a.All shares purchased were withheld to satisfy tax withholding obligations upon the vesting of restricted stock unit awards or exercise of stock options. These shares were not acquired pursuant to any repurchase plan or program.
b.We have no share repurchase plan or programs.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On April 1, 2021 (the “Closing Date”), Nesco Holdings II, Inc., a subsidiary of Custom Truck One Source, Inc. (formerly Nesco Holdings, Inc.), completed the acquisition of Custom Truck One Source, L.P. (“Custom Truck LP”) in a series of transactions described below (the “Acquisition”). On April 1, 2021, Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of common stock (“Common Stock”) from “NSCO” to “CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.”
Throughout this section, unless otherwise noted, terms such as “we,” “our,” “us,” or “the Company” refer to Nesco Holdings prior to the Acquisition and to the combined company after the Acquisition. Unless the context otherwise requires, the terms “Nesco” or
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“Nesco Holdings” mean Nesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to the Acquisition.
Acquisition of Custom Truck LP
On December 3, 2020, Nesco Holdings and Nesco Holdings II, Inc., a subsidiary of Nesco Holdings (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 LP, Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom Truck LP. In connection with the Acquisition, Nesco Holdings 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 LP (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share.
Also on December 3, 2020, Nesco Holdings entered into a Common Stock Purchase Agreement (the “Investment Agreement”) with Platinum, relating to, among other things, the issuance and sale to Platinum (the “Subscription”) 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, on December 21, 2020, Nesco Holdings 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, the PIPE 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”).
On the Closing Date, in connection with (i) the Rollovers, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors. Following the completion of these transactions, as of April 1, 2021, the Company 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 purchase price for the Acquisition was $1.5 billion.
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”) with Bank 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.
Presentation of Financial Condition and Results of Operations
Custom Truck LP became a wholly owned subsidiary of the Company on April 1, 2021. The Company's consolidated financial statements prepared under United States generally accepted accounting principles (“GAAP”) include Custom Truck LP as of December 31, 2021 and for the period from April 1, 2021 to December 31, 2021. Accordingly, information presented for the year ended December 31, 2021 represents the financial results of Nesco Holdings and its subsidiaries for that entire period and the financial results of Custom Truck LP and its subsidiaries only from April 1, 2021 to December 31, 2021. Financial information for the year ended December 31, 2021 is not comparable to the year ended December 31, 2020 because of the Acquisition. We have provided an analysis of the year ended December 31, 2021 compared to the year ended December 31, 2020, which financial results are those of Nesco Holdings and its subsidiaries prior to the Acquisition and does not include Custom Truck LP. Additionally, we have included information on a "pro forma" basis as further described below, which we believe provides for more meaningful year-over-year comparability. 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 year ended December 31, 2021, and the year ended December 31, 2020.For a discussion and analysis of the year ended December 31, 2020 compared to the same period in 2019, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K dated March 9, 2021.
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Pro Forma Financial Information
The unaudited pro forma combined financial information presented in the section entitled “Supplemental Pro Forma Information,” give effect to the Acquisition, as if the Acquisition had occurred on January 1, 2020, and is presented to facilitate comparisons with our results following the Acquisition. This information has been prepared in accordance with Securities and Exchange Commission Article 11 of Regulation S-X. Such unaudited pro forma combined financial information also uses the fair value of assets and liabilities and the estimated fair value of tax assets and liabilities on the Closing Date, and makes the following assumptions: (1) removes acquisition-related costs and charges that were recognized in the Company's consolidated financial statements in the year ended December 31, 2021 and applies these costs and charges to the year ended December 31, 2020, as if the Acquisition and Related Financing Transactions had occurred on January 1, 2020; (2) removes the loss on the extinguishment of debt that was recognized in the Company's consolidated financial statements in the year ended December 31, 2021 and applies the charge to the year ended December 31, 2020, as if the debt extinguishment giving rise to the loss had occurred on January 1, 2020; (3) adjusts for the impacts of purchase accounting in the years ended December 31, 2021 and 2020; (4) adjusts interest expense, including amortization of debt issuance costs, to reflect borrowings on the ABL Facility and issuance of the 2029 Secured Notes, as if the funds had been borrowed and notes had been issued on January 1, 2020 and used to repay pre-acquisition debt; and (5) adjusts for the income tax effect using a tax rate of 25%.
Financial and Performance Measures
Financial Measures
Revenue — As a full-service equipment provider, we generate revenue through renting, selling, assembling, upfitting, and servicing new and used heavy-duty trucks and cranes, as well as the sale of related parts. We also sell and rent specialized tools on an individual basis and in kits. Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. For periods after January 1, 2021, the Company records changes in estimated collectability directly against rental revenue. Equipment sales revenue reflects the value of vocational trucks and other equipment sold to customers. Parts and service revenue is derived from maintenance and repair services, light upfit services, and parts, tools and accessories sold directly to customers.
Cost of rental revenue — Cost of rental revenue reflects repairs and maintenance costs of rental equipment, parts costs, labor and other overheads related to maintaining the rental fleet, and freight associated with the shipping of rental equipment.
Depreciation of rental equipment — Depreciation of rental equipment is comprised of depreciation expense on the rental fleet. We allocate the cost of rental equipment generally over the rentable life of the equipment. The depreciation allocation is based upon estimated lives ranging from five to seven years. The cost of equipment is depreciated to an estimated residual value using the straight-line method.
Cost of equipment sales — Cost of equipment sales reflects production and inventory costs associated with new units sold, parts costs, labor and other overheads related to production, and freight associated with the shipping and receiving of equipment and parts. Cost of equipment sales also includes the net book value of rental units sold.
Selling, general and administrative expenses — Selling, general and administrative expenses include sales compensation, fleet licensing fees and corporate expenses, including salaries, stock-based compensation expense, insurance, advertising costs, professional services, fees earned on customer arranged financing, gains or losses resulting from insurance settlements, and information technology costs.
Amortization and non-rental depreciation — Amortization expense relates to intangible assets such as customer lists, trade names, etc. Non-rental depreciation expense reflects the depreciation of property and equipment that is not part of the rental fleet.
Transaction expenses — Transaction expenses and other include expenses directly related to the acquisition of businesses. These expenses generally are comprised of travel and out-of-pocket expenses and legal, accounting and valuation or appraisal fees incurred in connection with pre- and post-closure activities. We also include costs and expenses associated with post-acquisition integration activities related to the acquired businesses.
Financing and other expense (income) — Financing and other expense (income) reflects the financing income associated with sales-type lease activity, foreign currency gains and losses related to our Canadian operations, as well as other miscellaneous gains or losses from non-operating activities. Also included in financing and other expense (income) are the unrealized remeasurement gains and losses related to our interest rate collar and redeemable warrants.
Interest expense — Interest expense consists of contractual interest expense on outstanding debt obligations, floorplan financing facilities, amortization of deferred financing costs and other related financing expenses.
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Income Tax Expense (Benefit) — We have net operating loss carryforward and disallowed interest deduction carryforward assets, which are generally available to be used to offset taxable income generated in future years. Due to limitations on the use of these carryforwards under U.S. federal and state income tax regulations, we record valuation allowances to reduce the carryforward assets to amounts that we estimate will be realized. Accordingly, income tax expense or benefit generally is comprised of changes to these valuation allowance estimates and does not reflect taxes on current period income (or tax benefit on current period losses). For these reasons, our effective tax rate differs from the federal statutory tax rate.
Performance Measures
We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions:
Ending OEC — Original equipment cost (“OEC”) is the original equipment cost of units at a given point in time.
Average OEC on rent — 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.
Sales order backlog — Sales order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Sales order backlog should not be considered an accurate measure of future net sales.
Operating Segments
Following the Acquisition, we modified our management structure and expanded from two reportable operating segments to three: Equipment Rental Solutions, Truck and Equipment Sales and Aftermarket Parts and Services. Segment information provided within this Annual Report on Form 10-K has been adjusted for all prior periods consistent with the current reportable segment presentation.
Equipment Rental Solutions (“ERS”) Segment — We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. As of December 31, 2021, this equipment (the “rental fleet”) is comprised of more than 9,000 units. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options (“RPOs”) on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet, of the foregoing products.
Truck and Equipment Sales (“TES”) Segment — We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated salesforce of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in
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our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.
Aftermarket Parts and Services (“APS”) Segment — The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.
Non-GAAP Financial Measures
In this MD&A and in the Supplemental Pro Forma Information, we report certain financial measures that are not required by, or presented in accordance with, GAAP. We utilize these financial measures to manage our business on a day-to-day basis, and some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide investors with expanded insight to assess performance, in addition to the standard GAAP-based financial measures. Reconciliation of the most directly comparable GAAP measure to each non-GAAP measure that we refer to is included in this Annual Report on Form 10-K. The following provides a description of the non-GAAP financial measures.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial performance measure that the Company uses to monitor its results of 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 income (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, including the method by which the assets were acquired, and capital structures. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (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 income or loss before interest expense, income taxes, depreciation and amortization, share-based compensation, and other items that the Company does not view as indicative of ongoing performance. 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. The Company also includes an adjustment to remove the impact of accounting for certain of our rental contracts with customers containing a rental purchase option that are accounted for under GAAP as a sales-type lease. We include this adjustment because we believe continuing to reflect the transactions as an operating lease better reflects the economics of the transactions given our large portfolio of rental contracts. These, and other, adjustments to GAAP net income or loss that are applied to derive Adjusted EBITDA are specified by the Company’s senior secured credit agreements.
Although management evaluates and presents the Adjusted EBITDA non-GAAP measure for the reasons described herein, please be aware that this non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the same or similar names that other companies report, and, as a result, the non-GAAP measure we report may not be comparable to those reported by others.
Pro Forma Adjusted EBITDA
We present Pro Forma Adjusted EBITDA as if the Acquisition had occurred on January 1, 2020. Refer to the reconciliation of pro forma combined net income (loss) to Pro Forma Adjusted EBITDA for the three and twelve-month periods ended December 31, 2021 and 2020 in the section entitled “Supplemental Pro Forma Information.”
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Gross Profit Excluding Depreciation of Rental Equipment
Gross profit excluding depreciation of rental equipment is a financial performance measure that we use to monitor our results from operations. We believe the exclusion of depreciation expense of the rental fleet provides a meaningful measure of financial performance because it provides useful information relating to profitability that reflects ongoing and direct operating expenses, such as freight costs and fleet maintenance costs, related to our rental fleet. Although management evaluates and presents this non-GAAP measure for the reasons described herein, please be aware that this non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, gross profit or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the same or similar names that other companies report, and as a result, the non-GAAP measure we report may not be comparable to those reported by others.
Overview of Markets
We continue to focus on four primary end markets: Transmission and Distribution, or T&D, Telecom, Rail, and Infrastructure. In the T&D end market, we continue to observe demand for new generation assets resulting in the development of new transmission lines as well as repair projects to address advanced-age transmission and distribution grids to replace existing lines and poles. These factors resulted in continued demand from our customers of the Company’s products and services. Telecom, specifically the roll-out of 5G, has seen some positive trends over the last year and half. Our existing T&D related contactor customers are expected to deliver the roll-out, and our existing equipment portfolio aligns well with the needs of this market. Rail investment, both in the freight and commuter markets, remains robust. The existing rail infrastructure is aged and in need of maintenance. Infrastructure also provides potential growth opportunities as seen by the major road and bridge maintenance work experienced across the United States.
Uncertainty remains regarding emerging variant strains of COVID-19, and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted in the United States and the rest of the world, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to the U.S., and the Company has continued to meet the needs of 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. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. The ensuing economic impacts from restrictions put in place around the globe to address the COVID-19 pandemic, including shutdowns and workplace changes, have led to issues, broadly, in the global flow of goods and services (the “supply chain”). The Company continues to monitor the impact of the COVID-19 pandemic and related restrictions on our supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in our production and manufacturing processes. Supply chain disruptions, such as the ongoing semiconductor shortage, could potentially limit the ability of these manufacturers to meet demand in future periods.
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Results of Operations
Year ended December 31, 2021 compared to year ended December 31, 2020
The consolidated operating results presented below for the year ended December 31, 2021 include the results of Custom Truck LP from April 1, 2021 to December 31, 2021. The consolidated operating results for the year ended December 31, 2020 represent those of Nesco Holdings before the acquisition of Custom Truck LP and, therefore, are not comparable.
Consolidated Results of Operations
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Rental revenue | $ | 370,067 | $ | 195,490 | |||||||
| Equipment sales | 695,334 | 56,632 | |||||||||
| Parts sales and services | 101,753 | 50,617 | |||||||||
| Total revenue | 1,167,154 | 302,739 | |||||||||
| Cost of revenue, excluding rental equipment depreciation | 800,031 | 147,764 | |||||||||
| Depreciation of rental equipment | 157,110 | 78,532 | |||||||||
| Gross profit | 210,013 | 76,443 | |||||||||
| Operating expenses | 251,980 | 59,195 | |||||||||
| Operating income (loss) | (41,967) | 17,248 | |||||||||
| Other expense | 135,109 | 68,599 | |||||||||
| Income (loss) before income taxes | (177,076) | (51,351) | |||||||||
| Income tax expense (benefit) | 4,425 | (30,074) | |||||||||
| Net income (loss) | $ | (181,501) | $ | (21,277) | |||||||
Total Revenue - The increase in revenue for the year ended December 31, 2021, both in total and for each of our individual revenue streams, was driven by the addition of Custom Truck LP’s revenues to our operating results. The Acquisition significantly increased the size of our rental fleet and added a new equipment production and sales line of business (which we report under our TES segment) and a parts sales and heavy equipment service business.
Cost of Revenue, Excluding Depreciation - Consistent with the increase in revenue versus the prior year period, the increase in cost of revenue was driven by the addition of Custom Truck LP’s cost of revenue, to our operating results.
Operating Expenses - The primary drivers of the increase in operating expenses for the year ended December 31, 2021 are the addition of Custom Truck, LP’s operating expenses to our operating results, as well as certain transaction and post-acquisition integration costs related to the Acquisition. Certain expenses directly related to the Acquisition and Related Financing Transactions are not expected to recur in future periods.
Other Expense - The increase in other expense for the year ended December 31, 2021 was largely driven by the $61.7 million loss on extinguishment of debt recognized during the period, which was directly related to the refinancing of Nesco’s asset-based revolving credit facility (the “2019 Credit Facility”) and its 10% Senior Secured Second Lien Notes due 2024 (the “2024 Secured Notes”) in connection with the Acquisition.
Income Tax Expense (Benefit) - The Company's effective tax rate for the year ended December 31, 2021 of negative 2.5%, differs from the U.S. federal statutory tax rate due primarily to the recording of valuation allowances against deferred tax assets. The Income tax expense and benefit in the years ended December 31, 2021 and 2020 primarily relates to changes in the valuation allowance and was an expense of $4.4 million and a benefit of $30.1 million, respectively.
Net Income (Loss) - The net income (loss) for the year ended December 31, 2021 is due to the addition of Custom Truck LP and the significant expenses incurred and recognized directly related to the Acquisition and Related Financing Transactions.
Key Performance Measures
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 cash flow through our earnings. Our highly variable cost structure adjusts with the utilization of our equipment, thereby reducing our costs to match our
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revenue. We principally evaluate financial performance based on the following measurements: ending OEC, average OEC on rent, fleet utilization, OEC on rent yield, and sales backlog. The table below presents these key measures.
| Year Ended December 31, | |||||||||||||||||||||||
| (in $000s) | 2021 | 2020 | Change | % Change | |||||||||||||||||||
Ending OEC(a) | $ | 1,363,451 | $ | 644,891 | $ | 718,560 | 111.4 | % | |||||||||||||||
Average OEC on rent(b) | $ | 960,203 | $ | 482,016 | $ | 478,187 | 99.2 | % | |||||||||||||||
Fleet utilization(c) | 81.2 | % | 75.3 | % | 5.9 | % | 7.8 | % | |||||||||||||||
OEC on rent yield(d) | 38.0 | % | 38.1 | % | (0.1) | % | (0.3) | % | |||||||||||||||
Sales order backlog(e) | $ | 411,636 | $ | — | $ | 411,636 | |||||||||||||||||
(a) Original equipment cost (“OEC”) on rent is the original equipment cost of units rented to customers at a given point in time.
(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.
(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 OEC.
(d) OEC on rent yield (“ORY”) is a measure of return realized by our 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.
(e) Sales order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Sales order backlog should not be considered an accurate measure of future net sales.
Ending OEC - The increase in Ending OEC for the year ended December 31, 2021 compared to the same period in 2020 was driven by the addition of Custom Truck LP’s rental fleet.
Average OEC on Rent - The increase in Average OEC on rent for the year ended December 31, 2021 compared to the same period in 2020 was driven by the addition of Custom Truck LP’s rental fleet.
Fleet Utilization - Fleet utilization improved for the year ended December 31, 2021 compared to the same period in 2020 due to continued customer demand during the current year period, coupled with the impact of the COVID-19 pandemic that affected rental volume in 2020.
OEC on Rent Yield - The increase in ORY was driven by the addition of the Custom Truck LP rental fleet and its impact on the mix of equipment types on rent. Also contributing to the increase in ORY in the year ended December 31, 2021 versus the year ended December 31, 2020 is the impact of pricing increases during 2021.
Sales Order Backlog - Sales order backlog consists of customer orders placed for customized and stock equipment. The increase in sales order backlog relates to the addition of Custom Truck LP’s new equipment sales business along with strong customer demand.
Adjusted EBITDA
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the years ended December 31, 2021 and 2020. As previously noted, Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP.
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| Year Ended December 31, | |||||||||||||||||||||||
| (in $000s) | 2021 | 2020 | $ Change | % Change | |||||||||||||||||||
| Net income (loss) | $ | (181,501) | (21,277) | $ | (160,224) | (753.0) | % | ||||||||||||||||
| Interest expense | 67,610 | 63,200 | 4,410 | 7.0 | % | ||||||||||||||||||
| Income tax expense (benefit) | 4,425 | (30,074) | 34,499 | (114.7) | % | ||||||||||||||||||
| Depreciation and amortization | 209,073 | 84,889 | 124,184 | 146.3 | % | ||||||||||||||||||
| EBITDA | 99,607 | 96,738 | 2,869 | 3.0 | % | ||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Non-cash purchase accounting impact (1) | 33,954 | 2,510 | 31,444 | 1,252.7 | % | ||||||||||||||||||
Transaction and integration costs (2) | 51,993 | 11,660 | 40,333 | 345.9 | % | ||||||||||||||||||
Loss on extinguishment of debt (3) | 61,695 | — | 61,695 | ||||||||||||||||||||
Sales-type lease adjustment (4) | 7,030 | — | 7,030 | ||||||||||||||||||||
Share-based payments (5) | 17,313 | 2,357 | 14,956 | 634.5 | % | ||||||||||||||||||
Change in fair value of derivative and warrants (6) | 6,192 | 5,303 | 889 | 16.8 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 277,784 | 118,568 | $ | 159,216 | 134.3 | % | ||||||||||||||||
(1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our ABL Credit Agreement.
(2) Represents transaction costs related to acquisitions of businesses, including the Acquisition, which are recognized within operating expenses in our Consolidated Statements of Operations and Comprehensive Income (Loss). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are expenses associated with the integration of acquired businesses.
(3) Loss on extinguishment of debt represents special charges, which are not expected to recur. Such charges are adjustments pursuant to our ABL Credit Agreement.
(4) Represents the impact of sales-type lease accounting for certain leases containing RPOs, as the application of sales-type lease accounting is not deemed to be representative of the ongoing cash flows of the underlying rental contracts. The adjustments are made pursuant to our ABL Credit Agreement.
(5) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.
(6) Represents the charge to earnings for our interest rate collar and the change in fair value of the liability for warrants.
Operating Results by Segment
Equipment Rental Solutions (ERS) Segment
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Rental revenue | $ | 354,557 | $ | 179,933 | |||||||
| Equipment sales | 105,435 | 31,533 | |||||||||
| Total revenue | 459,992 | 211,466 | |||||||||
| Cost of rental revenue | 94,644 | 56,140 | |||||||||
| Cost of equipment sales | 90,420 | 25,615 | |||||||||
| Depreciation of rental equipment | 151,954 | 74,376 | |||||||||
| Total cost of revenue | 337,018 | 156,131 | |||||||||
| Gross profit | $ | 122,974 | $ | 55,335 | |||||||
Total Revenue - For the year ended December 31, 2021, the increase in total revenue for the ERS segment was driven by the Acquisition. The increase in rental revenue for the year ended December 31, 2021 was driven by continued demand related to infrastructure investments in T&D and Telecom and the Acquisition.
Cost of Revenue - The increase in cost of revenue for the year ended December 31, 2021 was largely the result of the Acquisition.
Depreciation - Depreciation of our rental fleet increased in the year ended December 31, 2021 due to the Acquisition.
