Custom Truck One Source, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
| ☐ | 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
_______________________________
CUSTOM TRUCK ONE SOURCE, INC.
(Exact name of registrant as specified in its charter)
_______________________________
| 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 | ||||||
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding as of November 2, 2022 was 246,590,393.
Custom Truck One Source, Inc. and Subsidiaries
TABLE OF CONTENTS
| PART I | FINANCIAL INFORMATION | Page Number | ||||||||||||
| Item 1. | Financial Statements | |||||||||||||
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 | ||||||||||||||
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2022 and 2021 | ||||||||||||||
| Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||||||||
| Item 4. | Controls and Procedures | |||||||||||||
| PART II | OTHER INFORMATION | |||||||||||||
| Item 1. | Legal Proceedings | |||||||||||||
| Item 1A. | Risk Factors | |||||||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||||||||
| Item 3. | Defaults Upon Senior Securities | |||||||||||||
| Item 4. | Mine Safety Disclosures | |||||||||||||
| Item 5. | Other Information | |||||||||||||
| Item 6. | Exhibits | |||||||||||||
| SIGNATURES | ||||||||||||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Custom Truck One Source, Inc.
Condensed Consolidated Balance Sheets (unaudited)
| (in $000s, except share data) | September 30, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 26,174 | $ | 35,902 | |||||||
| Accounts receivable, net | 176,969 | 168,394 | |||||||||
| Financing receivables, net | 32,967 | 28,649 | |||||||||
| Inventory | 555,811 | 410,542 | |||||||||
| Prepaid expenses and other | 9,989 | 13,217 | |||||||||
| Total current assets | 801,910 | 656,704 | |||||||||
| Property and equipment, net | 106,721 | 108,612 | |||||||||
| Rental equipment, net | 865,569 | 834,325 | |||||||||
| Goodwill | 703,411 | 695,865 | |||||||||
| Intangible assets, net | 310,888 | 327,840 | |||||||||
| Operating lease assets | 34,317 | 36,014 | |||||||||
| Other assets | 30,818 | 24,406 | |||||||||
| Total Assets | $ | 2,853,634 | $ | 2,683,766 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | 102,657 | $ | 91,123 | |||||||
| Accrued expenses | 70,569 | 60,337 | |||||||||
| Deferred revenue and customer deposits | 30,660 | 35,791 | |||||||||
| Floor plan payables - trade | 81,440 | 72,714 | |||||||||
| Floor plan payables - non-trade | 267,480 | 165,239 | |||||||||
| Operating lease liabilities - current | 5,514 | 4,987 | |||||||||
| Current maturities of long-term debt | 1,588 | 6,354 | |||||||||
| Current portion of finance lease obligations | 2,471 | 4,038 | |||||||||
| Total current liabilities | 562,379 | 440,583 | |||||||||
| Long-term debt, net | 1,362,926 | 1,308,265 | |||||||||
| Finance leases | 3,265 | 5,109 | |||||||||
| Operating lease liabilities - noncurrent | 29,630 | 31,514 | |||||||||
| Deferred income taxes | 28,113 | 15,621 | |||||||||
| Derivative, warrants and other liabilities | 5,291 | 24,164 | |||||||||
| Total long-term liabilities | 1,429,225 | 1,384,673 | |||||||||
| Commitments and contingencies (see Note 15) | |||||||||||
| Stockholders' Equity | |||||||||||
Common stock — $0.0001 par value, 500,000,000 shares authorized, 248,069,853 and 247,358,412 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively | 25 | 25 | |||||||||
Treasury stock, at cost — 878,837 and 318,086 shares at September 30, 2022 and December 31, 2021, respectively | (6,903) | (3,020) | |||||||||
| Additional paid-in capital | 1,518,717 | 1,508,995 | |||||||||
| Accumulated other comprehensive loss | (10,287) | — | |||||||||
| Accumulated deficit | (639,522) | (647,490) | |||||||||
| Total stockholders' equity | 862,030 | 858,510 | |||||||||
| Total Liabilities and Stockholders' Equity | $ | 2,853,634 | $ | 2,683,766 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s, except per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Rental revenue | $ | 115,010 | $ | 109,108 | $ | 336,210 | $ | 255,936 | |||||||||||||||
| Equipment sales | 210,903 | 217,163 | 656,595 | 482,825 | |||||||||||||||||||
| Parts sales and services | 31,867 | 31,034 | 93,557 | 71,954 | |||||||||||||||||||
| Total revenue | 357,780 | 357,305 | 1,086,362 | 810,715 | |||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||
| Cost of rental revenue | 28,207 | 25,932 | 82,791 | 71,873 | |||||||||||||||||||
| Depreciation of rental equipment | 42,612 | 50,153 | 130,900 | 111,176 | |||||||||||||||||||
| Cost of equipment sales | 173,588 | 191,991 | 545,461 | 434,995 | |||||||||||||||||||
| Cost of parts sales and services | 25,201 | 23,977 | 71,787 | 60,510 | |||||||||||||||||||
| Total cost of revenue | 269,608 | 292,053 | 830,939 | 678,554 | |||||||||||||||||||
| Gross Profit | 88,172 | 65,252 | 255,423 | 132,161 | |||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | 49,835 | 48,625 | 152,269 | 111,939 | |||||||||||||||||||
| Amortization | 6,794 | 13,334 | 27,000 | 27,420 | |||||||||||||||||||
| Non-rental depreciation | 1,938 | 873 | 7,302 | 1,845 | |||||||||||||||||||
| Transaction expenses and other | 6,498 | 7,742 | 17,192 | 42,765 | |||||||||||||||||||
| Total operating expenses | 65,065 | 70,574 | 203,763 | 183,969 | |||||||||||||||||||
| Operating Income (Loss) | 23,107 | (5,322) | 51,660 | (51,808) | |||||||||||||||||||
| Other Expense | |||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 61,695 | |||||||||||||||||||
| Interest expense, net | 22,887 | 19,045 | 62,324 | 53,674 | |||||||||||||||||||
| Financing and other expense (income) | (1,747) | (3,656) | (25,905) | 143 | |||||||||||||||||||
| Total other expense | 21,140 | 15,389 | 36,419 | 115,512 | |||||||||||||||||||
| Income (Loss) Before Income Taxes | 1,967 | (20,711) | 15,241 | (167,320) | |||||||||||||||||||
| Income Tax Expense (Benefit) | 4,349 | (186) | 7,273 | 10,468 | |||||||||||||||||||
| Net Income (Loss) | $ | (2,382) | $ | (20,525) | $ | 7,968 | $ | (177,788) | |||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||
| Unrealized foreign currency translation adjustments | $ | (7,651) | $ | — | $ | (10,287) | $ | — | |||||||||||||||
| Other Comprehensive Income (Loss) | (7,651) | — | (10,287) | — | |||||||||||||||||||
| Comprehensive Income (Loss) | $ | (10,033) | $ | (20,525) | $ | (2,319) | $ | (177,788) | |||||||||||||||
| Net Income (Loss) Per Share: | |||||||||||||||||||||||
| Basic | $ | (0.01) | $ | (0.08) | $ | 0.03 | $ | (0.99) | |||||||||||||||
| Diluted | $ | (0.01) | $ | (0.08) | $ | 0.03 | $ | (0.99) | |||||||||||||||
| Weighted-Average Common Shares Outstanding: | |||||||||||||||||||||||
| Basic (in thousands) | 247,704 | 244,292 | 247,448 | 179,785 | |||||||||||||||||||
| Diluted (in thousands) | 247,704 | 244,292 | 247,926 | 179,785 | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | 7,968 | $ | (177,788) | |||||||
| Adjustments to reconcile net income (loss) to net cash flow from operating activities: | |||||||||||
| Depreciation and amortization | 171,121 | 145,967 | |||||||||
| Amortization of debt issuance costs | 3,485 | 3,416 | |||||||||
| Loss on extinguishment of debt | — | 61,695 | |||||||||
| Provision for losses on accounts receivable | 5,905 | 8,391 | |||||||||
| Share-based compensation | 9,526 | 12,716 | |||||||||
| Gain on sales and disposals of rental equipment | (35,064) | (8,636) | |||||||||
| Change in fair value of derivative and warrants | (18,013) | 5,453 | |||||||||
| Deferred tax expense | 6,792 | 10,003 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts and financing receivables | (17,637) | (33,217) | |||||||||
| Inventories | (155,111) | 79,040 | |||||||||
| Prepaids, operating leases and other | 2,475 | (2,115) | |||||||||
| Accounts payable | 9,900 | (2,450) | |||||||||
| Accrued expenses and other liabilities | 9,397 | 16,955 | |||||||||
| Floor plan payables - trade, net | 8,726 | (12,485) | |||||||||
| Customer deposits and deferred revenue | (5,126) | 5,810 | |||||||||
| Net cash flow from operating activities | 4,344 | 112,755 | |||||||||
| Investing Activities | |||||||||||
| Acquisition of business, net of cash acquired | (49,832) | (1,337,686) | |||||||||
| Purchases of rental equipment | (224,002) | (141,142) | |||||||||
| Proceeds from sales and disposals of rental equipment | 135,436 | 62,617 | |||||||||
| Other investing activities, net | (15,529) | (3,404) | |||||||||
| Net cash flow from investing activities | (153,927) | (1,419,615) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from debt | — | 947,420 | |||||||||
| 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 | (1,250) | (652) | |||||||||
| Borrowings under revolving credit facilities | 87,000 | 461,084 | |||||||||
| Repayments under revolving credit facilities | (34,945) | (307,056) | |||||||||
| Repayments of notes payable | (6,126) | (497,047) | |||||||||
| Finance lease payments | (3,308) | (4,382) | |||||||||
| Repurchase of common stock | (1,752) | — | |||||||||
| Acquisition of inventory through floor plan payables - non-trade | 451,202 | 184,950 | |||||||||
| Repayment of floor plan payables - non-trade | (348,961) | (248,234) | |||||||||
| Payment of debt issuance costs | — | (34,694) | |||||||||
| Net cash flow from financing activities | 141,860 | 1,324,534 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2,005) | — | |||||||||
| Net Change in Cash and Cash Equivalents | (9,728) | 17,674 | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 35,902 | 3,412 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 26,174 | $ | 21,086 | |||||||
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) — Continued
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Supplemental Cash Flow Information | |||||||||||
| Interest paid | $ | 44,414 | $ | 44,786 | |||||||
| Income taxes paid | — | 217 | |||||||||
| Non-Cash Investing and Financing Activities | |||||||||||
| Non-cash consideration - acquisition of business | — | 187,935 | |||||||||
| Rental equipment sales in accounts receivable | 747 | 1,429 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (unaudited)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 247,358,412 | (318,086) | $ | 25 | $ | (3,020) | $ | 1,508,995 | $ | — | $ | (647,490) | $ | 858,510 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (3,273) | (3,273) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 102,630 | (21,505) | — | (287) | 3,559 | — | — | 3,272 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 247,461,042 | (339,591) | $ | 25 | $ | (3,307) | $ | 1,512,554 | $ | — | $ | (650,763) | $ | 858,509 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | 13,623 | 13,623 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (2,636) | — | (2,636) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 607,561 | (150,420) | — | (1,156) | 1,785 | — | — | 629 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 248,068,603 | (490,011) | $ | 25 | $ | (4,463) | $ | 1,514,339 | $ | (2,636) | $ | (637,140) | $ | 870,125 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (2,382) | (2,382) | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (7,651) | — | (7,651) | ||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (388,521) | — | (2,437) | — | — | — | (2,437) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 1,250 | (305) | — | (3) | 4,378 | — | — | 4,375 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | 248,069,853 | (878,837) | $ | 25 | $ | (6,903) | $ | 1,518,717 | $ | (10,287) | $ | (639,522) | $ | 862,030 | ||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 49,156,753 | — | $ | 5 | $ | — | $ | 434,917 | $ | — | $ | (465,989) | $ | (31,067) | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (27,907) | (27,907) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 62,630 | — | — | — | 597 | — | — | 597 | ||||||||||||||||||||||||||||||||||||||||||
| Warrants liability | — | — | — | — | (10,290) | — | — | (10,290) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 49,219,383 | — | $ | 5 | $ | — | $ | 425,224 | $ | — | $ | (493,896) | $ | (68,667) | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (129,356) | (129,356) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 1,118,846 | (235,856) | — | (2,256) | 9,618 | — | — | 7,362 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued in business combination | 196,700,000 | — | 20 | — | 1,064,529 | — | — | 1,064,549 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 247,038,229 | (235,856) | $ | 25 | $ | (2,256) | $ | 1,499,371 | $ | — | $ | (623,252) | $ | 873,888 | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | (20,525) | (20,525) | ||||||||||||||||||||||||||||||||||||||||||
| Share-based payments | 267,434 | (80,590) | — | (751) | 4,883 | — | — | 4,132 | ||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 247,305,663 | (316,446) | $ | 25 | $ | (3,007) | $ | 1,504,254 | $ | — | $ | (643,777) | $ | 857,495 | ||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
Custom Truck One Source, Inc.
Notes to Unaudited Condensed 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 Combinations, 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”).
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.
7
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 our customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.
Supply Chain
The Company purchases raw materials, component parts and finished goods to be used in the manufacturing, sale and rental of its products. Uncertainty remains regarding supply chain disruptions, inflationary pressures, public health crises, and geopolitical risks that have led to issues, broadly, in the global flow of goods and services (the “supply chain”). Changes in the Company’s relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to suppliers or customers, could have a material adverse effect on the Company’s 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 the Company’s inability to market products. The unprecedented nature of the supply chain disruptions continues to make it difficult to predict the Company’s future business and financial performance. The Company continues to monitor the impact on its supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in the Company’s production and manufacturing processes and the ongoing semiconductor shortage, which 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 condensed 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 Unaudited Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the current interim period ended or comparable prior period. 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 September 30, 2022 and since the date of the Acquisition. Financial information presented for periods prior to the Acquisition represent those of Nesco Holdings and its subsidiaries.
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and the Condensed Consolidated Balance Sheet at December 31, 2021, has been derived from the audited consolidated financial statements of Custom Truck One Source, Inc. at that date. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements, have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Custom Truck One Source, Inc. audited consolidated financial statements included in the Custom Truck One Source, Inc. Annual Report on Form 10-K for the year ended December 31, 2021.
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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Accounting Pronouncements Issued Not Yet Adopted
Supplier Finance Programs. In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-04, Liabilities-Supplier Finance Programs (“ASU 2022-04”), which requires that a buyer in a supplier finance program disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature and effects of those programs on an entity’s working capital, liquidity, and cash flows. ASU 2022-04 is effective for the Company in the first quarter of 2023 and early adoption is permitted. The Company plans to adopt the disclosure requirements of ASU 2022-04 in the first quarter of 2023.
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 was $14.0 million and $10.8 million as of September 30, 2022 and December 31, 2021, respectively, and is included in accounts receivable, net on our Condensed Consolidated Balance Sheets.
Note 3: Business Combinations
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”).
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.
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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 of Custom Truck One Source, L.P. 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 12: Fair Value Measurements).
The following table summarizes the April 1, 2021 fair values of the assets acquired and liabilities assumed. Since the Closing Date, 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. The final assessment of the fair value of the Custom Truck LP assets acquired and liabilities assumed was complete as of March 31, 2022.
| (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.
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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. Approximately $265.4 million of the goodwill is expected to be deductible for income tax purposes.
Goodwill attributable to the Acquisition is assigned to our Segments as follows:
| (in $000s) | |||||
ERS | $ | 261,607 | |||
TES | 167,307 | ||||
APS | 28,899 | ||||
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, which commenced 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 previously issued by Nesco Holdings, 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 three and nine months ended September 30, 2021 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 three and nine months ended September 30, 2021 and applies these costs and charges 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 condensed consolidated financial statements in the three and nine months ended September 30, 2021 related to a special charge, which is not expected to recur; (3) adjusts for the impacts of purchase accounting in the nine months ended September 30, 2021; (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 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.