Gross Profit - The increase in gross profit for the year ended December 31, 2021 is due to the increase in rental revenue for the period, and improved margins on sales of used rental equipment. The improvement in margins on sales of used rental equipment was a function of the age and condition of the unit sold, and a lower mix of units subject to a rental purchase option.
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Truck and Equipment Sales (TES) Segment
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Equipment sales | $ | 589,899 | $ | 25,099 | |||||||
| Cost of equipment sales | 528,024 | 21,792 | |||||||||
| Gross profit | $ | 61,875 | $ | 3,307 | |||||||
Equipment Sales - Equipment sales increased for the year ended December 31, 2021 due to the Acquisition. We continue to see strong customer demand for our products, as evidenced by the growth in our sales order backlog versus the end of the third quarter of 2021.
Cost of Equipment Sales - Cost of equipment sales increased in line with the increase in equipment sales revenue for the year ended December 31, 2021. Included in the cost of equipment sales is the amortization of the purchase accounting inventory step-up of $15.2 million for the year ended December 31, 2021.
Gross Profit - The increase in gross profit for the year ended December 31, 2021 is primarily a function of the increase in equipment sales revenue.
Aftermarket Parts and Services (APS) Segment
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Rental revenue | $ | 15,510 | $ | 15,557 | |||||||
| Parts and services revenue | 101,753 | 50,617 | |||||||||
| Total revenue | 117,263 | 66,174 | |||||||||
| Cost of revenue | 86,943 | 44,217 | |||||||||
| Depreciation of rental equipment | 5,156 | 4,156 | |||||||||
| Total cost of revenue | 92,099 | 48,373 | |||||||||
| Gross profit | $ | 25,164 | $ | 17,801 | |||||||
Total Revenue - The increase in revenue for the year ended December 31, 2021 was driven by the acquisition of Custom Truck L.P.
Cost of Revenue - Compared to the prior year, cost of revenue increased due to the Acquisition.
Gross Profit - Total segment gross profit was impacted by increased revenue in the period.
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Supplemental Pro Forma Information
As result of the Acquisition and Related Financing Transactions, we believe presenting supplemental pro forma financial information is beneficial to the readers of our financial statements. The following table sets forth key metrics used by management to run our business on a pro forma and combined basis as if the Acquisition and Related Financing Transactions had occurred on January 1, 2020. Refer to the information below for a full reconciliation of the statements of operations.
Summary Pro Forma Financial Information and Operational Data
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Revenue | $ | 1,483,625 | $ | 1,356,481 | |||||||
| Gross profit | $ | 278,418 | $ | 239,201 | |||||||
| Net income (loss) | $ | (90,521) | $ | (96,415) | |||||||
| Adjusted EBITDA | $ | 323,118 | $ | 295,067 | |||||||
| Fleet and Operational Metrics: | |||||||||||
| Ending OEC | $ | 1,363,451 | $ | 1,342,497 | |||||||
| Average OEC on rent | $ | 1,097,200 | $ | 1,020,004 | |||||||
| Fleet utilization | 81.2 | % | 75.3 | % | |||||||
| OEC on rent yield | 38.0 | % | 38.1 | % | |||||||
| Sales order backlog | $ | 411,636 | $ | 152,917 | |||||||
Pro Forma Financial Statements
The following pro forma information has been prepared in accordance with Article 11 of Regulation S-X, "Pro Forma Financial Information," as amended by the Securities and Exchange Commission's Final Rule Release No. 33-10786, "Amendments to Financial Disclosures About Acquired and Disposed Businesses," as adopted on May 21, 2020 ("Article 11"). The amended Article 11 became effective on January 1, 2021. The pro forma combined statements of operations for the years ended December 31, 2021 and 2020 combine the Consolidated Statements of Operations and Comprehensive Income (Loss) of Nesco Holdings and Custom Truck LP, giving effect to the following items as if they had occurred on January 1, 2020:
i.the sale of the Company’s Common Stock, proceeds from which were used for the Acquisition;
ii.the extinguishment of Nesco’s asset-based revolving credit facility (the "2019 Credit Facility") and its 10% Senior Secured Second Lien Notes due 2024 (the "2024 Secured Notes") and the contemporaneous issuance of the 2029 Secured Notes and borrowings under the ABL Facility, proceeds from which were used for the Acquisition; and
iii.the estimated effects of the Acquisition of Custom Truck LP, inclusive of the estimated effects of debt repaid.
The adjustments presented in the following pro forma financial information have been identified and presented to provide relevant information necessary for a comprehensive understanding of the combined company following the transactions and events described above. The pro forma financial information set forth below is based upon available information and assumptions that we believe are reasonable and is for illustrative purposes only. The financial results may have been different if the transactions described above had been completed sooner. You should not rely on the pro forma financial information as being indicative of the historical results that would have been achieved if these transactions and events had been completed as of January 1, 2020. The pro forma combined financial information below should be read in conjunction with the consolidated financial statements and related notes of the Company included elsewhere in this Annual Report on Form 10-K. All pro forma adjustments and their underlying assumptions are described more fully below.
During the preparation of these pro forma combined financial statements, we assessed whether there were any material differences between the accounting policies of the Company and Custom Truck LP. The assessment we performed did not identify any material differences and, as such, these pro forma combined financial statements do not adjust for or assume any differences in accounting policies between the two entities.
The following pro forma combined financial information and associated notes are based on the historical financial statements of Nesco Holdings and Custom Truck LP prior to the Acquisition. The pro forma combined statements of operations for periods indicated below are based on, derived from, and should be read in conjunction with, the Company’s historical financial statements.
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Pro Forma Combined Statements of Operations — Year Ended December 31, 2021
| (in $000s) | Custom Truck One Source, Inc. | Custom Truck LP (Three Months Ended March 31, 2021) | Pro Forma Adjustmentsa | Pro Forma Combined | |||||||||||||||||||
| Rental revenue | $ | 370,067 | $ | 51,973 | $ | — | $ | 422,040 | |||||||||||||||
| Equipment sales | 695,334 | 245,955 | — | 941,289 | |||||||||||||||||||
| Parts sales and services | 101,753 | 18,543 | — | 120,296 | |||||||||||||||||||
| Total revenue | 1,167,154 | 316,471 | — | 1,483,625 | |||||||||||||||||||
| Cost of revenue | 800,031 | 240,678 | (19,186) | b | 1,021,523 | ||||||||||||||||||
| Depreciation of rental equipment | 157,110 | 22,757 | 3,817 | c | 183,684 | ||||||||||||||||||
| Total cost of revenue | 957,141 | 263,435 | (15,369) | 1,205,207 | |||||||||||||||||||
| Gross profit | 210,013 | 53,036 | 15,369 | 278,418 | |||||||||||||||||||
| Selling, general and administrative | 155,783 | 34,428 | — | 190,211 | |||||||||||||||||||
| Amortization | 40,754 | 1,990 | 3,589 | d | 46,333 | ||||||||||||||||||
| Non-rental depreciation | 3,613 | 1,151 | (213) | d | 4,551 | ||||||||||||||||||
| Transaction expenses and other | 51,830 | 5,254 | (40,277) | e | 16,807 | ||||||||||||||||||
| Total operating expenses | 251,980 | 42,823 | (36,901) | 257,902 | |||||||||||||||||||
| Operating income (loss) | (41,967) | 10,213 | 52,270 | 20,516 | |||||||||||||||||||
| Loss on extinguishment of debt | 61,695 | — | (61,695) | f | — | ||||||||||||||||||
| Interest expense, net | 72,843 | 9,992 | (3,919) | g | 78,916 | ||||||||||||||||||
| Finance and other expense (income) | 571 | (2,346) | — | (1,775) | |||||||||||||||||||
| Total other expense | 135,109 | 7,646 | (65,614) | 77,141 | |||||||||||||||||||
| Income (loss) before taxes | (177,076) | 2,567 | 117,884 | (56,625) | |||||||||||||||||||
| Taxes | 4,425 | — | 29,471 | h | 33,896 | ||||||||||||||||||
| Net income (loss) | $ | (181,501) | $ | 2,567 | $ | 88,413 | $ | (90,521) | |||||||||||||||
a.The pro forma adjustments give effect to the following as if they occurred on January 1, 2020: (i) the Acquisition, (ii) the extinguishment of Nesco Holdings’ 2019 Credit Facility the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings of Custom Truck LP’s credit facility and term loan that was repaid on the closing of the Acquisition.
b.Represents the elimination from cost of revenue of the run-off of the estimated step-up in fair value of inventory acquired that was recognized in the Company’s consolidated financial statements for the year ended December 31, 2021. The impact of the step-up is reflected as an adjustment to the comparable prior period ended December 31, 2020, as if the Acquisition had occurred on January 1, 2020. Includes the reduction to depreciation expense for the difference between historical depreciation and depreciation of the fair value of the property and equipment acquired from the Acquisition.
c.Represents the adjustment for depreciation of rental fleet relating to the estimated mark-up to fair value from purchase accounting as a result of the Acquisition.
d.Represents the differential in other amortization and depreciation related to the estimated fair value of the identified intangible assets from purchase accounting as a result of the Acquisition.
e.Represents the elimination of transaction expenses recognized in the Company’s consolidated financial statements for the year ended December 31, 2021. The expenses were directly attributable to the Acquisition and are reflected as adjustments to the comparable prior period (e.g. December 31, 2020) as if the Acquisition had occurred on January 1, 2020.
f.Represents the elimination of the loss on extinguishment of debt recognized in the Company’s consolidated financial statements for the year ended December 31, 2021 as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred on January 1, 2020.
g.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company’s debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment of Custom Truck LP’s borrowings under its revolving credit and term loan facility; and (v) the issuance of the 2029 Secured Notes.
h.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%.
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Pro Forma Combined Statements of Operations — Year Ended December 31, 2020
| (in $000s) | Nesco Holdings | Custom Truck LP | Pro Forma Adjustmentsa | Pro Forma Combined | |||||||||||||||||||
| Rental revenue | $ | 195,490 | $ | 215,008 | $ | — | $ | 410,498 | |||||||||||||||
| Equipment sales | 56,632 | 764,302 | — | 820,934 | |||||||||||||||||||
| Parts sales and services | 50,617 | 74,432 | — | 125,049 | |||||||||||||||||||
| Total revenue | 302,739 | 1,053,742 | — | 1,356,481 | |||||||||||||||||||
| Cost of revenue | 147,764 | 769,913 | 14,775 | b | 932,452 | ||||||||||||||||||
| Depreciation of rental equipment | 78,532 | 97,653 | 8,643 | c | 184,828 | ||||||||||||||||||
| Total cost of revenue | 226,296 | 867,566 | 23,418 | 1,117,280 | |||||||||||||||||||
| Gross profit | 76,443 | 186,176 | (23,418) | 239,201 | |||||||||||||||||||
| Selling, general and administrative | 46,409 | 119,814 | — | 166,223 | |||||||||||||||||||
| Amortization | 3,153 | 8,381 | 13,936 | d | 25,470 | ||||||||||||||||||
| Non-rental depreciation | 95 | 4,722 | (972) | d | 3,845 | ||||||||||||||||||
| Transaction expenses and other | 9,538 | — | 40,277 | e | 49,815 | ||||||||||||||||||
| Total operating expenses | 59,195 | 132,917 | 53,241 | 245,353 | |||||||||||||||||||
| Operating income (loss) | 17,248 | 53,259 | (76,659) | (6,152) | |||||||||||||||||||
| Loss on extinguishment of debt | — | 2,261 | 61,695 | f | 63,956 | ||||||||||||||||||
| Interest expense, net | 63,200 | 54,244 | (26,232) | g | 91,212 | ||||||||||||||||||
| Finance and other expense (income) | 5,399 | (12,199) | — | (6,800) | |||||||||||||||||||
| Total other expense | 68,599 | 44,306 | 35,463 | 148,368 | |||||||||||||||||||
| Income (loss) before taxes | (51,351) | 8,953 | (112,122) | (154,520) | |||||||||||||||||||
| Taxes | (30,074) | — | (28,031) | h | (58,105) | ||||||||||||||||||
| Net income (loss) | $ | (21,277) | $ | 8,953 | $ | (84,091) | $ | (96,415) | |||||||||||||||
a.The pro forma adjustments give effect to the following as if they occurred on January 1, 2020: (i) the Acquisition, (ii) the extinguishment of Nesco Holdings’ 2019 Credit Facility and the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings of Custom Truck LP’s credit facility and term loan that was repaid on the closing of the Acquisition.
b.Represents adjustments to cost of revenue for (i) the run-off of the estimated step-up in fair value of inventory acquired and (ii) a reduction to depreciation expense for the difference between historical depreciation and depreciation of the fair value of the property and equipment acquired from the Acquisition.
c.Represents the adjustment for depreciation of rental fleet relating to the estimated mark-up to fair value from purchase accounting as a result of the Acquisition.
d.Represents the differential in other amortization and depreciation related to the estimated fair value of the identified intangible assets from purchase accounting as a result of the Acquisition.
e.Represents transaction expenses directly attributable to the Acquisition as if the Acquisition had occurred on January 1, 2020.
f.Represents the loss on extinguishment of debt as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred on January 1, 2020.
g.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company’s debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment of Custom Truck LP’s borrowings under its revolving credit and term loan facility; and (v) the issuance of the 2029 Secured Notes.
h.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%.
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Reconciliation of Pro Forma Net Income (Loss) to Pro Forma Adjusted EBITDA
The following table provides a reconciliation of pro forma net income (loss) to pro forma Adjusted EBITDA:
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Net income (loss) | $ | (90,521) | $ | (96,415) | |||||||
| Interest expense | 71,204 | 75,086 | |||||||||
| Income tax expense (benefit) | 33,896 | (58,105) | |||||||||
| Depreciation and amortization | 243,570 | 222,878 | |||||||||
| EBITDA | 258,149 | 143,444 | |||||||||
| Adjustments: | |||||||||||
| Non-cash purchase accounting impact(a) | 15,755 | 21,682 | |||||||||
| Transaction and integration costs(b) | 16,967 | 53,037 | |||||||||
| Loss on extinguishment of debt(c) | — | 63,956 | |||||||||
| Sales-type lease adjustment(d) | 8,185 | 3,210 | |||||||||
| Share-based payments(e) | 17,870 | 4,435 | |||||||||
| Change in fair value of derivative and warrants(f) | 6,192 | 5,303 | |||||||||
| Adjusted EBITDA | $ | 323,118 | $ | 295,067 | |||||||
a.Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement.
b.Represents transaction costs related to acquisitions of businesses, including post-acquisition integration costs, which are recognized within operating expenses in our Consolidated Statements of Operations and Comprehensive Income (Loss). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are expenses associated with the integration of acquired businesses.
c.Loss on extinguishment of debt represents a special charge, which is not expected to recur. Such charges are adjustments pursuant to our credit agreement.
d.Represents the adjustment for the impact of sales-type lease accounting for certain leases containing rental purchase options (or “RPOs”), as the application of sales-type lease accounting is not deemed to be representative of the ongoing cash flows of the underlying rental contracts. This adjustment is made pursuant to our credit agreement.
e.Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.
f.Represents the charge to earnings for our interest rate collar and the change in fair value of the liability for warrants.
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Liquidity and Capital Resources
Our principal sources of liquidity include cash generated by operating activities and borrowings under revolving credit facilities as described below. 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 December 31, 2021, we had $35.9 million in cash and cash equivalents compared to $3.4 million as of December 31, 2020. As of December 31, 2021, we had $394.9 million of outstanding borrowings under our ABL Facility compared to $251.0 million of outstanding borrowing under the 2019 Credit Facility as of December 31, 2020.
We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to fund operating activities and working capital, the purchase of rental equipment and inventory items offered for sale, payments due under leases, debt service, and acquisitions. We plan to fund such cash requirements from our existing sources of cash. In addition, we may seek additional financing through the use of additional operating leases or other financing sources as market conditions permit. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, such as human capital costs, which are not accurately estimable) as of December 31, 2021:
| (in $000s) | Notes Payable | Long-Term Debt | Operating Leases | Finance Leases | |||||||||||||||||||
| 2022 | $ | 6,354 | $ | — | $ | 6,879 | $ | 4,326 | |||||||||||||||
| 2023 | 1,597 | — | 6,521 | 1,901 | |||||||||||||||||||
| 2024 | 1,080 | — | 5,765 | 3,223 | |||||||||||||||||||
| 2025 | 1,117 | — | 5,051 | — | |||||||||||||||||||
| 2026 | 22,471 | 394,945 | 4,162 | — | |||||||||||||||||||
| Thereafter | — | 920,000 | 20,658 | — | |||||||||||||||||||
| $ | 32,619 | $ | 1,314,945 | $ | 49,036 | $ | 9,450 | ||||||||||||||||
We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. All of these agreements are cancellable within a specified notification period to the supplier. Such amounts are not estimable as of December 31, 2021.
ABL Facility
In connection with the Acquisition on the Closing Date, 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 the 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 had no commitments from any lender to provide incremental commitments.
Borrowings under the ABL Facility are 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.
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As of December 31, 2021, borrowing availability under the ABL Facility was $347.0 million, and outstanding standby letters of credit were $4.0 million. 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) the London Interbank Offered Rate (“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 subsidiaries owned directly by a U.S. subsidiary and subject to certain other exceptions and 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 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
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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 0.000%) depending on the year of redemption.
In addition, at any time prior to April 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 to April 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).
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Floor Plan Financing
Daimler Truck Financial
The Company is party to the Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”) which bears interest at a rate of the Federal Funds Rate (“Prime”) plus 0.80% after an initial interest free period of up to 150 days. The total capacity under the Daimler Facility is $175.0 million. As of December 31, 2021, borrowings on the Daimler Facility were $46.0 million. The Daimler agreement is evergreen and is subject to termination by either party through written notice.
PACCAR
The Company has an Inventory Financing Agreement with PACCAR Financial Corp that provides the Company with a line of credit of $50.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of LIBOR plus 2.4%. As of December 31, 2021, borrowings on the PAACAR line of credit were $26.7 million. The PACCAR agreement extends automatically each April and is subject to termination by either party through written notice.
PNC Equipment Finance, LLC
The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement provides the Company with a $295.0 million revolving credit facility, which matures on August 25, 2022 and bears interest at a rate of LIBOR plus 3.05%. As of December 31, 2021, borrowings on the Loan Agreement were $165.2 million.
Notes Payable
Our notes payable require the Company to pay monthly and quarterly interest payments and have maturities beginning in 2022 through 2026. Notes payable includes (i) debt assumed from the Acquisition related to borrowings for facilities renovations and to support general business activities, (ii) notes payable related to past businesses acquired, and (iii) term loans. Subsequent to the Acquisition, the Company consolidated certain notes payable assumed from the Acquisition into a $23.9 million loan agreement with Security Bank of Kansas City (“SBKC”) that bears interest at a rate of 3.125% per annum, and a $3.5 million loan agreement with SBKC that bears interest at a rate of 3.5% per annum.
Historical Cash Flows
The following table summarizes our sources and uses of cash:
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Net cash flow from operating activities | $ | 138,926 | $ | 42,829 | |||||||
| Net cash flow from investing activities | (1,429,480) | (29,314) | |||||||||
| Net cash flow from financing activities | 1,323,044 | (16,405) | |||||||||
| Net change in cash and cash equivalents | $ | 32,490 | $ | (2,890) | |||||||
As of December 31, 2021, we had cash and cash equivalents of $35.9 million, an increase of $32.5 million from December 31, 2020. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, including paying down the outstanding balance under our ABL Facility.
Cash Flows from Operating Activities
Net cash provided by operating activities was $138.9 million for the year ended December 31, 2021, as compared to $42.8 million in the same period of 2020. The increase was driven by the addition of Custom Truck LP’s equipment sales levels in the current period.
Cash Flows from Investing Activities
Net cash used in investing activities was $1,429.5 million for the year ended December 31, 2021, as compared to cash used in investing activities of $29.3 million in 2020. The increase in cash used in investing activities is due to the Acquisition.
Cash Flows from Financing Activities
Net cash provided by financing activities was $1,323.0 million for the year ended December 31, 2021, as compared to $16.4 million in 2020. The increase is primarily due to the refinancing of Nesco’s debt and sale of Common Stock in connection with the Acquisition and Related Financing Transactions.
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Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In applying accounting principles it is often required to use estimates. These estimates consider the facts, circumstances, and information available, and may be based on subjective inputs, assumptions, and information known and unknown to us. Material changes in certain of the estimates that we use, could potentially affect, by a material amount, our consolidated financial position and results of operations. Although results may vary, we believe our estimates are reasonable and appropriate. See Note 2 to our consolidated financial statements for a summary of our significant accounting policies. The following describes certain of our significant accounting policies that involve more subjective and complex judgments where the effect on our consolidated financial position and operating performance could be material.
Revenue Recognition
Rental Revenue - Our rental contracts are for various equipment, aftermarket parts and services under 28 day or monthly agreements which include automatic renewal provisions. The majority of our rental payments are due upon receipt, with a minority that are billed in arrears. Revenue is recognized ratably over the rental agreement period and in accordance with Accounting Standards Codification 840, Leases (“Topic 840”) prior to January 1, 2021 and in accordance with Accounting Standards Codification 842, Leases (“Topic 842”) subsequent to December 31, 2020. Unearned revenue is reported in our deferred rent income line of our Consolidated Balance Sheet. We had deferred revenue of $3.0 million as of December 31, 2021 and $1.0 million as of December 31, 2020.
Equipment Sales - We sell both new and used equipment. Our new equipment products are sold at list price. We do not discount or offer other pricing incentives or concessions. The contractual sales price for each individual product represents the standalone selling price. Our used equipment is of a sufficiently unique nature - based on the specifics of its age, usage, etc. - that it does not have an observable standalone selling price. Equipment sales revenue is recognized when vehicles are delivered, which is when the transfer of title, risks and rewards of ownership, and control are considered passed to the customer. Payment is usually due and collected within 30 days subsequent to transfer of control of the vehicle. There are no rights of return or warranties offered on equipment sales.
Parts Sales and Services - We sell aftermarket parts and services in addition to services. We record revenue as parts and services are delivered. The amount of consideration we receive for parts is based upon a list price net of discounts and incentives. The amount of consideration received for service is based upon labor hours expended and parts utilized to perform and complete the necessary services for our customers. There are no rights of return or warranties offered on parts sales. Payment is usually due and collected within 30 days subsequent to delivery of parts or performance of service.
Useful Lives and Salvage Values of Rental Equipment and Property and Equipment
Our rentable equipment consists of aftermarket parts and specialized rental equipment. Purchases of our equipment are recorded at cost, the OEC and we depreciate OEC to an estimated salvage value. We depreciate our aftermarket parts over their estimated useful rentable life of five years. We depreciate our rental equipment over its estimated useful rentable life of five to seven years with an estimated residual value of 15% to 35% of the OEC, using the straight-line method. Useful life is estimated based upon the expected period the equipment will be in the fleet as a rentable unit. A salvage value is estimated to approximate the value of the equipment at the end of its useful (i.e., rentable) life, allowing for a reasonable profit margin on the sale of the equipment when we remove the unit from the fleet. In establishing useful lives and salvage values, we consider factors related to customer demand of differing types of equipment in order for us to hold and maintain an optimal mix of equipment types in our fleet. We also continuously evaluate factors related to the condition and serviceability of the equipment in our fleet in order to make estimates of useful life and expected end-of-life value. Depreciation of our equipment is recognized as a component of our cost of revenue. For sold equipment, the carrying value of an item is recognized as cost of equipment sale within cost of revenue. Changes in estimated useful life and/or salvage value would impact our gross profit in our consolidated financial statements. To the extent that the useful lives of our rental equipment were to increase or decrease by one year, we estimate that our annual depreciation expense would increase or decrease by approximately $104.3 million, respectively. Similarly, to the extent the estimated salvage values of our rental equipment were to increase or decrease by one percentage point, we estimate that our annual depreciation expense would change by approximately $2.8 million. Any change in depreciation expense as a result of a hypothetical change in either useful lives or salvage values would generally result in a proportional increase or decrease in the gross profit we would recognize upon the ultimate sale of the asset.
Business Combinations
We have made acquisitions in the past and may continue to make acquisitions in the future. We allocate the cost of the acquired enterprise to the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. Rental equipment generally represents the largest component and was 38% of total assets acquired over the last three years followed by
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goodwill at 29% and other intangible assets at 19%. Goodwill is attributable to the synergies and economies of scale expected from the combination of the businesses.
In addition to long-lived fixed assets, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable, deferred revenue and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the carrying values reflected on the acquired entities’ balance sheets. However, when appropriate, we adjust these carrying values for factors such as collectability and existence. The intangible assets that we have acquired are primarily goodwill, customer relationships, trade names, and non-compete agreements. Goodwill is calculated as the excess of the cost of the acquired entity over the fair value of the net assets acquired. Customer relationships, trade names, and non-compete agreements are valued based on an excess earnings or income approach with consideration to projected cash flows.
Our estimates of the values of tangible assets from our business combinations, principally rental equipment, utilize data that reflect quoted prices for similar assets available in active markets (such as the used equipment market). For this reason, estimates of the fair values of these items is not considered to be highly subjective or complex. However, to estimate the values of intangible assets we utilize income methods that involve forecasting future cash flow related to the acquired businesses. The estimates of future cash flow require us to establish expectations about customer demand, investments in maintaining or expanding infrastructure for the markets the businesses serve, and the supply and capacity of equipment in the rental market, among others. Additionally, we are required to establish expectations for the businesses’ cost of capital and ability to acquire and maintain equipment in the future. Critical estimates utilized in valuing intangible assets acquired include, but are not limited to, free cash flows, taxes, amortization, customer attrition rates, royalty rates, and discount rates. Changes in these assumptions would have an impact to the amount of intangible assets recorded and the resulting amortization expense.
Goodwill and the Evaluation of Goodwill Impairment
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. We review goodwill for impairment at least annually or more frequently as warranted by triggering events that indicate potential impairment. Goodwill is tested for impairment at the reporting unit level, which we have determined to be ERS, TES, and APS. We use a variety of methodologies in conducting impairment assessments, including qualitative analysis, income and market approaches. The market value approach compares current and projected financial results to entities of similar size and industry to determine market value. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends.
Factors that management must estimate when performing impairment tests include sales volume, prices, inflation, discount rates, tax rates and capital spending. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties. The estimates of future cash flow require us to establish expectations about customer demand, investments in maintaining or expanding infrastructure for the markets each reporting unit serves, and the supply and capacity of equipment in the rental market, among others. Additionally, we are required to establish expectations for the businesses’ cost of capital and ability to acquire and maintain equipment in the future. Measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates, as well as how the estimates compare to our eventual future operating performance. Changes in these estimates could change our conclusion regarding the impairment of goodwill assets and potentially result in a non-cash impairment in the future period.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA made broad and complex changes to the U.S. tax code. The principal change impacting our tax provision includes the limitation on deductible interest expense, the resulting federal limitation from which creates an indefinite lived deferred tax asset for which a valuation allowance assessment is required. This limitation is affected by the determination of the meaning of depreciation, which was clarified by the final regulations issued on July 27, 2020 described below. In March 2020, the United States Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) reduced the amount of disallowed interest expense which resulted in a greater amount of interest deduction. On July 27, 2020, the United States Department of Treasury and Internal Revenue Service issued final regulations that provided guidance on the determination of disallowed interest expense (the “Final Regulations”).
The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets.
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The evaluation includes the consideration of all available evidence, both positive and negative, regarding the estimated future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimated future taxable income exclusive of temporary differences and tax planning strategies. Our income tax carryforwards are comprised of federal and state net operating loss carryforwards (“NOLs”), some of which are subject to annual usage limitations. Certain of our state NOLs are subject to expiration, while other state NOLs and all of our federal NOLs do not have expirations. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.
While we remain in a cumulative loss condition, our ability to evaluate the realizability of deferred tax assets is generally limited to the ability to offset timing differences on taxable income associated with deferred tax liabilities. Therefore, a change in estimate of deferred tax asset valuation allowances for federal or state jurisdictions during this cumulative loss condition period will primarily be affected by changes in estimates of the time periods that deferred tax assets and liabilities will be realized, or on a limited basis to tax planning strategies that may result in a change in the amount of taxable income realized. At December 31, 2021, our deferred tax asset valuation allowance was $84.6 million.
Recent Accounting Pronouncements
See Note 2: Summary of Significant Accounting Policies, to our Annual Report on Form 10-K for a discussion of recently issued and adopted accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under our asset-based revolving credit facility. Interest rate changes generally impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. As of December 31, 2021, we had $394.9 million aggregate principal amount of variable rate debt, consisting of the balance outstanding under the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on the ABL Facility by approximately $0.5 million on an annual basis. This amount does not reflect the impact of the interest rate collar currently in place.
We manage a portion of our risks from exposures to fluctuations in interest rates as part of our risk management program through the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings and cash flows caused by fluctuations, and our primary exposure is from our variable-rate debt. We currently have an interest rate collar agreement in place as a hedge against fluctuations in the required interest payments due on variable rate debt. All of our derivative activities are for purposes other than trading.
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis.
Our interest rate collar contract was executed under a standard master agreement that contains a cross-default provision to our borrowing agreement with the counterparty, which provides the ability of the counterparty to terminate the interest rate collar agreement upon an event of default under the borrowing agreement.
Exchange rate risk
During the year ended December 31, 2021, we generated $18.5 million of U.S. dollar denominated revenues in Canadian dollars. Each 100 basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate for the year would have correspondingly changed our revenues by approximately $0.1 million. We do not currently hedge our exchange rate exposure.
38
Item 8. Financial Statements and Supplementary Data
Custom Truck One Source, Inc. and Subsidiaries
Consolidated Financial Statements Index
| Page No. | ||||||||
Report of Independent Registered Public Accounting Firm - Ernst & Young LLP (PCAOB ID No. 42) | ||||||||
Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP (PCAOB ID No. 34) | ||||||||
| Consolidated Financial Statements: | ||||||||
| Consolidated Balance Sheets | ||||||||
| Consolidated Statements of Operations and Comprehensive Income (Loss) | ||||||||
| Consolidated Statements of Cash Flows | ||||||||
| Consolidated Statements of Stockholders’ Equity (Deficit) | ||||||||
| Notes to Consolidated Financial Statements | ||||||||
39
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Custom Truck One Source, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Custom Truck One Source, Inc. (the Company) as of December 31, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit) and cash flows for the year ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2022 expressed an adverse opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2021 due to the of adoption of Accounting Standards Update No. 2016-02, “Leases (Topic 842).”
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
40
| Accounting for acquisition of Custom Truck One Source, L.P. | |||||
| Description of the Matter | As described in Note 3 to the consolidated financial statements, during 2021, the Company completed its acquisition of Custom Truck One Source, L.P. for net consideration of $1.5 billion. The transaction was accounted for as a business combination. Auditing the Company's accounting for its acquisition of Custom Truck One Source, L.P. was complex due to the significant estimation required by management to determine the fair value of trade names and customer relationship intangible assets of $151 million and $150 million, respectively. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the significant underlying assumptions related to the future performance of the acquired business. The Company used the relief from royalty method to measure the trade name intangible assets and the multi-period excess earnings method to measure the customer relationship intangible assets. The significant assumptions used to estimate the value of the intangible assets included discount rates, customer attrition rates, royalty rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and EBITDA margins). These significant assumptions are forward looking and could be affected by future economic and market conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding of the Company’s accounting for the acquisition, including recognition and measurement of the identifiable trade names and customer relationship intangible assets. To test the estimated fair value of the trade names and customer relationship intangible assets, we performed audit procedures that included, among others, assessing the appropriateness of the valuation methodologies used and testing the significant assumptions used in the model, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market and economic trends and to the historical results of the acquired business. We involved our valuation specialists to assist in our evaluation of the significant assumptions and models used in the fair value estimates. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021.
Kansas City, Missouri
March 16, 2022
41
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the shareholders and the Board of Directors of Custom Truck One Source, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Custom Truck One Source, Inc. (formerly Nesco Holdings, Inc.) and subsidiaries (the "Company") as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows, for the years ended December 31, 2020 and 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the 2020 and 2019 financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
March 8, 2021
We began serving as the Company’s auditor in 2016. In 2021 we became the predecessor auditor.
42
Custom Truck One Source, Inc.
Consolidated Balance Sheets
| (in $000s, except share data) | December 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 35,902 | $ | 3,412 | |||||||
| Accounts receivable, net | 168,394 | 60,933 | |||||||||
| Financing receivables, net | 28,649 | — | |||||||||
| Inventory | 410,542 | 31,367 | |||||||||
| Prepaid expenses and other | 13,217 | 7,530 | |||||||||
| Total current assets | 656,704 | 103,242 | |||||||||
| Property and equipment, net | 108,612 | 6,269 | |||||||||
| Rental equipment, net | 834,325 | 335,812 | |||||||||
| Goodwill | 695,865 | 238,052 | |||||||||
| Intangible assets, net | 327,840 | 67,579 | |||||||||
| Deferred income taxes | — | 16,952 | |||||||||
| Operating lease assets | 36,014 | — | |||||||||
| Other assets | 24,406 | 498 | |||||||||
| Total Assets | $ | 2,683,766 | $ | 768,404 | |||||||
| Liabilities and Stockholders' Equity (Deficit) | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 91,123 | $ | 31,829 | |||||||
| Accrued expenses | 60,337 | 31,991 | |||||||||
| Deferred revenue and customer deposits | 35,791 | 975 | |||||||||
| Floor plan payables - trade | 72,714 | — | |||||||||
| Floor plan payables - non-trade | 165,239 | — | |||||||||
| Operating lease liabilities - current | 4,987 | — | |||||||||
| Current maturities of long-term debt | 6,354 | 1,280 | |||||||||
| Current portion of finance lease obligations | 4,038 | 5,276 | |||||||||
| Total current liabilities | 440,583 | 71,351 | |||||||||
| Long-term debt, net | 1,308,265 | 715,858 | |||||||||
| Finance leases | 5,109 | 5,250 | |||||||||
| Operating lease liabilities - noncurrent | 31,514 | — | |||||||||
| Deferred income taxes | 15,621 | — | |||||||||
| Derivative and warrants liabilities | 24,164 | 7,012 | |||||||||
| Total long-term liabilities | 1,384,673 | 728,120 | |||||||||
| Commitments and contingencies (see Note 19) | |||||||||||
| Stockholder's Equity (Deficit) | |||||||||||
Common stock — $0.0001 par value, 500,000,000 shares authorized, 247,358,412 and 49,156,753 shares issued and outstanding, at December 31, 2021 and 2020, respectively | 25 | 5 | |||||||||
Treasury stock, at cost — 318,086 shares at December 31, 2021 | (3,020) | — | |||||||||
| Additional paid-in capital | 1,508,995 | 434,917 | |||||||||
| Accumulated deficit | (647,490) | (465,989) | |||||||||
| Total stockholders' equity (deficit) | 858,510 | (31,067) | |||||||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 2,683,766 | $ | 768,404 | |||||||
See accompanying notes to consolidated financial statements.
43
Custom Truck One Source, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
| Year Ended December 31, | |||||||||||||||||
| (in $000s, except share and per share data) | 2021 | 2020 | 2019 | ||||||||||||||
| Revenue | |||||||||||||||||
| Rental revenue | $ | 370,067 | $ | 195,490 | $ | 197,996 | |||||||||||
| Equipment sales | 695,334 | 56,632 | 34,075 | ||||||||||||||
| Parts sales and services | 101,753 | 50,617 | 31,964 | ||||||||||||||
| Total revenue | 1,167,154 | 302,739 | 264,035 | ||||||||||||||
| Cost of Revenue | |||||||||||||||||
| Cost of rental revenue | 99,885 | 61,207 | 53,045 | ||||||||||||||
| Depreciation of rental equipment | 157,110 | 78,532 | 70,568 | ||||||||||||||
| Cost of equipment sales | 618,444 | 47,407 | 28,822 | ||||||||||||||
| Cost of parts sales and services | 81,702 | 39,150 | 25,052 | ||||||||||||||
| Total cost of revenue | 957,141 | 226,296 | 177,487 | ||||||||||||||
| Gross Profit | 210,013 | 76,443 | 86,548 | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Selling, general and administrative expenses | 155,783 | 46,409 | 37,284 | ||||||||||||||
| Amortization | 40,754 | 3,153 | 3,007 | ||||||||||||||
| Non-rental depreciation | 3,613 | 95 | 115 | ||||||||||||||
| Transaction expenses | 51,830 | 9,538 | 10,124 | ||||||||||||||
| Total operating expenses | 251,980 | 59,195 | 50,530 | ||||||||||||||
| Operating Income (Loss) | (41,967) | 17,248 | 36,018 | ||||||||||||||
| Other Expense | |||||||||||||||||
| Loss on extinguishment of debt | 61,695 | — | 4,005 | ||||||||||||||
| Interest expense, net | 72,843 | 63,200 | 63,361 | ||||||||||||||
| Financing and other expense (income) | 571 | 5,399 | 1,690 | ||||||||||||||
| Total other expense | 135,109 | 68,599 | 69,056 | ||||||||||||||
| Income (Loss) Before Income Taxes | (177,076) | (51,351) | (33,038) | ||||||||||||||
| Income Tax Expense (Benefit) | 4,425 | (30,074) | (5,986) | ||||||||||||||
| Net Income (Loss) | $ | (181,501) | $ | (21,277) | $ | (27,052) | |||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||
Interest rate collar (net of taxes of $285 in the year ended December 31, 2019) | $ | — | $ | — | $ | 396 | |||||||||||
| Other Comprehensive Income (Loss) | $ | — | $ | — | $ | 396 | |||||||||||
| Comprehensive Income (Loss) | $ | (181,501) | $ | (21,277) | $ | (26,656) | |||||||||||
| Basic Earnings (Loss) Per Share | $ | (0.75) | $ | (0.43) | $ | (0.82) | |||||||||||
| Diluted Earnings (Loss) Per Share | $ | (0.75) | $ | (0.43) | $ | (0.82) | |||||||||||
| Weighted-Average Common Shares Outstanding | 241,370,317 | 49,064,615 | 33,066,165 | ||||||||||||||
See accompanying notes to consolidated financial statements.
44
Custom Truck One Source, Inc.
Consolidated Statements of Cash Flows
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Operating Activities | |||||||||||||||||
| Net income (loss) | $ | (181,501) | $ | (21,277) | $ | (27,052) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash flow from operating activities: | |||||||||||||||||
| Depreciation and amortization | 209,073 | 84,889 | 76,772 | ||||||||||||||
| Amortization of debt issuance costs | 4,740 | 3,290 | 2,913 | ||||||||||||||
| Loss on extinguishment of debt | 61,695 | — | 4,005 | ||||||||||||||
| Provision for losses on accounts receivable | 11,103 | 3,765 | 3,292 | ||||||||||||||
| Share-based compensation | 17,313 | 2,357 | 1,014 | ||||||||||||||
| Gain on sales and disposals of rental equipment | (11,636) | (7,996) | (6,080) | ||||||||||||||
| Change in fair value of derivative and warrants | 6,192 | 5,303 | 1,709 | ||||||||||||||
| Asset impairment | — | — | 657 | ||||||||||||||
| Deferred tax expense (benefit) | 3,863 | (28,810) | (6,861) | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Accounts and financing receivables | (37,716) | 7,061 | (17,073) | ||||||||||||||
| Inventories | 46,574 | (9,642) | (22,683) | ||||||||||||||
| Prepaids, operating leases and other | (6,123) | (2,313) | (2,578) | ||||||||||||||
| Accounts payable | 8,060 | 3,113 | 7,547 | ||||||||||||||
| Accrued expenses and other liabilities | 5,580 | 4,384 | 6,560 | ||||||||||||||
| Floor plan payables - trade, net | (18,276) | — | — | ||||||||||||||
| Customer deposits and deferred revenue | 19,985 | (1,295) | (3,350) | ||||||||||||||
| Net cash flow from operating activities | 138,926 | 42,829 | 18,792 | ||||||||||||||
| Investing Activities | |||||||||||||||||
| Acquisition of business, net of cash acquired | (1,337,686) | — | (48,425) | ||||||||||||||
| Purchases of rental equipment | (188,389) | (67,546) | (106,641) | ||||||||||||||
| Proceeds from sales and disposals of rental equipment | 99,833 | 38,933 | 28,452 | ||||||||||||||
| Other investing activities, net | (3,238) | (701) | (3,065) | ||||||||||||||
| Net cash flow from investing activities | (1,429,480) | (29,314) | (129,679) | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Proceeds from debt | 952,743 | — | 475,000 | ||||||||||||||
| Proceeds from issuance of common stock | 883,000 | — | — | ||||||||||||||
| Payment of common stock issuance costs | (6,386) | — | — | ||||||||||||||
| Payment of premiums on debt extinguishment | (53,469) | — | — | ||||||||||||||
| Share-based payments | (652) | — | — | ||||||||||||||
| Borrowings under revolving credit facilities | 491,084 | 86,178 | 313,000 | ||||||||||||||
| Repayments under revolving credit facilities | (347,111) | (85,208) | (272,000) | ||||||||||||||
| Repayments of notes payable | (507,509) | (1,146) | (527,531) | ||||||||||||||
| Finance lease payments | (5,223) | (15,950) | (5,201) | ||||||||||||||
| Acquisition of inventory through floor plan payables - non-trade | 304,902 | — | — | ||||||||||||||
| Repayment of floor plan payables - non-trade | (353,641) | — | — | ||||||||||||||
| Payment of debt issuance costs | (34,694) | (279) | (15,488) | ||||||||||||||
| Proceeds from merger and capitalization | — | — | 147,269 | ||||||||||||||
| Net cash flow from financing activities | 1,323,044 | (16,405) | 115,049 | ||||||||||||||
| Net Change in Cash and Cash Equivalents | 32,490 | (2,890) | 4,162 | ||||||||||||||
| Cash and Cash Equivalents at Beginning of Period | 3,412 | 6,302 | 2,140 | ||||||||||||||
| Cash and Cash Equivalents at End of Period | $ | 35,902 | $ | 3,412 | $ | 6,302 | |||||||||||
Custom Truck One Source, Inc.