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| Three Months Ended | Nine Months Ended | |||||||||||||
| (in $000s) | September 30, 2021 | September 30, 2021 | ||||||||||||
| Revenue | $ | 357,305 | $ | 1,127,186 | ||||||||||
| Net income (loss) | $ | (14,956) | $ | (87,884) | ||||||||||
The following presents a summary of the pro forma adjustments that are directly attributable to the business combination:
| Three Months Ended | Nine Months Ended | |||||||||||||
| (in $000s) | September 30, 2021 | September 30, 2021 | ||||||||||||
| Increase (decrease) net income/loss: | ||||||||||||||
| Impact of fair value mark-ups on inventory | a | $ | 7,426 | $ | 17,752 | |||||||||
| Impact of fair value mark-ups on rental fleet depreciation | b | — | (3,817) | |||||||||||
| Intangible asset amortization and other depreciation expense | c | — | (3,377) | |||||||||||
| Transaction expenses | d | — | 40,277 | |||||||||||
| Interest expense and amortization of debt issuance costs | e | — | 3,919 | |||||||||||
| Loss on extinguishment of debt refinanced | f | — | 61,695 | |||||||||||
| Income tax expense | g | (1,857) | (29,112) | |||||||||||
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 three and nine months ended September 30, 2021.
b.Represents the adjustment for depreciation of rental fleet relating to the 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 three and nine months ended September 30, 2021.
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.Loss on extinguishment of debt represents a special charge, which is not expected to recur. Such charges are adjustments pursuant to our credit agreement.
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 $7.7 million and $42.8 million in transaction costs related to the Acquisition within Transaction expenses during the three and nine months ended September 30, 2021, respectively.
Acquisition of HiRail
On January 14, 2022, a subsidiary of the Company, CTOS Canada, Ltd., closed a Share Purchase Agreement with certain affiliates of Ontario Limited (d/b/a HiRail Leasing), Ontario Inc. (d/b/a Heavy Equipment Repairs), and Ontario Limited (d/b/a Northshore Rail Contracting) (collectively “HiRail”) to acquire 100% of the equity interests of HiRail. The acquisition of HiRail expands our presence in our strategic markets and deepens our relationships with key customers. HiRail, including the assignment of purchase accounting goodwill (see below), is included in the Company’s ERS segment.
Purchase Price
The Company paid $51.0 million, net of working capital adjustments, to HiRail equity interest holders and to repay debt obligations as consideration for the HiRail acquisition.
Opening Balance Sheet
The Acquisition of HiRail has been accounted for using the acquisition method of accounting. 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 January 14, 2022. The excess of the purchase price over those fair values is recorded as goodwill and is attributable to expanded access to markets for our product and service offering, synergies, and broader product offerings to existing customers of HiRail. The total purchase price has been preliminarily assigned to the underlying assets acquired and liabilities assumed based upon their preliminary fair values as of January 14, 2022, 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 12: Fair Value Measurements).
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The following table summarizes as of January 14, 2022, fair values of the assets acquired and liabilities assumed. The final assessment of the fair value of the HiRail assets acquired and liabilities assumed, including estimates of fair values for inventory, property and equipment, rental equipment, certain intangible assets and deferred income taxes was not complete as of September 30, 2022. The preliminary fair values are subject to change, pending a final determination of the fair values of assets acquired and liabilities assumed as more information is received about their respective values. As of September 30, 2022, the Company is in the process of determining the value of intangible assets acquired related to customer relationships.
| (in $000s) | January 14, 2022 | Changes | September 30, 2022 | ||||||||||||||
| Current assets | $ | 2,891 | $ | 956 | $ | 3,847 | |||||||||||
| Property, equipment and other assets | 819 | — | 819 | ||||||||||||||
| Rental equipment | 34,224 | — | 34,224 | ||||||||||||||
| Total identifiable assets acquired | 37,934 | 956 | 38,890 | ||||||||||||||
| Total identifiable liabilities assumed | (6,011) | (1,314) | (7,325) | ||||||||||||||
| Total net assets | 31,923 | (358) | 31,565 | ||||||||||||||
| Goodwill | 8,685 | (323) | 8,362 | ||||||||||||||
| Intangible assets | 11,027 | — | 11,027 | ||||||||||||||
| Net assets acquired (purchase price) | 51,635 | (681) | 50,954 | ||||||||||||||
| Less: cash acquired | (1,122) | — | (1,122) | ||||||||||||||
| Net cash paid | $ | 50,513 | $ | (681) | $ | 49,832 | |||||||||||
Since January 14, 2022, HiRail has generated $3.8 million and $11.7 million of revenue and $1.6 million and $2.3 million of pre-tax income since January 14, 2022, which are included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2022, respectively. Costs and expenses related to the acquisition were expensed as incurred and were not material. Additionally, pro forma information as if the acquisition of HiRail had occurred on January 1, 2021 is not being presented as the information is not considered material to our consolidated financial statements.
Note 4: Revenue
Revenue Disaggregation
Geographic Areas
The Company had total revenue in the following geographic areas:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| United States | $ | 347,093 | $ | 351,391 | $ | 1,056,324 | $ | 798,372 | |||||||||||||||
| Canada | 10,687 | 5,914 | 30,038 | 12,343 | |||||||||||||||||||
| Total revenue | $ | 357,780 | $ | 357,305 | $ | 1,086,362 | $ | 810,715 | |||||||||||||||
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Major Product Lines and Services
Equipment leasing and equipment sales are the core businesses of the Company, with leasing complemented by the sale of rental units from the rental fleet. The Company’s revenue by major product and service line for the three and nine months ended September 30, 2022 and 2021 are presented in the tables below.
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in $000s) | Topic 842 | Topic 606 | Total | Topic 842 | Topic 606 | Total | |||||||||||||||||||||||||||||
| Rental: | |||||||||||||||||||||||||||||||||||
| Rental | $ | 110,054 | $ | — | $ | 110,054 | $ | 105,165 | $ | — | $ | 105,165 | |||||||||||||||||||||||
| Shipping and handling | — | 4,956 | 4,956 | — | 3,943 | 3,943 | |||||||||||||||||||||||||||||
| Total rental revenue | 110,054 | 4,956 | 115,010 | 105,165 | 3,943 | 109,108 | |||||||||||||||||||||||||||||
| Sales and services: | |||||||||||||||||||||||||||||||||||
| Equipment sales | 4,456 | 206,447 | 210,903 | 6,905 | 210,258 | 217,163 | |||||||||||||||||||||||||||||
| Parts and services | 970 | 30,897 | 31,867 | 1,940 | 29,094 | 31,034 | |||||||||||||||||||||||||||||
| Total sales and services | 5,426 | 237,344 | 242,770 | 8,845 | 239,352 | 248,197 | |||||||||||||||||||||||||||||
| Total revenue | $ | 115,480 | $ | 242,300 | $ | 357,780 | $ | 114,010 | $ | 243,295 | $ | 357,305 | |||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| (in $000s) | Topic 842 | Topic 606 | Total | Topic 842 | Topic 606 | Total | |||||||||||||||||||||||||||||
| Rental: | |||||||||||||||||||||||||||||||||||
| Rental | $ | 322,634 | $ | — | $ | 322,634 | $ | 246,064 | $ | — | $ | 246,064 | |||||||||||||||||||||||
| Shipping and handling | — | 13,576 | 13,576 | — | 9,872 | 9,872 | |||||||||||||||||||||||||||||
| Total rental revenue | 322,634 | 13,576 | 336,210 | 246,064 | 9,872 | 255,936 | |||||||||||||||||||||||||||||
| Sales and services: | |||||||||||||||||||||||||||||||||||
| Equipment sales | 20,572 | 636,023 | 656,595 | 13,711 | 469,114 | 482,825 | |||||||||||||||||||||||||||||
| Parts and services | 8,949 | 84,608 | 93,557 | 4,740 | 67,214 | 71,954 | |||||||||||||||||||||||||||||
| Total sales and services | 29,521 | 720,631 | 750,152 | 18,451 | 536,328 | 554,779 | |||||||||||||||||||||||||||||
| Total revenue | $ | 352,155 | $ | 734,207 | $ | 1,086,362 | $ | 264,515 | $ | 546,200 | $ | 810,715 | |||||||||||||||||||||||
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.
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, the discussions below on credit risk and the Company's allowance for credit losses address the Company's total revenues.
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. The Company recorded bad debt expense as reductions of rental revenue in accordance with the collectability provisions of Topic 842 of $0 million and $0.7 million during the three months ended September 30, 2022 and 2021, respectively, and $1.7 million and $6.8 million during the nine months ended September 30, 2022 and 2021, respectively. The Company recorded changes in its allowances for credit losses within selling, general, and administrative expense in its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) of $0.4 million and $0.2 million, during the three months ended September 30, 2022 and 2021, respectively, and $2.6 million and $1.5 million, during the nine months ended September 30, 2022 and 2021, respectively.
When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of September 30, 2022 and December 31, 2021, the Company had approximately $2.1 million and $2.9 million, respectively, of deferred rental revenue.
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Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $28.6 million and $32.9 million in deposits as of September 30, 2022 and December 31, 2021, respectively. Of the $32.9 million deposit liability balance as of December 31, 2021, $31.7 million was recorded as revenue during the nine months ended September 30, 2022 due to performance obligations being satisfied. The Company’s remaining performance obligations on its equipment deposit liabilities have original expected durations of one year or less.
The Company does not have material contract assets, and as such 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: Sales-Type Leases
Revenue from sales-type leases was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Equipment sales | $ | 7,099 | $ | 6,905 | $ | 27,007 | $ | 13,711 | |||||||||||||||
| Cost of equipment sales | 5,938 | 6,592 | 23,073 | 11,588 | |||||||||||||||||||
| Gross profit (loss) | $ | 1,161 | $ | 313 | $ | 3,934 | $ | 2,123 | |||||||||||||||
As these transactions remained under rental contracts, $5.1 million and $3.2 million for the three months ended September 30, 2022 and 2021, respectively, and $15.6 million and $6.0 million for the nine months ended September 30, 2022 and 2021, respectively, were billed under the contracts as rentals.
Note 6: Inventory
Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, serial lifts, digger derricks, dump bodies, etc.) and the in-process costs incurred in the final assembly of those units. As part of the business model, the Company sells 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. Inventory consisted of the following:
| (in $000s) | September 30, 2022 | December 31, 2021 | |||||||||
| Whole goods | $ | 434,398 | $ | 326,641 | |||||||
| Aftermarket parts and services inventory | 121,413 | 83,901 | |||||||||
| Inventory | $ | 555,811 | $ | 410,542 | |||||||
Note 7: Rental Equipment
Rental equipment, net consisted of the following:
| (in $000s) | September 30, 2022 | December 31, 2021 | |||||||||
| Rental equipment | $ | 1,329,079 | $ | 1,247,375 | |||||||
| Less: accumulated depreciation | (463,510) | (413,050) | |||||||||
| Rental equipment, net | $ | 865,569 | $ | 834,325 | |||||||
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Note 8: Long-Term Debt
Debt obligations and associated interest rates consisted of the following:
| (in $000s) | September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||
| ABL Facility | $ | 447,000 | $ | 394,945 | 4.7% | 1.8% | |||||||||||||||||
| 2029 Secured Notes | 920,000 | 920,000 | 5.5% | 5.5% | |||||||||||||||||||
| Notes payable | 26,575 | 32,619 | 3.1%-5.0% | 3.0%-5.0% | |||||||||||||||||||
| Total debt outstanding | 1,393,575 | 1,347,564 | |||||||||||||||||||||
| Deferred finance fees | (29,061) | (32,945) | |||||||||||||||||||||
| Net debt | 1,364,514 | 1,314,619 | |||||||||||||||||||||
| Less: current maturities | (1,588) | (6,354) | |||||||||||||||||||||
| Long-term debt | $ | 1,362,926 | $ | 1,308,265 | |||||||||||||||||||
As of September 30, 2022, borrowing availability under the ABL Facility was $300.1 million, and outstanding standby letters of credit were $2.9 million.
Note 9: Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of shares of Common Stock outstanding. Diluted earnings (loss) per share includes the effects of potentially dilutive shares of Common Stock. Potentially dilutive effects include contingently issuable shares and share-based compensation. Our potentially dilutive shares aggregated 26.4 million and 25.4 million for the three and nine months ended September 30, 2022, respectively, and 25.0 million and 26.0 million for the three and nine months ended September 30, 2021, respectively, and included warrants, contingently issuable shares, and share-based compensation, and were not included in the computation of diluted earnings (loss) per share because they would be anti-dilutive.
The following tables set forth the computation of basic and dilutive earnings (loss) per share:
| Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
| (in $000s, except per share data) | Net Income (Loss) | Weighted Average Shares | Per Share Amount | Net Income (Loss) | Weighted Average Shares | Per Share Amount | ||||||||||||||||||||||||||||||||
| Basic earnings (loss) | $ | (2,382) | 247,704 | $ | (0.01) | $ | (20,525) | 244,292 | $ | (0.08) | ||||||||||||||||||||||||||||
| Dilutive common share equivalents | — | — | ||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) | $ | (2,382) | 247,704 | $ | (0.01) | $ | (20,525) | 244,292 | $ | (0.08) | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
| (in $000s, except per share data) | Net Income (Loss) | Weighted Average Shares | Per Share Amount | Net Income (Loss) | Weighted Average Shares | Per Share Amount | ||||||||||||||||||||||||||||||||
| Basic earnings (loss) | $ | 7,968 | 247,448 | $ | 0.03 | $ | (177,788) | 179,785 | $ | (0.99) | ||||||||||||||||||||||||||||
| Dilutive common share equivalents | 478 | — | — | |||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) | $ | 7,968 | 247,926 | $ | 0.03 | $ | (177,788) | 179,785 | $ | (0.99) | ||||||||||||||||||||||||||||
Note 10: Equity
Preferred Stock
As of September 30, 2022 and December 31, 2021, we were authorized to issue 10,000,000 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 September 30, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
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Common Stock
As of September 30, 2022 and December 31, 2021, the Company was authorized to issue 500,000,000 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.
On August 2, 2022, the Company’s Board of Directors authorized a stock repurchase program, beginning in the third quarter of 2022, allowing for the repurchase of up to $30 million of the Company’s ordinary common shares. During the three and nine months ended September 30, 2022, the Company repurchased approximately 0.4 million of its common stock for a total of $2.4 million, including an accrual of $0.6 million and also commission fees for the repurchase of its common stock.
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 11: Share-Based Compensation
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, performance share units and deferred compensation.
Share-based compensation expense recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) was $4.4 million and $9.5 million for the three and nine months ended September 30, 2022, respectively, and $4.9 million and $12.7 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was approximately $35.9 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Amended and Restated 2019 Omnibus Incentive Plan. That cost is expected to be recognized over a weighted average period of approximately 2.0 years.
Note 12: Fair Value Measurements
The Financial Accounting Standards Board (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.
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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 | ||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| ABL Facility | $ | 447,000 | $ | — | $ | 447,000 | $ | — | |||||||||||||||
| 2029 Secured Notes | 920,000 | — | 761,300 | — | |||||||||||||||||||
| Other notes payable | 26,575 | — | 26,575 | — | |||||||||||||||||||
| Warrant liabilities | 5,291 | — | — | 5,291 | |||||||||||||||||||
| 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 | |||||||||||||||||||
The carrying amounts of the ABL Facility and other notes payable approximated fair value as of September 30, 2022 and December 31, 2021 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 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 13: 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 13: 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
Nesco Holdings’ 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 are hereafter referred to collectively as the “Warrants.”
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.
The Public Warrants are 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 have been accounted for as a derivative liability and remeasured at their estimated fair value each period. The Company recorded Financing and other (income) expense of approximately $0.8 million and $(0.9) million during the three months ended September 30, 2022 and 2021, respectively, and $(16.3) million and $8.1 million during the nine months ended September 30, 2022 and 2021, respectively, in its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) related to the fair value remeasurement.
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Note 14: Income Taxes
We are subject to income taxes primarily in the U.S. and Canada. Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. As a result of acquisitions and other transactions that have resulted in changes in control, certain of our federal and state net operating loss and interest expense carryforwards (collectively, “Carryforward Assets”) are subject to limitations prescribed by U.S. Internal Revenue Code Section 382 (“Section 382”) and similar rules in state and local taxing jurisdictions. We record a valuation allowance against deferred tax assets, including Carryforward 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. For interim periods, we estimate our annual effective tax rate, exclusive of discrete items, which is derived primarily by our estimate of our valuation allowance as of the end of our fiscal year. Excluding discrete items, our estimated annual effective tax rate for the year ending December 31, 2022 is approximately 14.0%. In the nine months ended September 30, 2022, discrete items, including derivative mark-to-market adjustments, transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our consolidated group, resulted in an overall effective tax rate in the period of 47.7%. The effect of these items resulted in approximately $7.3 million of tax expense being recognized in the nine months ended September 30, 2022. The Company’s effective tax rate for the nine months ended September 30, 2021 of negative 6.3%, which differed from the U.S. federal statutory tax rate due primarily to the recording of valuation allowances.