Consolidated Statements of Cash Flows — Continued
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Supplemental Cash Flow Information | |||||||||||||||||
| Interest paid | $ | 92,625 | $ | 60,340 | $ | 53,595 | |||||||||||
| Income taxes paid | 541 | 646 | 455 | ||||||||||||||
| Non-Cash Investing and Financing Activities | |||||||||||||||||
| Non-cash consideration - acquisition of business | 187,935 | — | — | ||||||||||||||
| Rental equipment and property and equipment purchases in accounts payable | — | 9,122 | 21,643 | ||||||||||||||
| Rental equipment sales in accounts receivable | 1,555 | 5,120 | 4,684 | ||||||||||||||
See accompanying notes to consolidated financial statements.
45
Custom Truck One Source, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 21,660,638 | — | $ | 2 | $ | — | $ | 259,298 | $ | (418,056) | $ | (158,756) | |||||||||||||||||||||||||||||
| Net income (loss) prior to reverse recapitalization | — | — | — | — | — | (10,988) | (10,988) | ||||||||||||||||||||||||||||||||||
| Net income (loss) post reverse recapitalization | — | — | — | — | — | (16,064) | (16,064) | ||||||||||||||||||||||||||||||||||
| Reverse capitalization | 27,373,265 | — | 3 | — | 172,265 | — | 172,268 | ||||||||||||||||||||||||||||||||||
| Share-based payments | — | — | — | — | 1,014 | — | 1,014 | ||||||||||||||||||||||||||||||||||
| Interest rate collar | — | — | — | — | — | 396 | 396 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 49,033,903 | — | $ | 5 | $ | — | $ | 432,577 | $ | (444,712) | $ | (12,130) | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (21,277) | (21,277) | ||||||||||||||||||||||||||||||||||
| Share-based payments | 122,850 | — | — | — | 2,340 | — | 2,340 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 49,156,753 | — | $ | 5 | $ | — | $ | 434,917 | $ | (465,989) | $ | (31,067) | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (181,501) | (181,501) | ||||||||||||||||||||||||||||||||||
| Share-based payments | 1,501,659 | (318,086) | — | (3,020) | 19,839 | — | 16,819 | ||||||||||||||||||||||||||||||||||
| Warrants liability reclassification (see Note 16) | — | — | — | — | (10,290) | — | (10,290) | ||||||||||||||||||||||||||||||||||
| Shares issued in business combination | 196,700,000 | — | 20 | — | 1,064,529 | — | 1,064,549 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 247,358,412 | (318,086) | $ | 25 | $ | (3,020) | $ | 1,508,995 | $ | (647,490) | $ | 858,510 | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
46
Custom Truck One Source, Inc.
Notes to Consolidated Financial Statements
Note 1: Business and Organization
Organization
Custom Truck One Source, Inc., formerly Nesco Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries are engaged in the business of providing a range of products and services to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance and customization services related to that equipment. Immediately following the acquisition by Nesco Holdings II, Inc. of Custom Truck One Source, L.P. (“Custom Truck LP”) as discussed in Note 3: Business Combination, on April 1, 2021 (the “Acquisition”), Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of common stock (“Common Stock”) from “NSCO” to “CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.” Terms such as, “we,” “our,” “us,” or “the Company” refer to Nesco Holdings prior to the Acquisition, and to the combined company after the Acquisition. Unless the context otherwise requires, the term “Nesco” or “Nesco Holdings” as used in these financial statements means Nesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to and on the date of the Acquisition.
We are a specialty equipment provider to the electric utility transmission and distribution, telecommunications, rail and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent, produce, sell and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. Following the Acquisition, we changed our reportable segments to be consistent with how we currently manage the business, representing three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”). Segment information provided within this Annual Report on Form 10-K, including Note 21: Segments, has been adjusted for all prior periods to be consistent with the current reportable segment presentation.
Equipment Rental Solutions (“ERS”) Segment
We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet, of the foregoing products.
Truck and Equipment Sales (“TES”) Segment
We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated sales force of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.
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Aftermarket Parts and Services (“APS”) Segment
The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which is executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.
COVID-19
During the on-going Coronavirus Disease 2019 ("COVID-19") pandemic, we have undertaken efforts intended to maintain the health and safety of our employees and their families and our customers, vendors, and communities, and to ensure the Company's continued financial and operational viability, especially in relation to our position as a supplier to critical infrastructure related industries. All of our locations remain operational, and we are maintaining social distancing and enhanced cleaning protocols and usage of personal protective equipment, where appropriate.
Uncertainty remains regarding emerging variant strains of COVID-19, and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted in the United States and the rest of the world, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to the U.S., and the Company has continued to meet the needs of 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. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. The ensuing economic impacts from restrictions put in place around the globe to address the COVID-19 pandemic, including shutdowns and workplace changes, have led to issues, broadly, in the global flow of goods and services (the “supply chain”). The Company continues to monitor the impact of the COVID-19 pandemic and related restrictions on our supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in our production and manufacturing processes. Supply chain disruptions, such as the ongoing semiconductor shortage, could potentially limit the ability of these manufacturers to meet demand in future periods.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the accounting policies described below. Our consolidated financial statements include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with GAAP requires that these Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the current annual period or prior annual periods. The consolidated financial position and results of operations and cash flows (including segment information) presented herein include those of Custom Truck One Source, Inc. as of December 31, 2021 and since the date of the Acquisition. Financial information presented for periods prior to the Acquisition represent those of Nesco Holdings and its subsidiaries.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP, which requires us to use judgment to make estimates that directly affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates are used for items including, but not limited to, the useful lives and residual values of our rental equipment, and the allocation of purchase price related to business combinations. In addition, estimates are used to test both long-lived assets, goodwill, and indefinite-lived assets for impairment, and to determine the fair value of impaired assets, if any impairment exists. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances. We review our estimates on an ongoing basis using information currently available, and we revise our recorded estimates as updated information becomes available, facts and circumstances change, or actual amounts become determinable. Actual results could differ from our estimates.
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Recently Adopted Accounting Standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance to account for leases (“Topic 842”). This guidance revised prior practice related to accounting for leases under Topic 840, for both lessees and lessors. Topic 842 requires that lessees recognize: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Effective January 1, 2021, the Company adopted Topic 842. In connection with the adoption of Topic 842, the Company recognized lease liabilities and ROU assets as of January 1, 2021, as further described in Note 10: Leases as Lessee. The comparative prior period financial statement information has not been restated and continues to be reported under the accounting standards in effect for those periods (e.g., under Topic 840). Additionally, pursuant to Topic 842, accounting and recognition for leases qualifying as finance leases is unchanged from the prior accounting and recognition requirements under Topic 840, which referred to such leases as capital leases. As of January 1, 2021, we had capital lease obligations of approximately $10.5 million which became “finance leases” under Topic 842.
The adoption of Topic 842 did not have a significant impact on the recognition of leasing revenue; however, pursuant to the requirements of Topic 842, the Company records changes in estimated collectability of operating lease trade receivables directly against rental revenue. Such amounts were previously classified as selling, general and administrative expenses.
The Company elected the package of practical expedients permitted under the transition guidance within the new standard that allows it to not reassess: (a) whether any expired or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases and (c) initial direct costs for any expired or existing leases. Historical financial information was not updated, and the financial disclosures required under Topic 842 are not provided for periods prior to January 1, 2021.
Measurement of Current Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which amended ASC Topic No. 326 (“Topic 326”). Topic 326 follows an impairment model (known as the current expected credit loss, or “CECL,” model) that is based on expected losses rather than incurred losses. Under the CECL model, we estimate credit losses over the contractual term of our non-operating lease trade receivables and our financing receivables based on relevant historical information from historical experience and adjusted for current conditions and reasonable and supportable forecasts that affect collectability. Credit losses relating to these financial assets are recorded through the allowance for doubtful accounts. Topic 326 was adopted effective January 1, 2021, and the effect of this guidance was immaterial to the Company’s consolidated results of operations, financial position and cash flows.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment, intended to simplify the subsequent accounting for goodwill acquired in a business combination. Prior guidance required utilizing a two-step process to review goodwill for impairment. A second step was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of a reporting unit’s goodwill (as if purchase accounting were performed on the testing date) to the carrying amount of the goodwill. The new guidance eliminates the second step from the goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (although the loss should not exceed the total amount of goodwill allocated to the reporting unit). We adopted this guidance effective January 1, 2021; however, as discussed in Note 11: Goodwill and Intangible Assets, there was no impairment of goodwill in the years ended December 31, 2021, 2020 or 2019. Accordingly, the adoption of this standard did not have any impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity's own equity. Among other changes, the guidance made revisions to Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change the scope of contracts that are recognized as assets or liabilities. This ASU is effective for
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interim and annual periods beginning after December 15, 2021, and adoption of the ASU can either be on a modified retrospective or full retrospective basis. The impact of this guidance on the Company’s consolidated financial statements is currently being evaluated.
Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This ASU addresses the previous lack of specific guidance in the accounting standards codification related to modifications or exchanges of freestanding equity-classified written call options (such as warrants) by specifying the accounting for various modification scenarios. The ASU is effective for interim and annual periods beginning after December 15, 2021. The impact of this guidance on the Company’s consolidated financial statements is currently being evaluated.
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU improves the comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination and requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amended guidance specifies for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities, thereby providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, and an entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The impact of this guidance on the Company’s consolidated financial statements is currently being evaluated.
Revenue Recognition
We recognize revenue in accordance with two different accounting standards: (1) Topic 606 and Topic 842 for periods after January 1, 2021, and (2) Topic 606 and Topic 840, for periods prior to January 1, 2021.
Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A “performance obligation” is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. Our contracts with customers generally do not include multiple performance obligations.
Rental Revenue – Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. We also charge customers for damaged equipment, which is assessed and billed at the time a rental asset is returned to the Company and recorded within Parts Sales and Services revenue. In connection with our adoption of Topic 842, beginning January 1, 2021, we record changes in the estimated collectability of operating lease trade receivables against rental revenue. Such amounts were previously classified as selling, general and administrative expenses. Our rental contracts are for various equipment, aftermarket parts and services under 28-day or monthly agreements which include automatic renewal provisions. The majority of our rental payments are due upon receipt, with a majority billed at the end of each 28-day or monthly period. Revenue is recognized ratably over the rental agreement period and in accordance with Topic 842, and, for periods prior to January 1, 2021, Topic 840. Unearned revenue is reported in deferred revenue and customer deposits in our consolidated balance sheets. We require our rental customers to maintain liability and property insurance covering the units during the rental term and to indemnify us from losses caused by the negligence of the customer, their employees or contractors.
We also provide rental customers the opportunity to enter into contracts containing a rental purchase option (“RPO”). The RPO allows the customer to earn credit towards the purchase price of the leased equipment. The earned credit is based on rental payments made. Certain leases containing these purchase options are classified as sales-type leases because the RPO purchase price related to the leased equipment is considered to be a “bargain purchase option” in the lease. Revenue on these lease contracts is recognized at the point in time when the customer’s net purchase price for the equipment meets or falls below the fair value of the equipment. Revenue from these leases is recorded as equipment sales in the Consolidated Statements of Operations and Comprehensive Income (Loss).
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Equipment Sales – We sell both new and used equipment. The contractual sales price for each individual product represents the standalone selling price. Our used equipment is of a sufficiently unique nature, based on specific characteristics such as its age and usage, that it does not have an observable standalone selling price. Equipment sales revenue is recognized when equipment is delivered, which is when the transfer of control is considered passed to the customer. Payment is usually due within 30 days subsequent to transfer of control of the asset. There are no rights of return or warranties offered on equipment sales.
Parts Sales and Services – We sell aftermarket parts and services. We derive our services revenue primarily from maintenance, repair and upfit services on heavy-duty trucks and cranes. Revenue from these services includes parts sales needed to complete the service work. We recognize services revenue as the service work is completed. We record revenue on a point in time basis as parts are delivered. The amount of consideration we receive for parts is based upon a list price net of discounts and incentives, and the impact of such variable consideration is factored into the amount of revenue we recognize at any point in time. The amount of consideration received for services is based upon labor hours expended and parts utilized to perform and complete the necessary services for our customers. There are no rights of return or warranties offered on parts sales. Payment is usually due and collected within 30 days subsequent to delivery of parts or performance of service.
We record sales tax billed to customers and remitted to governmental authorities on a net basis and, consequently, these amounts are excluded from revenues and expenses. Sales taxes are recorded as accrued expenses when billed.
Shipping and Handling Costs – We classify shipping and handling fees billed to customers related to the placement of rental units as rental revenue in our Consolidated Statements of Operations and Comprehensive Income (Loss). We include the related shipping and handling costs in cost of rental revenue, excluding depreciation, in our Consolidated Statements of Operations and Comprehensive Income (Loss). Shipping and handling fees billed to customers related to the sale of equipment and parts are recorded as equipment sales or parts sales and services revenue, respectively. The related shipping and handling costs are recorded in cost of equipment sales or cost of parts sales and services, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash and short-term investments with remaining maturities of three months or less when acquired. The carrying amount of cash and cash equivalents approximates its fair value. The Company maintains deposits at financial institutions in excess of federally insured limits.
Trade Receivables and Allowance for Credit Losses
We are exposed to credit losses from trade receivables generated through our leasing, sales and service businesses. We assess each customer’s ability to pay for the products and services by conducting a credit review. The credit review considers expected billing exposure and timing for payment and the customer’s established credit rating. We perform a credit review of new customers at inception of the customer relationship and, for existing customers, when the customer transacts new leases or product orders after a period of dormancy. We also consider contract terms and conditions, country risk and business strategy in the evaluation.
We monitor ongoing credit exposure through an active review of customer balances against contract terms and due dates. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. The allowances for credit losses reflect the estimate of the amount of receivables that management assesses will be unable to be collected based on historical write-off experience and, as applicable, current conditions and reasonable and supportable forecasts that affect collectability. This estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease the allowances. We review the adequacy of the allowance on a quarterly basis. The allowance for doubtful accounts is included in accounts receivable, net on our Consolidated Balance Sheets.
Accounts receivable, net consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Trade receivables | $ | 179,214 | $ | 67,305 | |||||||
| Less: allowance for doubtful accounts | (10,820) | (6,372) | |||||||||
| Accounts receivable, net | $ | 168,394 | $ | 60,933 | |||||||
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The relationship between bad debt expense and allowance for doubtful accounts is presented below:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Allowance - beginning of period | $ | 6,372 | $ | 4,654 | $ | 7,562 | |||||||||||
| Accounts written off during period, net of recoveries | (6,655) | (2,047) | (6,909) | ||||||||||||||
| Bad debts expense | 11,103 | 3,765 | 4,001 | ||||||||||||||
| Allowance - end of period | $ | 10,820 | $ | 6,372 | $ | 4,654 | |||||||||||
In accordance with the adoption of Topic 842, effective January 1, 2021, specifically identifiable lease revenue receivables not deemed probable of collection are recorded as a reduction of rental revenue. The remaining provision for credit losses, which relates to product sales and services, is recorded in selling, general and administrative expense. For periods prior to January 1, 2021, the entire provision for credit losses was recorded in selling, general and administrative expense.
Inventory
Inventory is carried at the lower of cost or net realizable value. The Company periodically reviews inventories on hand and maintains reserves for slow-moving, excess, or obsolete inventories.
Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, aerial lifts, digger derricks, dump bodies, etc.), and the in-process costs incurred in the final assembly of those units. As part of our business model, we sell unassembled individual whole goods and whole goods with varying levels of customization direct to consumers or dealers. Whole goods inventory also includes new equipment purchased specifically for resale to customers, which purchases are recorded directly to inventory when received. Cost is determined by specific identification for whole goods inventory. Aftermarket parts and services inventories are recorded at weighted average cost.
Rental Equipment and Property and Equipment
Rental Equipment
Rental equipment is primarily comprised of the cost of truck-mounted aerial lifts, cranes, trucks, trailers, digger derricks, line equipment, cranes, pressure diggers, underground and other machinery and equipment. The rental equipment we purchase is recorded at cost and depreciated over the estimated rentable life of the equipment using the straight-line method over useful lives, depending on product categories, ranging from 5 to 7 years, to an estimated residual value, depending on product categories, ranging from 15% to 35% of cost. Depreciation of rental equipment commences when a rental unit is placed into the rental fleet and becomes available to rent and the cost is depreciated whether or not the equipment is on rent. We reevaluate the estimated rentable life as rental equipment is purchased, estimating the period that the asset will be held, considering factors such as historical rental activity and expectations of future rental activity. We also reevaluate the estimated residual values of the applicable rental equipment. The residual value of equipment is affected by factors that include equipment age, amount of usage and market conditions. Market conditions for used equipment sales can also be affected by external factors such as the economy, natural disasters, fuel prices, supply of similar used equipment, the market price for similar new equipment, and incentives offered by manufacturers of new equipment. These factors are considered when estimating future residual values and depreciation periods.
Expenditures for repair and maintenance that extend the useful life of the equipment and are necessary to keep an equipment unit in rentable condition are capitalized and depreciated over the estimated remaining useful life of the equipment, which is the period the repair and maintenance is expected to provide future economic benefit. When making repairs, we dispose of damaged and replaced components at their net carrying values. The cost of routine and recurring maintenance activities related to the rental fleet are charged to expense as incurred.
Property and Equipment
Property and equipment is primarily comprised of land, buildings and improvements, machinery and equipment, and vehicles, and is carried at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method based on useful lives ranging from to 39.5 years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Leasehold improvements are depreciated over the lesser of the improvement’s useful life or the remaining lease term.
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Leases as Lessee
We determine if an arrangement is a lease at inception of an arrangement. Operating and finance lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term, while lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the lease commencement date, in determining the present value of lease payments. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that we will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, we combine payments for leased assets, related services and other components of a lease. Finally, we apply a portfolio approach to determine the discount rate for leases with similar characteristics.
For our leases classified as operating, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus unamortized initial direct costs, plus/(minus) any unamortized prepaid/(accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For our leases classified as finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to the Company, or the Company is reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. We expect to exercise our options to purchase the rental equipment assets we lease under finance leases. Accordingly, the assets leased under the finance leases are included in rental equipment and property and equipment, and depreciation thereon is recognized in depreciation of rental equipment, cost of revenue and non-rental depreciation expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). When we make our contractually required payments under finance leases, we allocate a portion to reduce the finance lease obligation and a portion is recognized as interest expense.
Goodwill and Other Intangible Assets
We recognize goodwill when the purchase price of an acquired business exceeds the fair value of net assets acquired. Goodwill is not amortized for financial reporting purposes. Goodwill is impaired when its carrying value exceeds its implied fair value. We perform our goodwill impairment analysis annually on October 1 or more frequently if an event or circumstance (such as a significant adverse change in the business climate, operating performance metrics, or legal factors) indicates that an impairment may have occurred. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, then there is an indication impairment may exist.
We estimate the fair value of our reporting units using both an income approach based on the present value of estimated future cash flows and a market approach based on traded values of selected companies. We believe this approach yields the most appropriate evidence of fair value. Determining the fair value of our reporting units is judgmental and involves the use of significant estimates and assumptions. We based our fair value estimates on assumptions that we believe are reasonable. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for our reporting units.
Intangible assets with indefinite lives are not amortized but tested annually for impairment by comparing the carrying value of the asset to its fair value. We perform our impairment analysis on our intangible assets with indefinite lives annually on October 1 or more frequently if an event or circumstance indicates that an impairment loss may have occurred.
See Note 11: Goodwill and Intangible Assets for additional information.
Impairment of Long-Lived Assets, including Intangible Assets
We evaluate the carrying value of long-lived assets held for use, including rental equipment and definite-lived intangible assets, for impairment whenever an event or circumstance has occurred (such as a significant adverse change in the business climate, operating performance metrics, or legal factors) which suggests that the carrying value may not be recoverable. Impairment of a long-lived asset held for use (or relative asset group, if applicable) is measured when the anticipated separately identifiable undiscounted cash flows from the asset are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value. Fair value is determined primarily using anticipated cash flows discounted at a rate commensurate with the risk involved.
Other intangible assets consist of customer relationships, non-compete agreements and trade names. We amortize intangible assets with finite lives over the period the economic benefits are estimated to be consumed. Definite lived intangibles are amortized using the
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straight-line method over their useful life, as we believe this method best matches the pattern of economic benefit. See Note 11: Goodwill and Intangible Assets for additional information.
Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets and liabilities. These inputs can be readily observable, market corroborated, or generally unobservable.