Note 15: 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 allow 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 Internal Revenue Code (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.
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.
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Note 16: 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.
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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Total revenues from transactions with related parties | $ | 8,385 | $ | 6,594 | $ | 27,128 | $ | 16,332 | |||||||||||||||
| Expenses incurred from transactions with related parties included in cost of revenue | $ | 297 | $ | 451 | $ | 2,109 | $ | 1,625 | |||||||||||||||
| Expenses incurred from transactions with related parties included in operating expenses | $ | 1,398 | $ | 1,497 | $ | 4,635 | $ | 3,127 | |||||||||||||||
Amounts receivable from/payable to related parties included in the Condensed Consolidated Balance Sheets are as follows:
| (in $000s) | September 30, 2022 | December 31, 2021 | |||||||||
| Accounts receivable from related parties | $ | 5,743 | $ | 5,145 | |||||||
| Accounts payable to related parties | $ | 46 | $ | 26 | |||||||
Note 17: 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. We 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.
20
The Company’s segment results are presented in the tables below:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 112,009 | $ | — | $ | 3,001 | $ | 115,010 | |||||||||||||||
| Equipment sales | 37,121 | 173,782 | — | 210,903 | |||||||||||||||||||
| Parts and services | — | — | 31,867 | 31,867 | |||||||||||||||||||
| Total revenue | 149,130 | 173,782 | 34,868 | 357,780 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 27,221 | — | 26,187 | 53,408 | |||||||||||||||||||
| Equipment sales | 27,015 | 146,573 | — | 173,588 | |||||||||||||||||||
| Depreciation of rental equipment | 41,776 | — | 836 | 42,612 | |||||||||||||||||||
| Total cost of revenue | 96,012 | 146,573 | 27,023 | 269,608 | |||||||||||||||||||
| Gross profit | $ | 53,118 | $ | 27,209 | $ | 7,845 | $ | 88,172 | |||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 105,124 | $ | — | $ | 3,984 | $ | 109,108 | |||||||||||||||
| Equipment sales | 27,101 | 190,062 | — | 217,163 | |||||||||||||||||||
| Parts and services | — | — | 31,034 | 31,034 | |||||||||||||||||||
| Total revenue | 132,225 | 190,062 | 35,018 | 357,305 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 24,622 | — | 25,287 | 49,909 | |||||||||||||||||||
| Equipment sales | 19,546 | 172,445 | — | 191,991 | |||||||||||||||||||
| Depreciation of rental equipment | 49,125 | — | 1,028 | 50,153 | |||||||||||||||||||
| Total cost of revenue | 93,293 | 172,445 | 26,315 | 292,053 | |||||||||||||||||||
| Gross profit | $ | 38,932 | $ | 17,617 | $ | 8,703 | $ | 65,252 | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 325,679 | $ | — | $ | 10,531 | $ | 336,210 | |||||||||||||||
| Equipment sales | 133,674 | 522,921 | — | 656,595 | |||||||||||||||||||
| Parts and services | — | — | 93,557 | 93,557 | |||||||||||||||||||
| Total revenue | 459,353 | 522,921 | 104,088 | 1,086,362 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 79,863 | — | 74,715 | 154,578 | |||||||||||||||||||
| Equipment sales | 100,663 | 444,798 | — | 545,461 | |||||||||||||||||||
| Depreciation of rental equipment | 128,126 | — | 2,774 | 130,900 | |||||||||||||||||||
| Total cost of revenue | 308,652 | 444,798 | 77,489 | 830,939 | |||||||||||||||||||
| Gross profit | $ | 150,701 | $ | 78,123 | $ | 26,599 | $ | 255,423 | |||||||||||||||
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| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2021 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | 244,935 | $ | — | $ | 11,001 | $ | 255,936 | |||||||||||||||
| Equipment sales | 70,141 | 412,684 | — | 482,825 | |||||||||||||||||||
| Parts and services | — | — | 71,954 | 71,954 | |||||||||||||||||||
| Total revenue | 315,076 | 412,684 | 82,955 | 810,715 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | 67,683 | — | 64,700 | 132,383 | |||||||||||||||||||
| Equipment sales | 60,815 | 374,180 | — | 434,995 | |||||||||||||||||||
| Depreciation of rental equipment | 108,202 | — | 2,974 | 111,176 | |||||||||||||||||||
| Total cost of revenue | 236,700 | 374,180 | 67,674 | 678,554 | |||||||||||||||||||
| Gross profit | $ | 78,376 | $ | 38,504 | $ | 15,281 | $ | 132,161 | |||||||||||||||
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.
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:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Gross Profit | $ | 88,172 | $ | 65,252 | $ | 255,423 | $ | 132,161 | |||||||||||||||
| Selling, general and administrative expenses | 49,835 | 48,625 | 152,269 | 111,939 | |||||||||||||||||||
| Amortization | 6,794 | 13,334 | 27,000 | 27,420 | |||||||||||||||||||
| Non-rental depreciation | 1,938 | 873 | 7,302 | 1,845 | |||||||||||||||||||
| Transaction expenses and other | 6,498 | 7,742 | 17,192 | 42,765 | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 61,695 | |||||||||||||||||||
| Interest expense, net | 22,887 | 19,045 | 62,324 | 53,674 | |||||||||||||||||||
| Financing and other expense (income) | (1,747) | (3,656) | (25,905) | 143 | |||||||||||||||||||
| Income (Loss) Before Income Taxes | $ | 1,967 | $ | (20,711) | $ | 15,241 | $ | (167,320) | |||||||||||||||
The following table presents total assets by country:
| (in $000s) | September 30, 2022 | December 31, 2021 | |||||||||
| Assets: | |||||||||||
| United States | $ | 2,753,347 | $ | 2,653,058 | |||||||
| Canada | 100,287 | 30,708 | |||||||||
| $ | 2,853,634 | $ | 2,683,766 | ||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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 the COVID-19 pandemic, 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;
•the phase-out of LIBOR and uncertainty as to its replacement; and
•uncertainties relating to macroeconomic conditions.
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 the Annual Report for the year ended December 31, 2021, and in Part II, Item 1A of this Quarterly Report on Form 10-Q, for additional risks.
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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 “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.
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 is presented on a pro forma basis to give effect to the following as if they occurred on January 1, 2020: (i) the acquisition of Custom Truck LP and related impacts of purchase accounting, (ii) borrowings under the new debt structure and (iii) repayment of previously existing debt of Nesco Holdings and Custom Truck LP.
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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 and other — Transaction expenses and other expense 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 expense (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.
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 — Ending original equipment cost (“OEC”) is the original equipment cost of units at the end of the measurement 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
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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.
Average OEC on rent — Average OEC on rent is calculated as the weighted-average OEC on rent during the stated period.
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
We operate in three reportable operating segments: Equipment Rental Solutions, Truck and Equipment Sales and Aftermarket Parts and Services.
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 September 30, 2022, this equipment (the “rental fleet”) is comprised of more than 9,600 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 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 our customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout our 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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-
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GAAP measure that we refer to is included in this Quarterly Report on Form 10-Q. 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, 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 nine-month periods ended September 30, 2021 in the section entitled “Supplemental Pro Forma Information.”
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.
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Results of Operations
Three months ended September 30, 2022 compared to three months ended September 30, 2021
The operating results and financial metrics presented below for the three months ended September 30, 2022 and 2021 and the three months ended June 30, 2022 include the results of Custom Truck LP for all periods presented.
Consolidated Results of Operations
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | % of revenue | September 30, 2021 | % of revenue | $ Change | % of change | June 30, 2022 | % of revenue | |||||||||||||||||||||||||||
| Rental revenue | $ | 115,010 | 32.1 | % | $ | 109,108 | 30.5 | % | $ | 5,902 | 5.4 | % | $ | 112,055 | 30.9 | % | |||||||||||||||||||
| Equipment sales | 210,903 | 58.9 | % | 217,163 | 60.8 | % | (6,260) | (2.9) | % | 218,506 | 60.3 | % | |||||||||||||||||||||||
| Parts sales and services | 31,867 | 8.9 | % | 31,034 | 8.7 | % | 833 | 2.7 | % | 31,545 | 8.7 | % | |||||||||||||||||||||||
| Total revenue | 357,780 | 100.0 | % | 357,305 | 100.0 | % | 475 | 0.1 | % | 362,106 | 100.0 | % | |||||||||||||||||||||||
| Cost of revenue, excluding rental equipment depreciation | 226,996 | 63.4 | % | 241,900 | 67.7 | % | (14,904) | (6.2) | % | 236,024 | 65.2 | % | |||||||||||||||||||||||
| Depreciation of rental equipment | 42,612 | 11.9 | % | 50,153 | 14.0 | % | (7,541) | (15.0) | % | 43,324 | 12.0 | % | |||||||||||||||||||||||
| Gross profit | 88,172 | 24.6 | % | 65,252 | 18.3 | % | 22,920 | 35.1 | % | 82,758 | 22.9 | % | |||||||||||||||||||||||
| Operating expenses | 65,065 | 70,574 | (5,509) | 64,013 | |||||||||||||||||||||||||||||||
| Operating income (loss) | 23,107 | (5,322) | 28,429 | 18,745 | |||||||||||||||||||||||||||||||
| Other expense | 21,140 | 15,389 | 5,751 | 5,203 | |||||||||||||||||||||||||||||||
| Income (loss) before income taxes | 1,967 | (20,711) | 22,678 | 13,542 | |||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 4,349 | (186) | 4,535 | (81) | |||||||||||||||||||||||||||||||
| Net income (loss) | $ | (2,382) | $ | (20,525) | $ | 18,143 | $ | 13,623 | |||||||||||||||||||||||||||
Total Revenue - The increase in total revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily due to an increase in rental revenue and rental equipment sales, partially offset by a decline in new and used equipment sales in our TES segment. Supply headwinds continued to impact our ability to complete and deliver new equipment during the three months ended September 30, 2022 despite strong customer demand for our products, as evidenced by the growth in our rentals and rental equipment sales and sales order backlog.
Cost of Revenue, Excluding Rental Equipment Depreciation - The decrease in cost of revenue, excluding rental equipment depreciation for the three months ended September 30, 2022 was driven primarily by the decrease in new equipment sales volume versus the three months ended September 30, 2021.
Depreciation of Rental Equipment - Depreciation of our rental fleet decreased in the three months ended September 30, 2022 as a result of the higher level of rental equipment sales.
Operating Expenses - Operating expenses decreased in the three months ended September 30, 2022 as a result of reduced intangible asset amortization expense from the retirement of certain trade names in the first quarter of 2022 and lower transaction and post-acquisition integration costs related to the Acquisition.
Other Expense - Other expense for the three months ended September 30, 2022 increased primarily due to the increase in interest expense from variable rate debt and floor plan financing liabilities. Additionally, other expense for the three months ended September 30, 2022 and 2021 includes mark-to-market income (loss) from the private warrants liability, which is accounted for as a derivative financial instrument.
Income Tax Expense (Benefit) - Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. In the three months ended September 30, 2022, discrete items, including derivative mark-to-market adjustments, transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our
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consolidated group, resulted in an overall effective tax rate in the period of 47.7%. The effect of these items resulted in approximately $7.3 million of tax expense being recognized in the three months ended September 30, 2022.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax for certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. The IRA is effective for tax years beginning after December 31, 2022. Based on our current analysis of the provisions, we do not believe this legislation will have a material effect on our consolidated financial statements. We will continue to monitor the additional guidance from the IRS.
Net Income (Loss) - The change in net income (loss) for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was the result of gross profit expansion, partially offset by higher interest expense on variable-rate debt and variable-rate floor plan liabilities.
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, as well as sales of used equipment. Our highly variable cost structure adjusts with the utilization of our equipment, thereby reducing our costs to match our revenue. We principally evaluate financial performance based on the following measurements: average OEC on rent, fleet utilization, and OEC on rent yield. We also report sales order backlog related to our customers’ orders for new vocational heavy duty trucks as an indicator of the demand environment for our products. The table below presents these key measures.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | Change | % Change | June 30, 2022 | % Change | |||||||||||||||||||||||||||||
| Ending OEC | $ | 1,428,800 | $ | 1,371,746 | $ | 57,054 | 4.2 | % | $ | 1,399,500 | 2.1 | % | |||||||||||||||||||||||
| Average OEC on rent | $ | 1,182,500 | $ | 1,103,562 | $ | 78,938 | 7.2 | % | $ | 1,150,400 | 2.8 | % | |||||||||||||||||||||||
| Fleet utilization | 83.8 | % | 81.4 | % | 2.4 | % | 2.9 | % | 82.8 | % | 1.2 | % | |||||||||||||||||||||||
| OEC on rent yield | 38.5 | % | 38.0 | % | 0.5 | % | 1.3 | % | 39.2 | % | (1.8) | % | |||||||||||||||||||||||
| Sales order backlog | $ | 709,180 | $ | 338,457 | $ | 370,723 | 109.5 | % | $ | 663,619 | 6.9 | % | |||||||||||||||||||||||
Ending OEC - The increase in Ending OEC compared to the three months ended September 30, 2021 was driven by positive net rental fleet additions in the current quarter and the acquisition of HiRail in the first quarter 2022.
Average OEC on Rent - The increase in Average OEC on rent compared to the three months ended September 30, 2021 was driven by fleet growth and continued strong rental demand.
Fleet Utilization - Fleet utilization increased compared to the three months ended September 30, 2021 as a result of the factors noted above.
OEC on Rent Yield - OEC on Rent Yield increased compared to the three months ended September 30, 2021 as a result of the impact of continued pricing increases, reflective of strong demand.
Sales Order Backlog - Sales order backlog consists of customer orders placed for customized and stock equipment. The increase in sales order backlog compared to the three months ended September 30, 2021 was driven by continued strong customer demand.
Adjusted EBITDA
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the three months ended September 30, 2022 and 2021 and the three months ended June 30, 2022. As previously noted, Adjusted EBITDA is a non-GAAP financial measure
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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.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | $ Change | % Change | June 30, 2022 | $ Change | |||||||||||||||||||||||||||||
| Net income (loss) | $ | (2,382) | $ | (20,525) | $ | 18,143 | 88.4 | % | $ | 13,623 | $ | (16,005) | |||||||||||||||||||||||
| Interest expense | 19,338 | 17,324 | 2,014 | 11.6 | % | 18,050 | 1,288 | ||||||||||||||||||||||||||||
| Income tax expense (benefit) | 4,349 | (186) | 4,535 | 2,438.2 | % | (81) | 4,430 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 54,001 | 66,804 | (12,803) | (19.2) | % | 54,620 | (619) | ||||||||||||||||||||||||||||
| EBITDA | 75,306 | 63,417 | 11,889 | 18.7 | % | 86,212 | (10,906) | ||||||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||||||||
Non-cash purchase accounting impact (1) | 3,408 | 6,046 | (2,638) | (43.6) | % | 2,367 | 1,041 | ||||||||||||||||||||||||||||
Transaction and integration costs (2) | 6,501 | 7,748 | (1,247) | (16.1) | % | 6,043 | 458 | ||||||||||||||||||||||||||||
Sales-type lease adjustment (3) | 1,232 | 3,783 | (2,551) | (67.4) | % | 2,032 | (800) | ||||||||||||||||||||||||||||
Share-based payments (4) | 4,378 | 4,856 | (478) | (9.8) | % | 1,784 | 2,594 | ||||||||||||||||||||||||||||
Change in fair value of derivative and warrants (5) | 809 | (1,427) | 2,236 | 156.7 | % | (13,055) | 13,864 | ||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 91,634 | $ | 84,423 | $ | 7,211 | 8.5 | % | $ | 85,383 | $ | 6,251 | |||||||||||||||||||||||
(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 credit agreement.