Fair Value Hierarchy - In measuring fair value, we use observable market data when available and minimize the use of unobservable inputs. Unobservable inputs may be required to value certain financial instruments due to complexities in contract terms. Inputs used in fair value measurements are categorized into three fair value hierarchy levels for disclosure purposes. The entire fair value measurement is categorized based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are:
Level 1 - Inputs that reflect unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur with both sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs that reflect quoted prices for similar assets and liabilities are available in active markets, and inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - Inputs that are generally less observable or from unobservable sources in which there is little or no market data. These inputs may be used with internally developed methodologies that result in our best estimate of fair value.
Valuation Techniques - Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
Market approach - Technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income approach - Technique that converts future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing, and excess earnings models).
Cost approach - Technique that estimates the amount that would be required to replace the service capacity of an asset (i.e. replacement cost).
Assets and Liabilities with Recurring Fair Value Measurements - Certain assets and liabilities may be measured at fair value on an ongoing basis. We did not elect to apply the fair value option for recording financial assets and financial liabilities. Other than the interest rate collar and warrants liability, we do not have any assets or liabilities which we measure at fair value on a recurring basis.
Assets and Liabilities with Nonrecurring Fair Value Measurements - Certain assets and liabilities are not measured at fair value on an ongoing basis. These assets and liabilities, which include long-lived assets, goodwill, and intangible assets, are subject to fair value adjustment in certain circumstances. From time to time, the fair value is determined on these assets as part of related impairment tests. For certain assets and liabilities acquired in business combinations, we record the fair value as of the acquisition date. Refer to Note 3: Business Combination, for the fair values of assets acquired and liabilities assumed in connection with our business combinations. Other than acquisition adjustments, no adjustments to fair value or fair value measurements were required for non-financial assets and liabilities for all periods presented. See Note 11: Goodwill and Intangible Assets and Note 15: Fair Value Measurements for additional information.
Deferred Financing Costs
Direct costs incurred in connection with the issuance, and amendments thereto, of our debt are capitalized and amortized over the terms of the respective agreements using the effective interest method, or the straight-line method when not materially different than the effective interest method. The net carrying value of deferred financing costs are classified as a reduction to long-term debt in the Consolidated Balance Sheets (see Note 9: Long-Term Debt). The amortization is included in interest expense on our Consolidated Statements of Operations and Comprehensive Income (Loss).
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Accrued Expenses
Accrued expenses consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Accrued interest | $ | 11,773 | $ | 20,478 | |||||||
| Accrued salaries, wages and benefits | 36,535 | 3,176 | |||||||||
| Accrued sales taxes | 5,755 | 1,703 | |||||||||
| Other, including transaction expenses | 6,274 | 6,634 | |||||||||
| Total accrued expenses | $ | 60,337 | $ | 31,991 | |||||||
Cloud Computing Arrangement Implementation Costs
The Company has entered into certain cloud-based hosting agreements that are accounted for as service contracts. For internal-use software obtained through a hosting arrangement that is a service contract, the Company capitalizes certain implementation costs, such as costs incurred to integrate, configure, and customize internal-use software, which are consistent with costs incurred during the application development stage for on-premise software. These capitalized development costs are recorded in other assets on our Consolidated Balance Sheets. Implementation costs capitalized during the year ended December 31, 2021 were $7.6 million. Capitalized implementation costs are amortized straight-line over the term of the hosting arrangement plus any reasonably certain renewal periods, which range from three years to 10 years. Amortization expense for these assets is included in selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). For the years ended December 31, 2021, 2020, and 2019, amortization of these costs were not material.
Advertising Costs
We promote our business through various industries media channels, and expense advertising costs as incurred to selling, general, and administrative expenses. For the year ended December 31, 2021 advertising costs were approximately $4.8 million. Amounts were immaterial for years ended December 31, 2020 and 2019.
Share-Based Compensation
The fair value of equity-classified awards is determined at the grant date using techniques appropriate for the awards, which we use to determine compensation expense over the service period. The fair value of liability-classified awards is determined at the grant date and is remeasured at the end of each reporting period through the date of settlement and adjusted through compensation expense. We recognize compensation expense for our share-based payments over the requisite service period for the entire award. See Note 14: Share-Based Compensation for additional information.
Income Taxes
We utilize the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial accounting and tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more-likely-than-not to be realized in future periods. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The effect on net deferred tax assets and liabilities resulting from a change in tax rates is recognized as income or expense in the period that the change in tax rates is enacted.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of the deferred income tax expense or benefit associated with certain deferred tax assets and liabilities. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Our income tax returns are subject to examination by federal, state and foreign tax authorities. There may be differing interpretations of tax laws and regulations, and as a result, disputes may arise with these tax authorities involving the timing and amount of deductions and allocation of income. With the exception of net operating loss carryforwards (“NOLs”), we are no longer subject to federal, state, local, and foreign income tax examinations by tax authorities for years ending on or prior to December 31, 2017.
We recognize uncertain income tax positions if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant
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information. Our determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet recognition and measurement standards. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense (benefit) on our Consolidated Statements of Operations and Comprehensive Income (Loss). As of December 31, 2021 and 2020, our uncertain income tax positions, unrecognized tax benefits, and accrued interest were not material.
Acquisition Accounting
We have made acquisitions in the past and may continue to make acquisitions in the future. The assets acquired and liabilities assumed are recorded based on their respective fair values at the date of acquisition. Long-lived assets (principally rental equipment), goodwill and other intangible assets generally represent the largest components of our acquisitions. Rental equipment is valued utilizing either a cost, market or income approach, or a combination of certain of these methods, depending on the asset being valued and the availability of market or income data. The intangible assets that we have acquired are non-compete agreements, customer relationships and trade names and associated trademarks. The estimated fair values of these intangible assets reflect various assumptions about discount rates, revenue growth rates, operating margins, royalty rates, customer attrition rates, terminal values, useful lives and other prospective financial information. Goodwill is calculated as the excess of the cost of the acquired entity over the net of the fair value of the assets acquired and the liabilities assumed. Non-compete agreements, customer relationships and trade names and associated trademarks are valued based on an excess earnings or income approach based on projected cash flows.
Determining the fair value of the assets and liabilities acquired is judgmental in nature and can involve the use of significant estimates and assumptions. The judgments made in determining the estimated fair value assigned to the assets acquired, as well as the estimated life of the assets, can materially impact net income (loss) in periods subsequent to the acquisition because of depreciation and amortization, and in certain instances through impairment charges if the asset becomes impaired in the future. As discussed above, we regularly review long-lived assets for impairments.
When we make an acquisition, we also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the carrying values on the acquired entities’ balance sheets.
Note 3: Business Combination
Acquisition of Custom Truck One Source, L.P.
On December 3, 2020, Nesco Holdings and Nesco Holdings II, Inc., a subsidiary of Nesco Holdings (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 One Source, L.P., Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom Truck LP. In connection with the Acquisition, Nesco Holdings 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 LP (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share. We believe the Acquisition creates a leading, one-stop shop for specialty equipment serving highly attractive and growing infrastructure end markets, including transmission and distribution, telecom, rail and other national infrastructure initiatives.
Also on December 3, 2020, Nesco Holdings entered into a Common Stock Purchase Agreement (the “Investment Agreement”) with Platinum, relating to, among other things, the issuance and sale to Platinum (the “Subscription”) 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, on December 21, 2020, Nesco Holdings 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, the PIPE 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”).
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On April 1, 2021 (the “Closing Date”), in connection with (i) the Rollovers, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors.
Purchase Price
The Company issued 20,100,000 shares of Common Stock to Custom Truck LP equity interest holders, as well as paid cash and repaid debt obligations as consideration for the Acquisition. The trading price of the Common Stock was $9.35 per share on the Closing Date. The purchase price has been determined to be as follows:
| (in $000s, except share and per share data) | |||||
| Common stock issued | 20,100,000 | ||||
| Common stock per share price as of April 1, 2021 | $ | 9.35 | |||
| Fair value of common stock issued | $ | 187,935 | |||
| Cash consideration paid to equity interest holders | 790,324 | ||||
| Repayment of debt obligations | 552,600 | ||||
| Total purchase price | $ | 1,530,859 | |||
During the year ended December 31, 2021, the Company transferred an additional $3.4 million of cash consideration to the Sellers related to certain customary closing adjustments set forth in the Purchase Agreement.
Opening Balance Sheet
The Acquisition has been accounted for using the acquisition method of accounting, and the Company is considered the accounting acquirer. Under the acquisition method of accounting, we are required to assign the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the purchase price over those fair values is recorded as goodwill. The total purchase price has been assigned to the underlying assets acquired and liabilities assumed based upon their fair values as of the Closing Date, and the estimated fair values have been recorded based on independent valuations, discounted cash flow analysis, quoted market prices, contributory asset charges, and estimates made by management, which estimates fall under “Level 3” of the fair value hierarchy (as defined in Note 15: Fair Value Measurements).
The following table summarizes the April 1, 2021 fair values of the assets acquired and liabilities assumed. During the year ended December 31, 2021, the Company identified and recorded certain measurement period adjustments to the preliminary purchase price allocation, which are reflected in the table below. These adjustments were not significant and related primarily to rental equipment and current liabilities. The measurement period adjustments, coupled with the additional cash consideration discussed above, increased goodwill by approximately $15.6 million during the year ended December 31, 2021. Measurement period adjustments impacting the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021 were not significant. The final assessment of the fair value of the Custom Truck LP assets acquired and liabilities assumed, specifically estimates of deferred income taxes, and the final assignment of goodwill to reporting units, was not complete as of December 31, 2021. The estimated values of deferred income taxes is preliminary pending the Company’s completion of the evaluation of income tax net operating loss carryforwards for U.S. federal and state income tax purposes, which carryforwards are subject to limitations. In general, under Section 382 of the U.S. Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change carryforwards to offset future taxable income.
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| (in $000s) | |||||
| Accounts and financing receivables (a) | $ | 115,325 | |||
| Inventory | 431,648 | ||||
| Other current assets | 13,201 | ||||
| Property and equipment (b) | 104,721 | ||||
| Rental equipment | 556,569 | ||||
| Intangible assets (c) | 301,018 | ||||
| Operating lease assets | 23,793 | ||||
| Other assets | 18,223 | ||||
| Total identifiable assets acquired | 1,564,498 | ||||
| Current liabilities | (410,276) | ||||
| Long-term debt | (28,607) | ||||
| Operating lease liabilities-noncurrent | (21,308) | ||||
| Deferred tax and other liabilities | (31,261) | ||||
| Total identifiable liabilities assumed | (491,452) | ||||
| Total net assets | 1,073,046 | ||||
| Goodwill (d) | 457,813 | ||||
| Net assets acquired (purchase price) | $ | 1,530,859 | |||
a.The estimated fair value of accounts and financing receivables is $115.3 million, with the gross contractual amount being $122.4 million. The Company estimates approximately $7.0 million to be uncollectible.
b.Acquired property and equipment is primarily comprised of land, buildings and improvements with an estimated fair value of $67.9 million, and machinery, equipment and vehicles, with an estimated fair value of $31.1 million, as well as other property with an estimated fair value of $5.7 million.
c.The acquired identified intangible assets are comprised of trade names, with an estimated fair value of $151.0 million, and customer relationships, with an estimated fair value of $150.0 million. The weighted average useful lives of the trade names and the customer relationships are estimated to be 15 years and 12 years, respectively.
d.The goodwill recognized is attributable primarily to synergies and economies of scale provided by the acquired rental and new equipment sales businesses, as well as the assembled workforce of Custom Truck LP. A portion of the goodwill is expected to be deductible for income tax purposes.
Custom Truck LP has generated $923.8 million of revenue and $28.2 million of pre-tax loss since the Closing Date, which are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021.
Financing Transactions
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”). The 2029 Secured Notes were issued pursuant to an indenture, dated as of April 1, 2021, by and among the Issuer, Wilmington Trust, National Association, as trustee, and the guarantors party thereto (the “Indenture”). The Issuer will pay interest on the 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. The notes were offered pursuant to a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside of the United States in reliance on Regulation S under the Securities Act. The proceeds from the issuance and sale of the 2029 Secured Notes were used to consummate the Acquisition and to repay the Senior Secured Notes due 2024 (see Note 9: Long-Term Debt), repay certain indebtedness of Custom Truck LP and pay certain fees and expenses related to the Acquisition and financing transactions.
Also on the Closing Date, the Buyer, 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”) with Bank 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”), which includes borrowing capacity for revolving loans (with a swingline sub-facility) and the issuance of letters of credit. Proceeds from the ABL Facility were used to finance the repayment of certain indebtedness of (i) Custom Truck LP under that certain Credit Agreement, dated as of April 18, 2017 (the “Custom Truck LP Credit Facility”), by and among Custom Truck LP, the other entities party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, and (ii) Buyer under that certain Credit Agreement, dated as of July 31, 2019 (the “2019 Credit Facility”), by and among Capitol Investment Merger Sub 2, LLC, the other entities party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as well as to pay fees and expenses related to the Acquisition and the financing transactions.
Pro Forma Information
The below pro forma information is presented for the years ended December 31, 2021 and 2020 and uses the estimated fair value of assets and liabilities on the Closing Date, and makes the following assumptions: (1) removes acquisition-related costs and charges that were recognized in the Company's consolidated financial statements in the year ended December 31, 2021 and applies these costs and
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charges to the year ended December 31, 2020, as if the Acquisition and related financing transactions had occurred on January 1, 2020; (2) removes the loss on the extinguishment of debt that was recognized in the Company's consolidated financial statements in the year ended December 31, 2021 and applies the charge to the year ended December 31, 2020, as if the debt extinguishment giving rise to the loss had occurred on January 1, 2020; (3) adjusts for the impacts of purchase accounting in the years ended December 31, 2021 and 2020; (4) adjusts interest expense, including amortization of debt issuance costs, to reflect borrowings on the ABL Facility and issuance of the 2029 Secured Notes, as if the funds had been borrowed and the notes had been issued on January 1, 2020 and used to repay Nesco’s 2019 Credit Facility, Nesco’s Senior Secured Notes due 2024 (both as defined in Note 9: Long-Term Debt) and the Custom Truck LP Credit Facility and term loan; and (5) adjusts for the income tax effect using a tax rate of 25%. The pro forma information is not necessarily indicative of the Company’s results of operations had the Acquisition been completed on January 1, 2020, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies, synergies, or revenue opportunities that could result from the Acquisition.
| Year Ended December 31, | |||||||||||
| (in $000s) | 2021 | 2020 | |||||||||
| Revenue | $ | 1,483,625 | $ | 1,356,481 | |||||||
| Net income (loss) | $ | (90,521) | $ | (96,415) | |||||||
The following presents a summary of the pro forma adjustments that are directly attributable to the business combination:
| Year Ended December 31, | ||||||||||||||
| (in $000s) | 2021 | 2020 | ||||||||||||
| Increase (decrease) net income/loss: | ||||||||||||||
| Impact of fair value mark-ups on inventory | a | $ | 19,186 | $ | (14,775) | |||||||||
| Impact of fair value mark-ups on rental fleet depreciation | b | (3,817) | (8,643) | |||||||||||
| Intangible asset amortization and other depreciation expense | c | (3,376) | (12,964) | |||||||||||
| Transaction expenses | d | 40,277 | (40,277) | |||||||||||
| Interest expense and amortization of debt issuance costs | e | 3,919 | 26,232 | |||||||||||
| Loss on extinguishment of debt refinanced | f | 61,695 | (61,695) | |||||||||||
| Income tax expense | g | (29,471) | 28,031 | |||||||||||
a.Represents adjustments to cost of revenue for the run-off of the mark-up in fair value of inventory acquired and applied to the year ended December 31, 2020.
b.Represents the adjustment for depreciation of rental fleet relating to the estimated increase in the value of the rental fleet to its fair value.
c.Represents the differential in amortization and depreciation of non-rental equipment related to the respective fair values of the assets.
d.Represents adjustments for transaction expenses that are applied to the year ended December 31, 2020.
e.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to our debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the Senior Secured Notes due 2024; (iv) repayment of the Custom Truck LP Credit Facility; and (v) the issuance of the 2029 Secured Notes.
f.Represents the adjustment of the loss on extinguishment of debt applied to the year ended December 31, 2020 as though the repayment of the 2019 Credit Facility and Senior Secured Notes due 2024 had occurred on January 1, 2020.
g.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. This rate may vary from the actual effective rate of the historical and combined businesses.
Transaction Costs
The Company expensed approximately $51.8 million in transaction and post-acquisition integration costs related to the Acquisition within transaction expenses and other in the year ended December 31, 2021.
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Note 4: Revenue
Revenue Disaggregation
Geographic Areas
The Company had total revenue in the following geographic areas:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| United States | $ | 1,148,683 | $ | 295,125 | $ | 257,297 | |||||||||||
| Canada | 18,471 | 5,827 | 5,705 | ||||||||||||||
| Mexico | — | 1,787 | 1,033 | ||||||||||||||
| Total revenue | $ | 1,167,154 | $ | 302,739 | $ | 264,035 | |||||||||||
Major Product Lines and Services
Equipment leasing and equipment sales are the core businesses of the Company, with leasing complimented by the sale of rental units from the rental fleet. The Company’s revenue by major product and service line are presented in the tables below.
| Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s) | Topic 842 | Topic 606 | Total | Topic 840 | Topic 606 | Total | Topic 840 | Topic 606 | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Rental: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rental | $ | 355,658 | $ | — | $ | 355,658 | $ | 187,522 | $ | — | $ | 187,522 | $ | 189,161 | $ | — | $ | 189,161 | |||||||||||||||||||||||||||||||||||
| Shipping and handling | — | 14,409 | 14,409 | — | 7,968 | 7,968 | — | 8,835 | 8,835 | ||||||||||||||||||||||||||||||||||||||||||||
| Total rental revenue | 355,658 | 14,409 | 370,067 | 187,522 | 7,968 | 195,490 | 189,161 | 8,835 | 197,996 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales and services: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equipment sales | 16,274 | 679,060 | 695,334 | — | 56,632 | 56,632 | — | 34,075 | 34,075 | ||||||||||||||||||||||||||||||||||||||||||||
| Parts and services | 6,726 | 95,027 | 101,753 | — | 50,617 | 50,617 | — | 31,964 | 31,964 | ||||||||||||||||||||||||||||||||||||||||||||
| Total sales and services | 23,000 | 774,087 | 797,087 | — | 107,249 | 107,249 | — | 66,039 | 66,039 | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 378,658 | $ | 788,496 | $ | 1,167,154 | $ | 187,522 | $ | 115,217 | $ | 302,739 | $ | 189,161 | $ | 74,874 | $ | 264,035 | |||||||||||||||||||||||||||||||||||
Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. Equipment sales recognized pursuant to sales-type leases are recorded within equipment sales revenue. Charges to customers for damaged rental equipment are recorded within parts and services revenue. Parts and services revenue includes $21.5 million related to services provided to customers for the year ended December 31, 2021. Services revenue in the years ended December 31, 2020 and 2019 were not significant.
Receivables, Contract Assets and Liabilities
The Company manages credit risk associated with its accounts receivable at the customer level. Because the same customers generate the revenues that are accounted for under both Topic 606 and Topic 842 (or Topic 840 for periods prior to January 1, 2021), the discussions below on credit risk and the Company's allowance for credit losses address the Company's total revenues. Concentration of credit risk with respect to the Company's receivables is limited because of a large number of geographically diverse customers who operate in a variety of end user markets. The Company manages credit risk through credit approvals, credit limits, and other monitoring procedures.
The Company’s allowance for credit losses reflects its estimate of the amount of receivables that it will be unable to collect. The estimated losses are based upon a review of outstanding receivables, the related aging, including specific accounts if deemed necessary, and on the Company’s historical collection experience. The estimated losses are calculated using the loss rate method based upon a review of outstanding receivables, related aging, and historical collection experience. The Company's estimates reflect changing circumstances, including changes in the economy or in the particular circumstances of individual customers, and, as a result, the Company may be required to increase or decrease its allowance. During the year ended December 31, 2021, the Company recognized bad debt expense of $8.5 million, as reductions of rental revenue in accordance with the collectability provisions of Topic 842. During the year ended December 31, 2021, the Company recognized $2.6 million (compared to bad debt expense in the years ended years ended December 31, 2020 and 2019 of $3.8 million and $3.3 million, respectively), within selling, general and
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administrative expense in its Consolidated Statements of Operations and Comprehensive Income (Loss), which included changes in its allowances for credit losses.
When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of December 31, 2021 and December 31, 2020, the Company had approximately $3.0 million and $1.0 million, respectively, of deferred rental revenue. Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $32.9 million in deposits as of December 31, 2021.
The Company does not have material contract assets, and it did not recognize any material impairments of any contract assets.
The primary costs to obtain contracts for new and rental unit sales with the Company's customers are commissions. The Company pays its sales force commissions related to the sale and rental of new and used units. For new unit and rental unit sales, the period benefited by each commission is less than one year. As a result, the Company has applied the practical expedient for incremental costs of obtaining a sales contract and expenses commissions as incurred.