(2) Represents transaction costs related to acquisitions of businesses, which are recognized within operating expenses in our Condensed 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) Represents the impact of sales-type lease accounting for certain leases containing rental purchase options ("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 credit agreement.
| Three Months Ended | Three Months Ended June 30, 2022 | |||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | ||||||||||||||||||
| Equipment sales | $ | (7,099) | $ | (6,905) | $ | (7,671) | ||||||||||||||
| Cost of equipment sales | 5,938 | 6,592 | 6,765 | |||||||||||||||||
| Gross profit | (1,161) | (313) | (906) | |||||||||||||||||
| Interest (income) expense | (2,719) | 897 | (2,220) | |||||||||||||||||
| Rentals invoiced | 5,112 | 3,199 | 5,158 | |||||||||||||||||
| Sales-type lease adjustment | $ | 1,232 | $ | 3,783 | $ | 2,032 | ||||||||||||||
(4) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.
(5) Represents the change in fair value of the liability for warrants.
Operating Results by Segment
Equipment Rental Solutions (ERS) Segment
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | $ Change | % Change | June 30, 2022 | % Change | |||||||||||||||||||||||||||||
| Rental revenue | $ | 112,009 | $ | 105,124 | $ | 6,885 | 6.5 | % | $ | 108,109 | 3.6 | % | |||||||||||||||||||||||
| Equipment sales | 37,121 | 27,101 | 10,020 | 37.0 | % | 37,200 | (0.2) | % | |||||||||||||||||||||||||||
| Total revenue | 149,130 | 132,225 | 16,905 | 12.8 | % | 145,309 | 2.6 | % | |||||||||||||||||||||||||||
| Cost of rental revenue | 27,221 | 24,622 | 2,599 | 10.6 | % | 27,851 | (2.3) | % | |||||||||||||||||||||||||||
| Cost of equipment sales | 27,015 | 19,546 | 7,469 | 38.2 | % | 30,418 | (11.2) | % | |||||||||||||||||||||||||||
| Depreciation of rental equipment | 41,776 | 49,125 | (7,349) | (15.0) | % | 42,384 | (1.4) | % | |||||||||||||||||||||||||||
| Total cost of revenue | 96,012 | 93,293 | 2,719 | 2.9 | % | 100,653 | (4.6) | % | |||||||||||||||||||||||||||
| Gross profit | $ | 53,118 | $ | 38,932 | $ | 14,186 | 36.4 | % | $ | 44,656 | 18.9 | % | |||||||||||||||||||||||
Total Revenue - The increase in total revenue for the ERS segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was driven by an increase in revenues for rental equipment and equipment sales revenue.
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Continued demand across our infrastructure end-markets coupled with positive net fleet acquisition in the current year resulted in greater levels of fleet utilization.
Cost of Revenue - The increase in total cost of revenue for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was largely due to the increase in cost of equipment sales, resulting from an increase in demand for rental equipment purchases by our customers.
Depreciation - Depreciation of our rental fleet decreased resulting from the higher level of rental equipment sales in the current year.
Gross Profit - The increase in gross profit for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was due to the increase in rental revenues and equipment sales for the period.
Truck and Equipment Sales (TES) Segment
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | $ Change | % Change | June 30, 2022 | % Change | |||||||||||||||||||||||||||||
| Equipment sales | $ | 173,782 | $ | 190,062 | $ | (16,280) | (8.6) | % | $ | 181,306 | (4.1) | % | |||||||||||||||||||||||
| Cost of equipment sales | 146,573 | 172,445 | (25,872) | (15.0) | % | 154,177 | (4.9) | % | |||||||||||||||||||||||||||
| Gross profit | $ | 27,209 | $ | 17,617 | $ | 9,592 | 54.4 | % | $ | 27,129 | 0.3 | % | |||||||||||||||||||||||
Equipment Sales - Equipment sales decreased for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 due to supply chain challenges related to the segment's inventory suppliers. However, 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 decreased for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily due to the decrease in equipment sales, partially offset by an increase in equipment sales prices for the period.
Gross Profit - The increase in gross profit for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 is reflective of the positive pricing environment for our products.
Aftermarket Parts and Services (APS) Segment
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2022 | September 30, 2021 | $ Change | % Change | June 30, 2022 | % Change | |||||||||||||||||||||||||||||
| Rental revenue | $ | 3,001 | $ | 3,984 | $ | (983) | (24.7) | % | $ | 3,946 | (23.9) | % | |||||||||||||||||||||||
| Parts and services revenue | 31,867 | 31,034 | 833 | 2.7 | % | 31,545 | 1.0 | % | |||||||||||||||||||||||||||
| Total revenue | 34,868 | 35,018 | (150) | (0.4) | % | 35,491 | (1.8) | % | |||||||||||||||||||||||||||
| Cost of revenue | 26,187 | 25,287 | 900 | 3.6 | % | 23,578 | 11.1 | % | |||||||||||||||||||||||||||
| Depreciation of rental equipment | 836 | 1,028 | (192) | (18.7) | % | 940 | (11.1) | % | |||||||||||||||||||||||||||
| Total cost of revenue | 27,023 | 26,315 | 708 | 2.7 | % | 24,518 | 10.2 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 7,845 | $ | 8,703 | $ | (858) | (9.9) | % | $ | 10,973 | (28.5) | % | |||||||||||||||||||||||
Total Revenue - Total revenue decreased for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, driven by a decrease in project starts affecting tools and accessories rentals.
Cost of Revenue - Cost of revenue increased for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 due to product mix and expenses related to facilities maintenance.
Gross Profit - The decrease in gross profit was primarily due to the increased supply chain costs and product mix.
Results of Operations
Nine Months Ended September 30, 2022 compared to nine months ended September 30, 2021
The consolidated operating results for the nine months ended September 30, 2021 include Custom Truck LP from April 1, 2021 to September 30, 2021 and, therefore, are not comparable to the nine months ended September 30, 2022.
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Consolidated Results of Operations
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| (in $000s) | 2022 | % of revenue | 2021 | % of revenue | $ Change | % of change | ||||||||||||||||||||
| Rental revenue | $ | 336,210 | 30.9 | % | $ | 255,936 | 31.6% | $ | 80,274 | 31.4 | % | |||||||||||||||
| Equipment sales | 656,595 | 60.4 | % | 482,825 | 59.6% | 173,770 | 36.0 | % | ||||||||||||||||||
| Parts sales and services | 93,557 | 8.6 | % | 71,954 | 8.9% | 21,603 | 30.0 | % | ||||||||||||||||||
| Total revenue | 1,086,362 | 100.0 | % | 810,715 | 100.0% | 275,647 | 34.0 | % | ||||||||||||||||||
| Cost of revenue, excluding rental equipment depreciation | 700,039 | 64.4 | % | 567,378 | 70.0% | 132,661 | 23.4 | % | ||||||||||||||||||
| Depreciation of rental equipment | 130,900 | 12.0 | % | 111,176 | 13.7% | 19,724 | 17.7 | % | ||||||||||||||||||
| Gross profit | 255,423 | 23.5 | % | 132,161 | 16.3% | 123,262 | 93.3 | % | ||||||||||||||||||
| Operating expenses | 203,763 | 183,969 | 19,794 | |||||||||||||||||||||||
| Operating income (loss) | 51,660 | (51,808) | 103,468 | |||||||||||||||||||||||
| Other expense | 36,419 | 115,512 | (79,093) | |||||||||||||||||||||||
| Income (loss) before income taxes | 15,241 | (167,320) | 182,561 | |||||||||||||||||||||||
| Income tax expense (benefit) | 7,273 | 10,468 | (3,195) | |||||||||||||||||||||||
| Net income (loss) | $ | 7,968 | $ | (177,788) | $ | 185,756 | ||||||||||||||||||||
Total Revenue - The increase in revenue for the nine months ended September 30, 2022, 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 Rental Equipment Depreciation - Consistent with the increase in revenue versus the prior year period, the increase in cost of revenue, excluding rental equipment depreciation, 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 nine months ended September 30, 2022 was the addition of Custom Truck, LP’s operating expenses to our operating results.
Other Expense - The decrease in other expense for the nine months ended September 30, 2022 was largely driven by charges related to mark-to-market charges related to our private warrants, which are accounted for as a liability derivative instrument. Expenses for a loss on extinguishment of debt related to the closing of the Acquisition are included in the nine months ended September 30, 2021.
Income Tax Expense (Benefit) - Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. In the nine months ended September 30, 2022, discrete items, including derivative mark-to-market adjustments, transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our consolidated group, resulted in an overall effective tax rate in the period of 47.7%. The effect of these items resulted in approximately $7.3 million of tax expense being recognized in the nine months ended September 30, 2022.