Note 5: Financing Receivables
The Company’s financing receivables are related to sales-type leases and are collateralized by a security interest in the underlying equipment. Financing receivables, net of unearned income of $0.4 million, were $28.6 million as of December 31, 2021.
Note 6: Inventory
Inventory consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Whole goods | $ | 326,641 | $ | 3,276 | |||||||
| Aftermarket parts and services inventory | 83,901 | 28,091 | |||||||||
| Inventory | $ | 410,542 | $ | 31,367 | |||||||
Note 7: Floor Plan Financing
Floor plan payables were assumed in connection with the Acquisition and represent financing arrangements to facilitate the Company’s purchase of new and used trucks, cranes, and construction equipment inventory. All floor plan payables are collateralized by the inventory financed. These payables become due and payable upon the sale, transfer, or reclassification of each unit of inventory. Certain floor plan arrangements require the Company to satisfy various financial ratios consistent with those under the ABL Facility. As of December 31, 2021, the Company was in compliance with these covenants.
The amounts owed under floor plan payables are summarized as follows (in thousands):
| (in $000s) | December 31, 2021 | ||||
| Trade: | |||||
| Daimler Truck Financial | $ | 46,012 | |||
| PACCAR Financial Services | 26,702 | ||||
| Trade floor plan payables | $ | 72,714 | |||
| Non-trade: | |||||
| PNC Equipment Finance, LLC | $ | 165,239 | |||
| Non-trade floor plan payables | $ | 165,239 | |||
Interest on outstanding floor plan payable balances is due and payable monthly. Floor plan interest expense was $5.2 million for the year ended December 31, 2021.
Trade Floor Plan Financing:
Daimler Truck Financial
The Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”) bears interest at a rate of Prime plus 0.80% after an initial interest free period of up to 150 days. The total borrowing capacity under the Daimler Facility is $175.0 million.
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PACCAR
The Company has an Inventory Financing Agreement with PACCAR Financial Corp that provides the Company with a line of credit of $50.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 2.4%.
Non-Trade Floor Plan Financing:
PNC Equipment Finance, LLC
The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement provides the Company with a $295.0 million revolving credit facility, which matures on August 25, 2022 and bears interest at a rate of LIBOR plus 3.05%.
Note 8: Rental Equipment and Property and Equipment
Rental equipment, net consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Rental equipment | $ | 1,247,375 | $ | 654,547 | |||||||
| Less: accumulated depreciation | (413,050) | (318,735) | |||||||||
| Rental equipment, net | $ | 834,325 | $ | 335,812 | |||||||
Property and equipment, net consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Buildings and leasehold improvements | $ | 52,418 | $ | 2,882 | |||||||
| Vehicles | 17,656 | — | |||||||||
| Land and improvements | 20,290 | — | |||||||||
| Machinery and equipment | 31,578 | 7,152 | |||||||||
| Furniture and fixtures | 5,502 | 1,782 | |||||||||
| Construction in progress | 2,016 | 2,590 | |||||||||
| Total property and equipment | 129,460 | 14,406 | |||||||||
| Accumulated depreciation | (20,848) | (8,137) | |||||||||
| Property and equipment, net | $ | 108,612 | $ | 6,269 | |||||||
Note 9: Long-Term Debt
Debt obligations and associated interest rates consisted of the following:
| (in $000s) | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | |||||||||||||||||||
| ABL Facility | $ | 394,945 | $ | — | 1.8% | ||||||||||||||||||
| 2019 Credit Facility | — | 250,971 | 3.4% | ||||||||||||||||||||
| 2029 Secured Notes | 920,000 | — | 5.5% | ||||||||||||||||||||
| Senior Secured Notes due 2024 | — | 475,000 | 10.0% | ||||||||||||||||||||
| Notes payable | 32,619 | 2,379 | 3.0%-5.0% | 5.0% | |||||||||||||||||||
| Total debt outstanding | 1,347,564 | 728,350 | |||||||||||||||||||||
| Deferred finance fees | (32,945) | (11,212) | |||||||||||||||||||||
| Net debt | 1,314,619 | 717,138 | |||||||||||||||||||||
| Less: current maturities | (6,354) | (1,280) | |||||||||||||||||||||
| Long-term debt | $ | 1,308,265 | $ | 715,858 | |||||||||||||||||||
In connection with the Acquisition and related financing transactions, on April 1, 2021, the Company entered into the ABL Facility and repaid the Custom Truck LP Credit Facility and Nesco’s 2019 Credit Facility as described in Note 3: Business Combination. Additionally, on April 1, 2021, the Company redeemed all of Nesco’s Senior Secured Notes due 2024 and paid a make-whole premium. The terms of the ABL Facility and 2029 Secured Notes are described below. The financing transactions related to the
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Acquisition resulted in the recognition of a loss on the extinguishment of debt in the year ended December 31, 2021, comprised of (i) the elimination of unamortized deferred financing fees related to the 2019 Credit Facility and the Senior Secured Notes due 2024 of $8.2 million and, (ii) the payment of the make-whole premium to holders of the Senior Secured Notes due 2024 of $38.5 million. Additionally, prior to the consummation of the Acquisition, on December 3, 2020, the Company entered into a bridge financing commitment that was available to be used to provide a portion of the financing necessary to fund the consideration to be paid pursuant to the terms of the Acquisition. Because the Company entered into the ABL Facility and issued the 2029 Secured Notes, financing under the bridge facility was not used; however, on the Closing Date, the Company paid $15.0 million in fees to the bridge financing parties, which fees are included in loss on extinguishment of debt, in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021.
ABL Facility
In connection with the Acquisition, Buyer, as borrower, and the ABL Guarantors (as defined below) 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 the 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 had no commitments from any lender to provide incremental commitments.
Borrowings under the ABL Facility are 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.
As of December 31, 2021, borrowing availability under the ABL Facility was $347.0 million, and outstanding standby letters of credit were $4.0 million. 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 (a) with respect to base rate loans, 0.50% to 1.00% and (b) 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 subsidiaries owned directly by a U.S. subsidiary and to certain other exceptions and subject to certain exceptions in the case of non-
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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 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 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 0.000%) depending on the year of redemption.
In addition, at any time prior to April 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
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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 to April 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).
Notes Payable
Our notes payable require the Company to pay monthly and quarterly interest payments and have maturities beginning in 2022 through 2026. Notes payable includes (i) debt assumed from the Acquisition related to borrowings for facilities renovations and to support general business activities, (ii) notes payable related to past businesses acquired, and (iii) term loans. Subsequent to the Acquisition, the Company consolidated certain notes payable assumed from the Acquisition into a $23.9 million loan agreement with Security Bank of Kansas City (“SBKC”) that bears interest at a rate of 3.125% per annum, and a $3.5 million loan agreement with SBKC that bears interest at a rate of 3.5% per annum.
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Debt Maturities
As of December 31, 2021, the principal payments of debt outstanding over the next five years and thereafter were as follows:
| (in $000s) | Notes Payable | Long-Term Debt | |||||||||
| 2022 | $ | 6,354 | $ | — | |||||||
| 2023 | 1,597 | — | |||||||||
| 2024 | 1,080 | — | |||||||||
| 2025 | 1,117 | — | |||||||||
| 2026 | 22,471 | 394,945 | |||||||||
| Thereafter | — | 920,000 | |||||||||
| Total | $ | 32,619 | $ | 1,314,945 | |||||||
| Less unamortized discount and issuance costs | — | (32,945) | |||||||||
| $ | 32,619 | $ | 1,282,000 | ||||||||
Note 10: Leases as Lessee
Our operating lease agreements primarily consist of real estate property, such as warehouses and office buildings, in addition to personal property, such as vehicles and equipment. The majority of our lease arrangements are comprised of fixed payments and a limited number of these arrangements include a variable payment component based on certain index fluctuations. We also lease certain rental equipment under master lease agreements, which are classified as finance leases. The master lease agreements are typically for a five-year period, at the end of which we are entitled to return or purchase the equipment, or extend the life of the lease.
The adoption of Topic 842 resulted in the recording of assets and lease liabilities of approximately $12.4 million and $12.4 million, respectively, as of January 1, 2021. The adoption did not have a material impact on our Consolidated Statements of Operations and Comprehensive Income (Loss) or Cash Flows.
Components of Lease Expense
The components of lease expense are as follows:
| (in $000s) | Year Ended December 31, 2021 | ||||
| Operating lease cost | $ | 6,969 | |||
| Finance lease cost: | |||||
| Amortization of lease assets | $ | 2,973 | |||
| Interest on lease liabilities | $ | 1,431 | |||
| Short-term lease cost | $ | 3,690 | |||
| Sublease income | $ | (5,383) | |||
| Total lease cost | $ | 9,680 | |||
Supplemental Cash Flow Information
Supplemental cash flow information related to leases is as follows:
| (in $000s) | Year Ended December 31, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||
| Operating cash outflows - payments on operating leases | $ | 6,969 | |||
| Operating cash outflows - interest payments on finance leases | $ | 1,431 | |||
| Finance cash outflows - payments on finance lease obligations | $ | 5,223 | |||
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Supplemental Balance Sheet Information
Supplemental balance sheet information related to leases is as follows:
| (in $000s) | December 31, 2021 | ||||
| Finance leases | |||||
| Property and equipment | $ | 3,535 | |||
| Accumulated depreciation | (95) | ||||
| Property and equipment, net | $ | 3,440 | |||
| Rental equipment | $ | 18,715 | |||
| Accumulated depreciation | (8,056) | ||||
| Rental equipment, net | $ | 10,659 | |||
Future Maturities and Payment Information
Maturities of lease liabilities as of December 31, 2021 are as follows:
| (in $000s) | Operating Leases | Finance Leases | |||||||||
| 2022 | $ | 6,879 | $ | 4,326 | |||||||
| 2023 | 6,521 | 1,901 | |||||||||
| 2024 | 5,765 | 3,223 | |||||||||
| 2025 | 5,051 | — | |||||||||
| 2026 | 4,162 | — | |||||||||
| Thereafter | 20,658 | — | |||||||||
| Total lease payments | 49,036 | 9,450 | |||||||||
| Less: imputed interest | (12,535) | (303) | |||||||||
| Total present value of lease liabilities | $ | 36,501 | $ | 9,147 | |||||||
The weighted average discount rate under operating and finance leases was 6% and 9%, respectively, as of December 31, 2021. The weighted average remaining lease term under operating and finance leases was 10.2 years and 2.8 years, respectively, as of December 31, 2021.
Note 11: Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
| (in $000s) | Weighted Average Remaining Life (Years) | December 31, 2021 | December 31, 2020 | ||||||||||||||
| Goodwill | $ | 695,865 | $ | 238,052 | |||||||||||||
| Intangible assets: | |||||||||||||||||
| Trade names | 13.6 | 180,780 | 29,780 | ||||||||||||||
| Customer relationships | 12.9 | 202,170 | 52,170 | ||||||||||||||
| Non-compete agreements and other | 1.8 | 538 | 520 | ||||||||||||||
| Intangible assets | 383,488 | 82,470 | |||||||||||||||
| Less: accumulated amortization | (55,648) | (14,891) | |||||||||||||||
| Intangible assets, net | $ | 327,840 | $ | 67,579 | |||||||||||||
Supplemental Goodwill Information
We recognize goodwill when the purchase price of an acquired business exceeds the fair value of net assets acquired. The increase in goodwill as of December 31, 2021 compared to December 31, 2020 relates to the Acquisition of Custom Truck LP (see Note 3: Business Combination, for additional information). Goodwill is not amortized for financial reporting purposes.
We perform our goodwill impairment analysis annually on October 1 or more frequently if an event or circumstance (such as a significant adverse change in the business climate, operating performance metrics, or legal factors) indicates that an impairment may have occurred. Goodwill is impaired when its carrying value exceeds its implied fair value. Recognized goodwill is assigned to our
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reporting units using an income approach based on the present value of estimated future cash flows. Additionally, intangible assets with indefinite lives that are not amortized are tested annually for impairment on October 1, or more frequently if an event or circumstance indicates that an impairment loss may have occurred. During the year ended December 31, 2021, there were no indicators of impairment necessitating an interim impairment test of goodwill. Impairment was not indicated in the annual analysis for goodwill or intangibles for the year ended December 31, 2021.
As discussed in Note 3: Business Combination, the Company acquired Custom Truck LP on April 1, 2021 and the allocation of the purchase price is preliminary specifically in relation to acquired deferred tax assets and assumed deferred tax liabilities. Accordingly, goodwill has been assigned to our ERS segment, TES segment and APS segment on a preliminary basis. The goodwill allocation by segment as of December 31, 2021 was: $490.7 million to the ERS segment, $167.3 million to the TES segment and $37.9 million to the APS segment. As of December 31, 2020, goodwill related to our ERS segment and APS segment was $229.5 million and $8.7 million, respectively.
Supplemental Intangible Asset Information
Amortization Expense
As of December 31, 2021, estimated amortization expense for intangible assets for each of the next five years and thereafter is estimated to be as follows:
| (in $000s) | Amortization | ||||
| 2022 | $ | 32,338 | |||
| 2023 | 25,328 | ||||
| 2024 | 25,317 | ||||
| 2025 | 25,315 | ||||
| 2026 | 25,314 | ||||
| Thereafter | 194,228 | ||||
| Total estimated future amortization expense | $ | 327,840 | |||
NESCO Trade Name
In connection with the Acquisition and the combination of the businesses of Nesco Holdings and Custom Truck LP, the Company’s products and services will no longer be marketed under the “NESCO” brand. Accordingly, management began the process of discontinuing the brand, which includes the use of trade names such as, “NESCO Specialty” and “NESCO Sales and Rentals.” Prior to the Acquisition, the trade name intangible asset was carried as an indefinite-lived intangible asset. As a result of the decommissioning of the brand, we determined that the trade name intangible asset should be reclassified to a definite-lived asset. Accordingly, the intangible asset will be amortized over a 12-month period, which is the estimated remaining period of economic benefit to the Company.
Note 12: Earnings (Loss) Per Share
Diluted net earnings (loss) per share includes the effects of potentially dilutive shares of Common Stock. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, and share-based compensation, all of which have been excluded from the calculation of diluted net earnings (loss) per share for the applicable periods because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. Our potentially dilutive shares aggregated 24.4 million, 27.7 million, and 26.6 million, respectively, for years ended December 31, 2021, 2020 and 2019.
The following tables set forth the computation of basic and dilutive loss per share:
| Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share and per share data) | Net Income (Loss) | Weighted Average Shares | Per Share Amount | Net Income (Loss) | Weighted Average Shares | Per Share Amount | Net Income (Loss) | Weighted Average Shares | Per Share Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic earnings (loss) per share | $ | (181,501) | 241,370,317 | $ | (0.75) | $ | (21,277) | 49,064,615 | $ | (0.43) | $ | (27,052) | 33,066,165 | $ | (0.82) | |||||||||||||||||||||||||||||||||||||||||
| Dilutive common share equivalents | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | (181,501) | 241,370,317 | $ | (0.75) | $ | (21,277) | 49,064,615 | $ | (0.43) | $ | (27,052) | 33,066,165 | $ | (0.82) | |||||||||||||||||||||||||||||||||||||||||
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Note 13: Equity
Preferred Stock
As of December 31, 2021 and December 31, 2020, we were authorized to issue 10,000,000 and 5,000,000 shares of preferred stock with a par value of $0.0001 per share, respectively, with such designation, rights and preferences as may be determined from time to time by our board of directors. As of December 31, 2021 and December 31, 2020, there were no shares of preferred stock issued or outstanding.
Common Stock
As of December 31, 2021 and December 31, 2020, we were authorized to issue 500,000,000 and 250,000,000 shares of common stock with a par value of $0.0001 per share, respectively.
During the period commencing on the date of the Acquisition and ending on the date that is eighteen months following the date of the Acquisition (the “Lockup Period” ), Platinum shall not transfer any shares of common stock beneficially owned or otherwise held by it other than transfers as allowed by the Amended and Restated Stockholder’s Agreement of Custom Truck One Source, Inc.
Contingently Issuable Shares
NESCO Holdings, LP is a Delaware limited partnership holding shares of our common stock. NESCO Holdings, LP is owned and controlled by Energy Capital Partners, and has the right to receive: (1) up to an additional 1,800,000 shares of common stock through July 31, 2024, in increments of 900,000 shares, if (x) the trading price of the common stock exceeds $13.00 per share or $16.00 per share for any 20 trading days during a 30 consecutive trading day period or (y) a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock of the Company exceeds $13.00 per share or $16.00 per share, and (2) an additional 1,651,798 shares of common stock if during the seven-year period ending July 31, 2026, the trading price of common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
Note 14: Share-Based Compensation
On July 8, 2021, the Company's stockholders approved the Amended and Restated 2019 Omnibus Incentive Plan, which increased the total authorized shares of Common Stock to 14,650,000 (the “Plan”). The purpose of the Plan is to provide the Company and its subsidiaries’ officers, directors, employees and consultants who, by their position, ability and diligence, are able to make important contributions to the Company’s growth and profitability, with an incentive to assist the Company in achieving its long-term corporate objectives, to attract and retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest in the Company. To accomplish these objectives, the Plan provides for awards of equity-based incentives through granting of restricted stock units, stock options, stock appreciation rights and other stock or cash-based awards. At December 31, 2021, there were approximately 6,743,800 shares in the share reserve still available for issuance.
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units (“RSUs”), performance share units (“PSUs”) and deferred compensation. Compensation expense for equity awards recognized in selling, general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss) was $17.3 million, $2.4 million and $0.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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Restricted Stock Units and Performance Stock Units
The following table summarizes the Company’s RSU and PSU award activity:
| RSUs | PSUs | ||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding, December 31, 2019 | 656,666 | $ | 6.98 | — | $ | — | |||||||||||||||||
| Granted | 867,838 | $ | 2.76 | — | $ | — | |||||||||||||||||
| Forfeited/cancelled/expired | (219,412) | $ | 6.37 | — | $ | — | |||||||||||||||||
| Vested | (127,500) | $ | 6.98 | — | $ | — | |||||||||||||||||
| Outstanding, December 31, 2020 | 1,177,592 | $ | 4.05 | — | $ | — | |||||||||||||||||
| Granted | 2,227,692 | $ | 9.57 | 2,135,000 | $ | 5.74 | |||||||||||||||||
| Forfeited/cancelled/expired | (24,919) | $ | 2.19 | — | $ | — | |||||||||||||||||
| Vested | (998,898) | $ | 4.39 | — | $ | — | |||||||||||||||||
| Outstanding, December 31, 2021 | 2,381,467 | $ | 9.09 | 2,135,000 | $ | 5.74 | |||||||||||||||||
Compensation expense for RSUs recognized in selling, general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) was $13.6 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, unrecognized compensation expense related to these awards was $24.1 million and is expected to be recognized over a remaining period of approximately 2.9 years.
Stock Options
The following table summarizes the Company’s stock option activity:
| Number of Options | Weighted Average Exercise Price | ||||||||||
| Outstanding stock options, December 31, 2019 | 1,513,334 | $ | 9.60 | ||||||||
| Granted | 1,297,076 | $ | 3.70 | ||||||||
| Exercised | — | $ | — | ||||||||
| Forfeited/cancelled/expired | (418,494) | $ | 9.45 | ||||||||
| Outstanding stock options, December 31, 2020 | 2,391,916 | $ | 6.43 | ||||||||
| Granted | — | $ | — | ||||||||
| Exercised | (502,761) | $ | 4.99 | ||||||||
| Forfeited/cancelled/expired | (7,956) | $ | 3.85 | ||||||||
| Outstanding stock options, December 31, 2021 | 1,881,199 | $ | 6.82 | ||||||||
Compensation expense for stock options recognized in selling, general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss) was $3.7 million and $1.2 million for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021, unrecognized compensation expense related to stock options was $0.1 million and is expected to be recognized over a remaining period of approximately 1.9 years.
As of December 31, 2021, the total intrinsic value of stock options outstanding and currently exercisable was $3.8 million. 502,761 stock options were exercised during the year ended December 31, 2021. No stock options were exercised during the years ended December 31, 2020 and 2019.
The following table presents the options outstanding and options exercisable by exercise price with the weighted-average remaining contractual life for the options outstanding and the weighted-average exercise price at December 31, 2021:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
| Exercise Price | Options Outstanding at December 31, 2021 | Weighted Average Remaining Contractual Life (In Years) | Weighted Average Grant Date Fair Value | Options Exercisable at December 31, 2021 | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||||
$3.49 - $10.00 | 1,881,199 | 6.8 | $ | 2.37 | 1,788,785 | $ | 2.37 | |||||||||||||||||||||||||
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The average fair value of each option award at grant date was estimated using the Black-Scholes option-pricing model assuming dividend yield of 0.0%, volatility of 47%, risk-free rate of return of 1.58%, and expected life of approximately seven years.
Expected volatility is based on the weighted-average combination of the Company’s historic volatility and of the implied volatility of a group of the Company’s peers. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The expected life of the Company’s stock option awards is derived from the simplified approach based on the weighted-average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.
Note 15: Fair Value Measurements
FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.
The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:
| Carrying Value | Fair Value | ||||||||||||||||||||||
| (in $000s) | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| ABL Facility | $ | 394,945 | $ | — | $ | 394,945 | $ | — | |||||||||||||||
| 2029 Secured Notes | 920,000 | — | 949,900 | — | |||||||||||||||||||
| Other notes payable | 32,619 | — | 32,619 | — | |||||||||||||||||||
| Derivative and warrant liabilities | 24,164 | — | 2,388 | 21,776 | |||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| 2019 Credit Facility | $ | 250,971 | $ | — | $ | 250,971 | $ | — | |||||||||||||||
| Senior Secured Notes due 2024 | 475,000 | — | 519,379 | — | |||||||||||||||||||
| Other notes payable | 2,379 | — | 2,379 | — | |||||||||||||||||||
| Derivative and warrant liabilities | 7,012 | — | 7,012 | — | |||||||||||||||||||
The carrying amounts of the ABL Facility, the 2019 Credit Facility and other notes payable approximated fair value as of December 31, 2021 and December 31, 2020 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the 2029 Secured Notes and Senior Secured Notes due 2024 is calculated using Level 2 inputs, based on bid prices obtained from brokers. The Level 3 fair value presented above consists of the fair value of the Non-Public Warrants (as defined in Note 16: Financial Instruments). The Company estimated the fair value using the Black-Scholes option-pricing model based on the market value of the underlying Common Stock, the remaining contractual term of the warrant, risk-free interest rates and expected dividends, and expected volatility of the price of the underlying Common Stock.
Note 16: Financial Instruments
In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest rate exposure. These financial instruments are not used for trading or speculative purposes.
Warrants
During the quarter ended March 31, 2021, the Company identified an immaterial error in its historical accounting for certain of its issued and outstanding warrants, as further described below.
The Company’s predecessor, Capitol Investment Corp. IV, an entity formed on May 1, 2017, as a special purpose acquisition company (“Capitol” or the “SPAC”), issued warrants for the purchase of approximately 7.5 million shares of the Company’s Common Stock pursuant to a private placement agreement (the “Non-Public Warrants”). In connection with the SPAC’s initial public offering, warrants for the purchase of approximately 13.4 million shares of the Company’s Common Stock were issued to public investors (the “Public Warrants”). The Public Warrants together with the Non-Public Warrants may hereafter be referred to collectively as the “Warrants.”
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The Warrants provide for the purchase of approximately 20.9 million shares of the Company’s Common Stock. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $11.50 per share, subject to certain adjustments. The Warrants are currently exercisable and terminate on the earlier to occur of (i) July 31, 2024, and (ii) the redemption date. The Company may redeem the Public Warrants at a price of $0.01 per Public Warrant upon providing 30-days’ notice, only in the event that the last sale price of the Common Stock is at least $18.00 per share for any 20 trading days within a 30-trading day period ending on the third day prior to the date on which notice of redemption is given. If the Company elects to redeem the Public Warrants as described above, the Public Warrant may be exercised on a “cashless basis.” The redemption rights do not apply to the Non-Public Warrants if, at the time of the redemption, such Non-Public Warrants continue to be held by the initial holders as of July 31, 2019, or their affiliates or permitted transferees; however, once such Non-Public Warrants are transferred (other than to an affiliate or permitted transferee), the Company may redeem those Non-Public Warrants that have been transferred in a manner similar to any Public Warrants. In periods prior to the quarter ended March 31, 2021, the Company accounted for both the Public Warrants and Non-Public Warrants as freestanding equity-classified instruments.
On April 12, 2021, the Securities and Exchange Commission issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (the “Statement”). The Statement indicated that, if warrant agreements can provide for potential changes to the settlement amounts that depend on the characteristics of the holder of the warrant, such provisions would preclude the warrants from being indexed to the entity’s stock, and, therefore, result in classification of the warrants as a liability measured at fair value, with changes in fair value each period reported in earnings. The Company’s warrant agreement provides for a different settlement amount in a cashless exercise for holders of the Non-Public Warrants upon exercise at any time as compared to holders of the Public Warrants upon the Company's election to redeem; therefore, the Non-Public Warrants are precluded from being indexed to the Company’s stock and should have been classified as liabilities.
The Public Warrants continue to be accounted for as freestanding equity-classified instruments because the Company has the ability to settle with holders of the Public Warrants either by net-share or physical settlement. Because the Non-Public Warrants do not meet the “indexed to the entity’s stock” condition, they should have been accounted for as a derivative liability and remeasured at their estimated fair value each period. The change in fair value each period should have been reported in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The effect of correcting the accounting for the Non-Public Warrants from an equity-classified instrument to a liability instrument resulted in the reclassification of $10.3 million from Additional paid-in capital to derivative and warrant liabilities on the Company’s consolidated balance sheet as of January 1, 2021, which represents the initial value of the Non-Public Warrants that should have been recognized on July 31, 2019, the date on which the Company merged with the SPAC. For the year ended December 31, 2021, the Company recognized an expense of $10.8 million in Other (income) expense in its Consolidated Statements of Operations and Comprehensive Income (Loss) related to the fair value remeasurement. Included in the remeasurement amount is an income amount of $1.4 million in the year ended December 31, 2021 representing the net change in the fair value of the Non-Public Warrants from July 31, 2019 (the issue date of the Non-Public Warrants) to December 31, 2019, of $6.1 million in income, partially offset by $4.7 million in expense from the change in fair value for the year ended December 31, 2020. In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated for the interim or annual periods prior to January 1, 2021, the Company applied the guidance of ASC 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality and SAB Topic 1.N, E, and concluded that the effect of the error on prior period financial statements was not material. The Company also evaluated if the cumulative effect of correcting the prior period misstatement in its consolidated financial statements would be material to the year ended December 31, 2021. The guidance states that prior-year misstatements which, if corrected in the current year would materially misstate the current year’s financial statements, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. The Company concluded the impact of correcting the accounting for the Non-Public Warrants on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2021 is immaterial.
Derivatives Not Designated as Hedges
On July 17, 2019, we entered into an interest rate collar (the “Collar”) agreement to mitigate the risk of changes in the interest rate paid during the contract period for $170.0 million of the Company’s variable rate loans. Under the Collar, we are required to pay the counterparty to the agreement an amount equal to the difference between a monthly LIBOR-based interest rate and a defined interest rate floor; conversely, we are entitled to receive from the counterparty an amount equal to the excess of a LIBOR-based interest rate and a defined interest rate cap. The required payments due to or due from the counterparty are calculated by applying the interest rate differential to the notional amount ($170.0 million) and are determined monthly through July 31, 2024. The Collar expires in July 2024 and has not been designated as a cash flow hedge. The Collar is carried at fair value and reported in Derivative and warrant liabilities on the Company's Consolidated Balance Sheets ($2.4 million and $7.0 million as of December 31, 2021 and December 31, 2020, respectively) as a Level 2 measurement (see Note 15: Fair Value Measurements). The change in fair value of the Collar is
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recognized in Other expense (income), net in our Consolidated Statements of Operations and Comprehensive Income (Loss) and totaled $(4.6) million, $5.3 million and $1.7 million in the years ended December 31, 2021, 2020 and 2019, respectively.
The counterparty to the Collar is an investment grade major international financial institution. The Company could be exposed to losses in the event of nonperformance by the counterparty; however, the credit rating and the concentration of risk in this financial institution are monitored on a continuous basis and present no significant credit risk to the Company.
Note 17: Income Taxes
We are subject to taxation in all jurisdictions in which we operate within the United States and Canada. Substantially all of our income before income taxes for all periods presented is U.S. sourced. The provision for income tax expense (benefit), including the amount of domestic and foreign loss before taxes, is as follows:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Components of income (loss) before tax: | |||||||||||||||||
| Domestic | $ | (180,669) | $ | (49,096) | $ | (30,046) | |||||||||||
| Foreign | 3,593 | (2,255) | (2,992) | ||||||||||||||
| Total income (loss) before tax | (177,076) | (51,351) | (33,038) | ||||||||||||||
| Current tax expense (benefit): | |||||||||||||||||
| Federal | — | (1,393) | — | ||||||||||||||
| Foreign | 320 | 61 | 483 | ||||||||||||||
| State | 242 | 66 | 392 | ||||||||||||||
| Total current tax expense (benefit) | 562 | (1,266) | 875 | ||||||||||||||
| Deferred tax expense (benefit): | |||||||||||||||||
| Federal | (33,415) | (9,179) | 852 | ||||||||||||||
| Foreign | 826 | — | — | ||||||||||||||
| State | (9,507) | (1,786) | 244 | ||||||||||||||
| Total deferred tax expense (benefit) | (42,096) | (10,965) | 1,096 | ||||||||||||||
| Expense (benefit) from change in valuation allowance | 45,959 | (17,843) | (7,957) | ||||||||||||||
| Total tax expense (benefit) | $ | 4,425 | $ | (30,074) | $ | (5,986) | |||||||||||
A reconciliation between the federal statutory income tax rate and our actual effective income tax rate is as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Expected federal statutory income tax rate | 21.0% | 21.0% | 21.0% | ||||||||||||||
| Tax effect of differences: | |||||||||||||||||
| Foreign operations | (0.3)% | (0.1)% | (1.2)% | ||||||||||||||
| Share-based payments | 1.0% | (0.2)% | (0.1)% | ||||||||||||||
| Effect of state income taxes, net of federal income tax benefit | 5.2% | 2.6% | 5.0% | ||||||||||||||
| Nondeductible acquisition costs | (0.7)% | —% | —% | ||||||||||||||
| Nondeductible expense on Warrants (see Note 16) | (1.3)% | —% | —% | ||||||||||||||
| Change in valuation allowance | (25.8)% | 34.7% | (8.4)% | ||||||||||||||
| Other | (1.6)% | 0.6% | 1.8% | ||||||||||||||
| Effective income tax rate | (2.5)% | 58.6% | 18.1% | ||||||||||||||
The Company's effective tax rate differs from the U.S. federal statutory tax rate of 21% due primarily to the recording of valuation allowance against our gross deferred tax assets.
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The components of the deferred tax assets and liabilities are as follows:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Deferred tax assets | |||||||||||
| Accounts receivable | $ | 2,703 | $ | 1,729 | |||||||
| Inventory | 6,435 | 740 | |||||||||
| Transaction and debt issuance costs | 4,946 | 2,609 | |||||||||
| Compensation and benefits | 6,067 | 668 | |||||||||
| Net operating loss carryforwards | 241,663 | 88,913 | |||||||||
| Section 163j interest disallowance carryforwards | 21,283 | 9,084 | |||||||||
Operating lease liabilities(a) | 8,731 | — | |||||||||
| Foreign tax credits, accrued expenses, and other | 455 | 1,977 | |||||||||
| Total deferred tax assets | 292,283 | 105,720 | |||||||||
| Less: valuation allowance | (84,577) | (16,542) | |||||||||
| Total deferred tax assets, net | 207,706 | 89,178 | |||||||||
| Deferred tax liabilities | |||||||||||
| Financing receivable | (3,466) | — | |||||||||
| Rental equipment and other property and equipment | (173,522) | (50,554) | |||||||||
| Goodwill and other intangibles | (36,825) | (21,672) | |||||||||
Operating lease assets(a) | (8,647) | — | |||||||||
| Prepaid expenses and other items | (867) | — | |||||||||
| Total deferred tax liabilities | (223,327) | (72,226) | |||||||||
| Net deferred tax asset (liability) | $ | (15,621) | $ | 16,952 | |||||||
(a) As a result of the adoption of Topic 842 during the year ended December 31, 2021, the Company recognized deferred taxes related to operating lease operating lease right-of-use assets and operating lease liabilities.
As a result of the Acquisition, the Company expects to be able to amortize for U.S. tax purposes, a portion of the goodwill recognized from the Acquisition. For U.S. income taxes, the Acquisition was partly a taxable acquisition and partly a non-taxable acquisition. Accordingly, the taxable component is expected to give rise to increases in the tax bases for a portion of the net assets acquired, while the non-taxable component will result in a carryforward of pre-acquisition tax bases (referred as, “carryover basis”) for a portion of the net assets acquired. The differential between the fair values of the assets acquired and the carryover basis has been recognized as a net deferred tax liability as of the Closing Date (see Note 3: Business Combination). Additionally, certain federal and state net operating loss and interest expense carryforwards were acquired in the Acquisition and the utilization of these is subject to limitations prescribed by U.S. Internal Revenue Code Section 382 (“Section 382”). The aforementioned net deferred tax liabilities recognized in connection with the assignment of the purchase price from the Acquisition include deferred tax assets from the tax deduction carryforwards, and were reduced by a valuation allowance as of the Closing Date.
We record a valuation allowance against deferred tax assets when we determine that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance primarily relates to federal and state net operating loss carryforwards, as well as disallowed interest expense deduction carryforwards. While the Acquisition resulted in a significant increase in deferred tax liabilities, these tax liabilities, which give rise to future taxable income against which tax carryforwards may be applied, are subject to limitations. Federal and state income tax limitation rules are expected to limit the application of our carryforwards and, accordingly, we record a valuation allowance to reduce our deferred tax assets to amounts expect to be realized.
The following presents changes in the valuation allowance:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Valuation allowance - beginning of year | $ | (16,542) | $ | (34,385) | $ | (31,610) | |||||||||||
| Assigned in purchase accounting (see Note 3) | (22,076) | — | — | ||||||||||||||
Charged to benefit (expense)(a) | (45,959) | 17,843 | (2,775) | ||||||||||||||
| Valuation allowance - end of year | $ | (84,577) | $ | (16,542) | $ | (34,385) | |||||||||||
(a) Charged to benefit (expense) during the year ended December 31, 2021 includes a reduction to the allowance of approximately $9.1 million related to federal and state disallowed interest expense deduction carryforwards, offset by additional valuation allowance related to tax losses generated in the year, resulting in net income tax expense of $4.4 million.
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As discussed above, the Company acquired certain federal and state net operating loss and interest expense carryforwards in connection with the Acquisition, the utilization of which is subject to limitations prescribed by Section 382. Accordingly, a portion of the carryforwards is expected to expire prior to being utilized. As of December 31, 2021, we had net operating loss carryforwards of approximately $1,035.6 million for U.S. federal income tax purposes and $447.1 million for state income tax purposes. As of December 31, 2020, we had net operating loss carryforwards of approximately $363.0 million for U.S. federal income tax purposes and $223.2 million for state income tax purposes. The net operating loss carryforwards expire at various dates commencing during 2027 through 2037 for U.S. federal income tax purposes and 2022 through 2041 for state income tax purposes.
Note 18: Concentration Risks
Concentration of Credit Risks
Financial instruments that potentially subject us to significant concentrations of credit risk include cash and accounts receivable. We maintain cash with federally insured financial institutions and may maintain deposits in excess of financial insured limits. However, we believe that we are not exposed to significant credit risks due to the financial position of the depository institutions in which our deposits are held. No customer accounted for more than 3% and three customers, collectively, accounted for 11.1%, respectively, of consolidated revenue in 2021 and 2020. No customer accounted for more than 10.0% of 2019 consolidated revenue. No customer accounted for more than 10% of accounts receivable as of December 31, 2021. Receivables from three customers were 12.1% of accounts receivable as of December 31, 2020.
Vendor Concentrations
In 2021 no vendor accounted for more than 10.0% of purchases. In 2020 and 2019, three vendors, collectively, accounted for more than 10.0% of purchases. Three and one vendors represented more than 10.0% of accounts payable as of December 31, 2021 and December 31, 2020, respectively.
Note 19: Commitments and Contingencies
We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Legal Matters
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. At this time, no claims of these types, certain of which are covered by insurance policies, have had a material effect on the Company. Certain jurisdictions in which the Company operates do not provide insurance recoveries related to punitive damages. For matters pertaining to the pre-Acquisition activities of Custom Truck LP, Sellers have agreed to indemnify Nesco and Buyer for losses arising out of the breach of Sellers’ pre-closing covenants in the Purchase Agreement and certain indemnified tax matters, with recourse limited to a $10 million and $8.5 million escrow account, respectively.
From time to time, the Company is audited by state and local taxing authorities. These audits typically focus on the Company’s withholding of state-specific sales tax and rental-related taxes.
Custom Truck LP’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the Internal Revenue Service (the “IRS”). The IRS issued an assessment on October 28, 2020 in an aggregate amount of $2.4 million for the 2015 periods, alleging that certain types of sold equipment are not eligible for the Mobile Machinery Exemption set forth in the Code. An appeal was filed on January 28, 2021. Based on management’s understanding of the facts and circumstances, including the relevant provisions of the Code, and historical precedent, including previous successful appeals of similar assessments in prior years, management does not believe the likelihood of a loss resulting from the IRS assessment to be probable at this time.
While it is not possible to predict the outcome of the foregoing matters with certainty, it is the opinion of management, that the final outcome of these matters will not have a material effect on the Company’s consolidated financial condition, results of operations and cash flows.
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Purchase Commitments
We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. All of these agreements are cancellable within a specified notification period to the supplier.
Note 20: Related Parties
The Company has transactions with related parties as summarized below.
Rentals and Sales — Energy Capital Partners (“ECP”), a stockholder in the Company, and their affiliates have ownership interests in a broad range of companies. The Company has entered into commercial transactions with subsidiaries of PLH Group, Inc., a company partially owned by an affiliate of ECP.
The Company rents and sells equipment and provides services to R&M Equipment Rental, a business partially owned by members of the Company’s management. The Company also rents equipment and purchases inventory, from R&M Equipment Rental. During the year ended December 31, 2021, the Company purchased approximately $19.4 million in rental equipment from R&M Equipment Rental.
The PIPE Investors, as described in Note 3: Business Combination, included certain members of management and directors of the Company, which persons purchased approximately 1.4 million shares of the Company’s common stock at a price of $5.00 per share.
Facilities Leases and Other — The Company leases certain facilities, as well as purchases aircraft charter services, from entities owned by members of the Company’s management and their immediate families. Payments to the related parties for these transactions are immaterial. Rent and air travel expenses are recorded in selling, general, and administrative expenses.
Management Fees — The Company entered into the Corporate Advisory Services Agreement with Platinum effective as of the Closing Date, under which management fees are payable to Platinum quarterly.
A summary of the transactions with the foregoing related parties included in the Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Total revenues from transactions with related parties | $ | 23,251 | $ | 9,181 | $ | 11,500 | |||||||||||
| Expenses incurred from transactions with related parties included in cost of revenue | $ | 1,687 | $ | — | $ | — | |||||||||||
| Expenses incurred from transactions with related parties included in operating expenses | $ | 4,283 | $ | — | $ | — | |||||||||||
Amounts receivable from/payable to related parties included in the Consolidated Balance Sheets are as follows:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Accounts receivable from related parties | $ | 5,145 | $ | 3,506 | |||||||
| Accounts payable to related parties | $ | 26 | $ | — | |||||||
Note 21: Segments
Our operations are primarily organized and managed by operating segment. Operating segment performance and resource allocations are primarily based on gross profit. The accounting policies of the reportable segments are consistent with those described in Note 2: Summary of Significant Accounting Policies to the financial statements. Intersegment sales and any related profits are eliminated in consolidation. In the second quarter of 2021, we changed our reportable segments, consistent with how we currently manage the business, in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”). The segment operations are described in Note 1: Business and Organization to these financial statements. Segment information presented below has been adjusted for all prior periods, consistent with the current reportable segment presentation.
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The Company’s segment results are presented in the tables below:
| Year Ended December 31, | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 354,557 | $ | — | $ | 15,510 | $ | 370,067 | |||||||||||||||
| Equipment sales | 105,435 | 589,899 | — | 695,334 | |||||||||||||||||||
| Parts and services | — | — | 101,753 | 101,753 | |||||||||||||||||||
| Total revenue | 459,992 | 589,899 | 117,263 | 1,167,154 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 94,644 | — | 86,943 | 181,587 | |||||||||||||||||||
| Equipment sales | 90,420 | 528,024 | — | 618,444 | |||||||||||||||||||
| Depreciation of rental equipment | 151,954 | — | 5,156 | 157,110 | |||||||||||||||||||
| Total cost of revenue | 337,018 | 528,024 | 92,099 | 957,141 | |||||||||||||||||||
| Gross profit | $ | 122,974 | $ | 61,875 | $ | 25,164 | $ | 210,013 | |||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 179,933 | $ | — | $ | 15,557 | $ | 195,490 | |||||||||||||||
| Equipment sales | 31,533 | 25,099 | — | 56,632 | |||||||||||||||||||
| Parts and services | — | — | 50,617 | 50,617 | |||||||||||||||||||
| Total revenue | 211,466 | 25,099 | 66,174 | 302,739 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 56,140 | — | 44,217 | 100,357 | |||||||||||||||||||
| Equipment sales | 25,615 | 21,792 | — | 47,407 | |||||||||||||||||||
| Depreciation of rental equipment | 74,376 | — | 4,156 | 78,532 | |||||||||||||||||||
| Total cost of revenue | 156,131 | 21,792 | 48,373 | 226,296 | |||||||||||||||||||
| Gross profit | $ | 55,335 | $ | 3,307 | $ | 17,801 | $ | 76,443 | |||||||||||||||
| Year Ended December 31, | |||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||
| ERS | TES | APS | Total | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 182,720 | $ | — | $ | 15,276 | $ | 197,996 | |||||||||||||||
| Equipment sales | 23,767 | 10,308 | — | 34,075 | |||||||||||||||||||
| Parts and services | — | — | 31,964 | 31,964 | |||||||||||||||||||
| Total revenue | 206,487 | 10,308 | 47,240 | 264,035 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 47,751 | — | 30,346 | 78,097 | |||||||||||||||||||
| Equipment sales | 20,302 | 8,520 | — | 28,822 | |||||||||||||||||||
| Depreciation of rental equipment | 66,228 | — | 4,340 | 70,568 | |||||||||||||||||||
| Total cost of revenue | 134,281 | 8,520 | 34,686 | 177,487 | |||||||||||||||||||
| Gross profit | $ | 72,206 | $ | 1,788 | $ | 12,554 | $ | 86,548 | |||||||||||||||
Total assets by operating segment are not disclosed herein because asset by operating segment data is not reviewed by the chief operating decision-maker (“CODM”) to assess performance and allocate resources.
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Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of consolidated gross profit to consolidated loss before income taxes:
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Gross Profit | $ | 210,013 | $ | 76,443 | $ | 86,548 | |||||||||||
| Selling, general and administrative expenses | 155,783 | 46,409 | 37,284 | ||||||||||||||
| Amortization | 40,754 | 3,153 | 3,007 | ||||||||||||||
| Non-rental depreciation | 3,613 | 95 | 115 | ||||||||||||||
| Transaction expenses | 51,830 | 9,538 | 10,124 | ||||||||||||||
| Loss on extinguishment of debt | 61,695 | — | 4,005 | ||||||||||||||
| Interest expense, net | 72,843 | 63,200 | 63,361 | ||||||||||||||
| Financing and other expense (income) | 571 | 5,399 | 1,690 | ||||||||||||||
| Income (Loss) Before Income Taxes | $ | (177,076) | $ | (51,351) | $ | (33,038) | |||||||||||
The following table presents total assets by country:
| (in $000s) | December 31, 2021 | December 31, 2020 | |||||||||
| Assets: | |||||||||||
| United States | $ | 2,653,058 | $ | 762,696 | |||||||
| Canada | 30,708 | 5,447 | |||||||||
| Mexico | — | 261 | |||||||||
| $ | 2,683,766 | $ | 768,404 | ||||||||
Note 22: Subsequent Events
On January 14, 2022, we closed a membership interest purchase agreement to acquire all of the issued and outstanding membership interests in Hi-Rail Leasing, Inc., a specialty equipment rental and sales provider to the electric utility T&D, telecommunications, infrastructure, and rail industries in Canada for approximately $51 million inclusive of customary post-closing adjustments.
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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
As previously reported on our Current Report on Form 8-K, dated April 1, 2021, upon the approval of the audit committee of our board of directors, Deloitte & Touche LLP (“Deloitte”) was dismissed as our independent registered public accounting firm, and Ernst & Young LLP (“EY”) was engaged as our independent registered public accounting firm. Deloitte served as the independent registered public accounting firm for NESCO Holdings prior to the Closing (as defined below). In connection with the consummation of the acquisition of Custom Truck LP on April 1, 2021 (the “Closing”), EY became the independent registered public accounting firm for CTOS effective April 1, 2021.
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Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
In accordance with Securities Exchange Act Rules 13a-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2021 because of the material weaknesses in our internal control over financial reporting described below.
(b) Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“2013 framework”) (“COSO”) in Internal Control-Integrated Framework. Management’s assessment did not include the internal controls of Custom Truck LP, which is included in the Company’s 2021 consolidated financial statements and constituted 76% of the Company’s total assets as of December 31, 2021 and 79% of the Company’s total revenue for the year then ended.
Based on that assessment, the Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2021, the Company’s internal control over financial reporting was not effective, due to the material weaknesses described below.
Inadequate General Information Technology Controls and Business Process Controls
On April 1, 2021, we completed the acquisition of Custom Truck LP, which resulted in a significant change in the Company’s internal control over financial reporting. We are in the process of integrating policies, processes, people, technology and operations for the combined company. As part of this integration, we have identified deficiencies in the design and operating effectiveness of internal controls associated with the control activities component of the COSO framework. These include:
1.During the third quarter ended September 30, 2021, we identified a material weakness in the design and operation of information technology general controls (“ITGCs”) related to an enterprise resource planning (“ERP”) system that supports the processes related to the preparation of our consolidated financial statements. Specifically, we did not maintain adequate
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control over user access to the ERP system to ensure appropriate segregation of duties and to restrict access to financial applications and data to appropriate Company personnel.
2.During the fourth quarter ended December 31, 2021, we identified control deficiencies related to overall ITGCs for both user access and program change-management for systems supporting all of the Company’s internal control processes and controls, controls over the completeness and accuracy of information used in business process controls and management review controls. Our business process controls (automated and manual) and management review controls were also deemed ineffective because they are adversely impacted by ineffective ITGCs. These control deficiencies could result in misstatements potentially impacting all financial statement accounts and disclosures that may not be prevented or detected.
Accordingly, these deficiencies constitute material weaknesses. The material weaknesses did not result in any identified misstatements to our consolidated financial statements, and there were no changes to previously released financial results. The Company’s independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report issued an adverse report on effectiveness of the Company’s internal control over financial reporting as of December 31, 2021.
(c) Remediation of the Material Weaknesses in Internal Control Over Financial Reporting
The Company is in the process of implementing changes associated with the design, implementation, and monitoring information technology general controls in the areas of user access and program change-management for systems supporting all of the Company’s internal control processes to ensure that internal controls are designed and operating effectively. A significant portion of our remediation plan to address the control deficiencies encompass the completion of our new ERP system implementation planned for the second quarter of 2022. The new ERP system will allow us to address segregation of duties by establishing user roles specific to the nature of each job function. We are also establishing controls to ensure appropriate authorization of new user access requests, including performance of routine reviews of user access, and controls over program-change management. Additionally, management is in the process of enhancing relevant process level controls that are relevant to the preparation of consolidated financial statements. The material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
(d) Changes to Internal Control over Financial Reporting
Other than the ongoing remediation plans described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Certifications
The certifications of the Company’s Chief Executive Officer and Chief Financial Officer required by the Sarbanes-Oxley Act are included as Exhibits 31 and 32 to this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Custom Truck One Source, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Custom Truck One Source, Inc.’s, internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Custom Truck One Source, Inc. (the Company) has not maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. Management has identified material weaknesses in the design and operation of controls related to:
(a) Not fully designing, implementing and monitoring general information technology controls in the areas of user access for a system that supports the processes related the preparation of the Company’s consolidated financial statements; and
(b) Not fully designing, implementing and monitoring general information technology controls including user access and program change-management, for systems supporting all of the Company’s internal control processes, controls over the completeness and accuracy of information used in business process controls and management review controls. Business process controls (automated and manual) and management review controls were also deemed ineffective because they are adversely impacted by ineffective ITGCs. These control deficiencies could result in misstatements potentially impacting all financial statement accounts and disclosures that may not be prevented or detected.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Custom Truck, LP, which is included in the 2021 consolidated financial statements of Custom Truck One Source, Inc. and constituted 76% of total assets as of December 31, 2021 and 79% of revenues for the year then ended. Our audit of internal control over financial reporting of Custom Truck One Source, Inc. also did not include an evaluation of the internal control over financial reporting of Custom Truck LP.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit) and cash flows for the year ended December 31, 2021, and the related notes and financial statement schedules listed in the Index at Item 15 (a). These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report dated March 16, 2022, which expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 16, 2022
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Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
We maintain a code of ethics applicable to all of our employees, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. This code is publicly available on our website at https://investors.customtruck.com. If we make any amendments to this code other than technical, administrative or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this code, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website at https://investors.customtruck.com or in a Current Report on Form 8-K filed with the SEC
The remaining information required by this item is incorporated by reference to, the applicable information in our Proxy Statement related to the 2022 Annual Meeting of Stockholders, which is expected to be filed with the SEC on or before April 30, 2022.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to, the applicable information in our Proxy Statement related to the 2022 Annual Meeting of Stockholders, which is expected to be filed with the SEC on or before April 30, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this item is incorporated by reference to, the applicable information in our Proxy Statement related to the 2022 Annual Meeting of Stockholders, which is expected to be filed with the SEC on or before April 30, 2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to, the applicable information in our Proxy Statement related to the 2022 Annual Meeting of Stockholders, which is expected to be filed with the SEC on or before April 30, 2022.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to, the applicable information in our Proxy Statement related to the 2022 Annual Meeting of Stockholders, which is expected to be filed with the SEC on or before April 30, 2022.
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PART IV
Item 15. Exhibit and Financial Statement Schedules
(a) Financial Statement Schedule
86
Condensed Financial Information for Custom Truck One Source, Inc.
for the years ended December 31, 2021, 2020 and 2019
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Custom Truck One Source, Inc.
Condensed Parent Company Balance Sheets
| (in $000s, except share data) | December 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Investment in subsidiaries | $ | 890,590 | $ | — | |||||||
| Deferred income taxes | — | 24,869 | |||||||||
| Total Assets | $ | 890,590 | $ | 24,869 | |||||||
| Liabilities and Stockholders' Deficit | |||||||||||
| Liabilities | |||||||||||
| Derivative and warrants liabilities | $ | 21,605 | $ | — | |||||||
| Deferred income taxes | 15,644 | — | |||||||||
| Negative investment in subsidiaries | — | 61,105 | |||||||||
| Total long-term liabilities | 37,249 | 61,105 | |||||||||
| Commitments and contingencies (see Note 5) | |||||||||||
| Stockholders' Equity (Deficit) | |||||||||||
Common stock — 0.0001 par value, 500,000,000 shares authorized, 247,358,412 and 49,156,753 shares issued and outstanding, at December 31, 2021 and 2020, respectively | 25 | 5 | |||||||||
Treasury stock, at cost — 318,086 shares at December 31, 2021 | (3,020) | — | |||||||||
| Additional paid-in capital | 1,503,826 | 429,748 | |||||||||
| Accumulated deficit | (647,490) | (465,989) | |||||||||
| Total stockholders' equity (deficit) | 853,341 | (36,236) | |||||||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 890,590 | $ | 24,869 | |||||||
See accompanying notes to condensed parent company financial statements.
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Custom Truck One Source, Inc.
Condensed Parent Company Statements of Operations and Comprehensive Income (Loss)
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Selling, general, and administrative expenses | $ | 17,313 | $ | 2,357 | $ | 816 | |||||||||||
| Total operating expenses | 17,313 | 2,357 | 816 | ||||||||||||||
| Operating Loss | (17,313) | (2,357) | (816) | ||||||||||||||
| Other Expense | |||||||||||||||||
| Equity in net loss of subsidiaries | 148,948 | 48,994 | 32,222 | ||||||||||||||
| Other expense | 10,815 | — | — | ||||||||||||||
| Total other expense | 159,763 | 48,994 | 32,222 | ||||||||||||||
| Income (Loss) Before Income Taxes | (177,076) | (51,351) | (33,038) | ||||||||||||||
| Income Tax Expense (Benefit) | 4,425 | (30,074) | (5,986) | ||||||||||||||
| Net Income (Loss) | $ | (181,501) | $ | (21,277) | $ | (27,052) | |||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||
Interest rate collar (net of taxes of $285 in the year ended December 31, 2019) | $ | — | $ | — | $ | 396 | |||||||||||
| Other Comprehensive Income (Loss) | — | — | 396 | ||||||||||||||
| Comprehensive Income (Loss) | $ | (181,501) | $ | (21,277) | $ | (26,656) | |||||||||||
See accompanying notes to condensed parent company financial statements.
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Custom Truck One Source, Inc.
Condensed Parent Company Statements of Cash Flows
| Year Ended December 31, | |||||||||||||||||
| (in $000s) | 2021 | 2020 | 2019 | ||||||||||||||
| Operating Activities | |||||||||||||||||
| Net cash flow from operating activities | $ | (148,948) | $ | (48,994) | $ | (179,491) | |||||||||||
| Investing Activities | |||||||||||||||||
| Changes in investment in subsidiaries | (727,014) | 48,994 | 32,222 | ||||||||||||||
| Net cash flow from investing activities | (727,014) | 48,994 | 32,222 | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Proceeds from merger and recapitalization | — | — | 147,269 | ||||||||||||||
| Proceeds from issuance of common stock | 883,000 | — | — | ||||||||||||||
| Common stock issuance costs | (6,386) | — | — | ||||||||||||||
| Share-based payments | (652) | — | — | ||||||||||||||
| Net cash flow from financing activities | 875,962 | — | 147,269 | ||||||||||||||
| Net Change in Cash | — | — | — | ||||||||||||||
| Cash at Beginning of Period | — | — | — | ||||||||||||||
| Cash at End of Period | $ | — | $ | — | $ | — | |||||||||||
See accompanying notes to condensed parent company financial statements.
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Custom Truck One Source, Inc.
Notes to Condensed Parent Company Financial Statements
Note 1: Basis of Presentation
Custom Truck One Source, Inc. (the “Parent”), a Delaware corporation, serves as the parent for its two primary operating companies, Custom Truck One Source, L.P. and NESCO, LLC (the “Subsidiaries”). The Subsidiaries are engaged in the business of providing a range of services and products to customers through sales and rentals of specialty equipment, sales of parts related to the specialty equipment, and repair and maintenance services related to that equipment. On April 1, 2021, the Parent, through its wholly-owned subsidiary, NESCO Holdings II, Inc., acquired Custom Truck One Source, L.P. (the “Acquisition”). In connection with the Acquisition, the Parent issued shares of its common stock to certain investors and in exchange for the member interests of Custom Truck One Source, L.P. Additionally, NESCO Holdings II, Inc. issued new notes payable, proceeds from which were used for the Acquisition, to repay prior indebtedness and to pay transaction expenses. Refer to Note 3: Business Combination, to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about the Acquisition and related financing transactions.
These parent company condensed financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes thereto of Custom Truck One Source, Inc included in this Annual Report on Form 10-K. For purposes of these condensed financial statements, the Parent’s wholly owned subsidiaries are recorded based upon its proportionate share of the subsidiaries’ net assets (similar to presenting them on the equity method).
Note 2: Financial Instruments
The Parent’s derivatives and warrants liabilities are comprised of warrants (the “Warrants”) that provide for the purchase of approximately 20.9 million shares of the Parent’s common stock. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $11.50 per share, subject to certain adjustments. Refer to Note 16: Financial Instruments, to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about financial instruments.
Note 3: Debt
The Parent’s subsidiaries have debt obligations under a revolving credit facility that are guaranteed by the Parent and each of its direct and indirect, existing and future, material wholly-owned domestic subsidiaries. Obligations under the ABL will be secured by a first-priority lien on substantially all the assets of the Parent and its subsidiaries. The obligations contain customary financial and non-financial covenants, including covenants that impose restrictions on, among other things, additional indebtedness, liens, investments, advances, guarantees and mergers and acquisitions. These covenants also place restrictions on asset sales, dividends and certain transactions with affiliates. Refer to Note 9: Long-Term Debt, to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about the Parent’s subsidiaries’ debt obligations.
Note 4: Income Taxes
Refer to Note 17: Income Taxes, to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about subsidiaries’ income taxes.
Note 5: Commitments and Contingencies
Refer to Note 19: Commitments and Contingencies, to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about commitments and contingencies.
Note 6: Subsequent Events
Refer to Note 22: Subsequent Events to the Custom Truck One Source, Inc. consolidated financial statements included in this Annual Report on Form 10-K for information about subsequent events.
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Note 7: Changes in Stockholders’ Equity (Deficit)
The following table provides a reconciliation of the beginning and ending amounts of total stockholders’ equity (deficit) for the years ended December 31, 2021 and 2020.
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 49,033,903 | — | $ | 5 | $ | — | $ | 427,391 | $ | (444,712) | $ | (17,316) | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (21,277) | (21,277) | ||||||||||||||||||||||||||||||||||
| Share-based payments | 122,850 | — | — | — | 2,357 | — | 2,357 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 49,156,753 | — | $ | 5 | $ | — | $ | 429,748 | $ | (465,989) | $ | (36,236) | |||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (181,501) | (181,501) | ||||||||||||||||||||||||||||||||||
| Share-based payments | 1,501,659 | (318,086) | — | (3,020) | 19,839 | — | 16,819 | ||||||||||||||||||||||||||||||||||
| Warrants liability reclassification (see Note 2) | — | — | — | — | (10,290) | — | (10,290) | ||||||||||||||||||||||||||||||||||
| Shares issued in business combination | 196,700,000 | — | 20 | — | 1,064,529 | — | 1,064,549 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 247,358,412 | (318,086) | $ | 25 | $ | (3,020) | $ | 1,503,826 | $ | (647,490) | $ | 853,341 | |||||||||||||||||||||||||||||
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(b) Exhibits
| Exhibit No. | Description | |||||||
| 2.1† | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 10.1† | ||||||||
| 10.2 | ||||||||
| 10.3† | ||||||||
| 10.4 | ||||||||
| 10.5+ | ||||||||
| 10.6+ | ||||||||
| 10.7+ | ||||||||
| 10.8§ | ||||||||
| 10.9+ | ||||||||
| 10.10+ | ||||||||
| 10.11+ | ||||||||
| 10.12+ | ||||||||
| 10.13+ | ||||||||
| 10.14† | ||||||||
| 10.15* | ||||||||
| 10.16* | ||||||||
| 10.17* | ||||||||
| 10.18* | ||||||||
| 21.1* | ||||||||
| 23.1* | ||||||||
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| 23.2* | ||||||||
| 24.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32 ** | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
** This certificate is being furnished herewith solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
† The schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be provided to the SEC upon request.
+ Management contract or compensatory plan.
§ Certain information contained in this exhibit has been redacted pursuant to Item 601(a)(6) of Regulation S-K
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CUSTOM TRUCK ONE SOURCE, INC. (Registrant) | ||||||||
| Date: | March 16, 2022 | /s/ Fred Ross | ||||||
| Fred Ross, Chief Executive Officer | ||||||||
| Date: | March 16, 2022 | /s/ Bradley Meader | ||||||
| Bradley Meader, Chief Financial Officer | ||||||||
| Date: | March 16, 2022 | /s/ R. Todd Barrett | ||||||
| R. Todd Barrett, Chief Accounting Officer | ||||||||
POWER OF ATTORNEY
The undersigned directors and officers of CTOS hereby constitute and appoint Fred Ross, Bradley Meader, and R. Todd Barrett with full power to act as our true and lawful attorney-in-fact with full power to execute in our name and behalf in the capacities indicated below, this Annual Report on Form 10-K and any and all amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||||||||||||
/s/ Marshall Heinberg | Chairman of the Board | March 16, 2022 | ||||||||||||
Marshall Heinberg | ||||||||||||||
| /s/ Bryan Kelln | Director | March 16, 2022 | ||||||||||||
| Bryan Kelln | ||||||||||||||
| /s/ David Glatt | Director | March 16, 2022 | ||||||||||||
| David Glatt | ||||||||||||||
| /s/ David Wolf | Director | March 16, 2022 | ||||||||||||
| David Wolf | ||||||||||||||
| Name | Title | Date | ||||||||||||
| /s/ Fred Ross | Chief Executive Officer and Director | March 16, 2022 | ||||||||||||
| Fred Ross | ||||||||||||||
| /s/ Georgia Nelson | Director | March 16, 2022 | ||||||||||||
| Georgia Nelson | ||||||||||||||
| /s/ Louis Samson | Director | March 16, 2022 | ||||||||||||
| Louis Samson | ||||||||||||||
| /s/ Mark Ein | Director | March 16, 2022 | ||||||||||||
| Mark Ein | ||||||||||||||
| /s/ Paul Bader | Director | March 16, 2022 | ||||||||||||
| Paul Bader | ||||||||||||||
| /s/ Rahman D’Argenio | Director | March 16, 2022 | ||||||||||||
| Rahman D’Argenio | ||||||||||||||
| /s/ Bradley Meader | Chief Financial Officer | March 16, 2022 | ||||||||||||
| Bradley Meader | ||||||||||||||
| /s/ R. Todd Barrett | Chief Accounting Officer | March 16, 2022 | ||||||||||||
| R. Todd Barrett | ||||||||||||||