Net Income (Loss) - The change in net income (loss) for the nine months ended September 30, 2022 was due to the addition of Custom Truck LP to our operating results, as well as significant transaction expenses included in the nine months ended September 30, 2021 connected to the closing of the Acquisition.
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Key Performance Measures
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | Change | % Change | |||||||||||||||||||
| Ending OEC | $ | 1,428,800 | $ | 1,371,746 | $ | 57,054 | 4.2 | % | |||||||||||||||
| Average OEC on rent | $ | 1,161,400 | $ | 1,078,947 | $ | 82,453 | 7.6 | % | |||||||||||||||
| Fleet utilization | 83.0 | % | 80.4 | % | 2.6 | % | 3.2 | % | |||||||||||||||
| OEC on rent yield | 38.9 | % | 37.5 | % | 1.4 | % | 3.7 | % | |||||||||||||||
| Sales order backlog | $ | 709,180 | $ | 338,457 | $ | 370,723 | 109.5 | % | |||||||||||||||
Ending OEC - The increase in Ending OEC was driven by positive net rental fleet additions in the current period and the acquisition of HiRail in the first quarter 2022.
Average OEC on Rent - The increase in Average OEC on rent was driven by fleet growth and continued strong rental demand.
Fleet Utilization - Fleet utilization increased as a result of the factors noted above.
OEC on Rent Yield - OEC on rent yield increased as a result of the impact of continued pricing increases, reflective of strong demand.
Sales Order Backlog - Sales order backlog consists of customer orders placed for customized and stock equipment. The increase in sales order backlog was driven by continued strong customer demand.
Adjusted EBITDA
The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the nine months ended September 30, 2022 and 2021. 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.
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||
| Net income (loss) | $ | 7,968 | $ | (177,788) | $ | 185,756 | 104.5 | % | |||||||||||||||
| Interest expense | 54,833 | 49,832 | 5,001 | 10.0 | % | ||||||||||||||||||
| Income tax expense (benefit) | 7,273 | 10,468 | (3,195) | (30.5) | % | ||||||||||||||||||
| Depreciation and amortization | 171,121 | 145,967 | 25,154 | 17.2 | % | ||||||||||||||||||
| EBITDA | 241,195 | 28,479 | 212,716 | 746.9 | % | ||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Non-cash purchase accounting impact (1) | 14,801 | 27,486 | (12,685) | (46.2) | % | ||||||||||||||||||
Transaction and integration costs (2) | 17,192 | 43,093 | (25,901) | (60.1) | % | ||||||||||||||||||
Loss on extinguishment of debt (3) | — | 61,695 | (61,695) | (100.0) | % | ||||||||||||||||||
Sales-type lease adjustment (4) | 3,793 | 3,273 | 520 | 15.9 | % | ||||||||||||||||||
Share-based payments (5) | 9,526 | 12,716 | (3,190) | (25.1) | % | ||||||||||||||||||
Change in fair value of derivative and warrants (6) | (18,013) | 5,453 | (23,466) | (430.3) | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 268,494 | $ | 182,195 | $ | 86,299 | 47.4 | % | |||||||||||||||
(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 Condensed 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 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.
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| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Equipment sales | $ | (27,007) | $ | (13,711) | |||||||
| Cost of equipment sales | 23,073 | 11,588 | |||||||||
| Gross profit | (3,934) | (2,123) | |||||||||
| Interest (income) expense | (7,827) | (622) | |||||||||
| Rentals invoiced | 15,554 | 6,018 | |||||||||
| Sales-type lease adjustment | $ | 3,793 | $ | 3,273 | |||||||
(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
The following segment information compares results by segment for the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The information for the period ended September 30, 2022 includes results of Custom Truck LP for the entire period, while information for the period ended September 30, 2021 include results of Custom Truck LP from April 1, 2021 to September 30, 2021. Accordingly, the year-over-year changes in all financial statement line items within each segment is attributable to the addition of Custom Truck LP on April 1, 2021. Refer to the Supplemental Pro Forma Information section in this filing that presents the consolidated results of the Company and Custom Truck LP for the nine months ended September 30, 2021.
Equipment Rental Solutions (ERS) Segment
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Rental revenue | $ | 325,679 | $ | 244,935 | |||||||
| Equipment sales | 133,674 | 70,141 | |||||||||
| Total revenue | 459,353 | 315,076 | |||||||||
| Cost of rental revenue | 79,863 | 67,683 | |||||||||
| Cost of equipment sales | 100,663 | 60,815 | |||||||||
| Depreciation of rental equipment | 128,126 | 108,202 | |||||||||
| Total cost of revenue | 308,652 | 236,700 | |||||||||
| Gross profit | $ | 150,701 | $ | 78,376 | |||||||
Truck and Equipment Sales (TES) Segment
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Equipment sales | $ | 522,921 | $ | 412,684 | |||||||
| Cost of equipment sales | 444,798 | 374,180 | |||||||||
| Gross profit | $ | 78,123 | $ | 38,504 | |||||||
Aftermarket Parts and Services (APS) Segment
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Rental revenue | $ | 10,531 | $ | 11,001 | |||||||
| Parts and services revenue | 93,557 | 71,954 | |||||||||
| Total revenue | 104,088 | 82,955 | |||||||||
| Cost of revenue | 74,715 | 64,700 | |||||||||
| Depreciation of rental equipment | 2,774 | 2,974 | |||||||||
| Total cost of revenue | 77,489 | 67,674 | |||||||||
| Gross profit | $ | 26,599 | $ | 15,281 | |||||||
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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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Summary Pro Forma Financial Information and Operational Data
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 Actual | 2021 Pro Forma | 2022 Actual | 2021 Pro Forma | |||||||||||||||||||
| Revenue | $ | 357,780 | $ | 357,305 | $ | 1,086,362 | $ | 1,127,186 | |||||||||||||||
| Gross profit | $ | 88,172 | $ | 72,678 | $ | 255,423 | $ | 199,132 | |||||||||||||||
| Net income (loss) | $ | (2,382) | $ | (14,956) | $ | 7,968 | $ | (87,884) | |||||||||||||||
| Adjusted EBITDA | $ | 91,634 | $ | 84,423 | $ | 268,494 | $ | 227,529 | |||||||||||||||
| Fleet and Operational Metrics: | |||||||||||||||||||||||
| Ending OEC | $ | 1,428,800 | $ | 1,371,746 | $ | 1,428,800 | $ | 1,371,746 | |||||||||||||||
| Average OEC on rent | $ | 1,182,500 | $ | 1,103,562 | $ | 1,161,400 | $ | 1,066,318 | |||||||||||||||
| Fleet utilization | 83.8 | % | 81.4 | % | 83.0 | % | 80.4 | % | |||||||||||||||
| OEC on rent yield | 38.5 | % | 38.0 | % | 38.9 | % | 37.5 | % | |||||||||||||||
| Sales order backlog | $ | 709,180 | $ | 338,457 | $ | 709,180 | $ | 338,457 | |||||||||||||||
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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 combine the Condensed 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 an accurate 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 condensed consolidated financial statements and related notes of the Company included elsewhere in this Quarterly Report on Form 10-Q. 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 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 Condensed Consolidated Statements of Net Income
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(Loss) for the periods indicated below are based on, derived from, and should be read in conjunction with, the Company’s historical financial statements.
Pro Forma Combined Condensed Consolidated Statement of Net Income (Loss) — Three Months Ended September 30, 2021
| (in $000s) | Custom Truck One Source, Inc. | Pro Forma Adjustmentsa | Pro Forma Combined | ||||||||||||||
| Rental revenue | $ | 109,108 | $ | — | $ | 109,108 | |||||||||||
| Equipment sales | 217,163 | — | 217,163 | ||||||||||||||
| Parts sales and services | 31,034 | — | 31,034 | ||||||||||||||
| Total revenue | 357,305 | — | 357,305 | ||||||||||||||
| Cost of revenue | 241,900 | (7,426) | b | 234,474 | |||||||||||||
| Depreciation of rental equipment | 50,153 | — | 50,153 | ||||||||||||||
| Total cost of revenue | 292,053 | (7,426) | 284,627 | ||||||||||||||
| Gross profit | 65,252 | 7,426 | 72,678 | ||||||||||||||
| Selling, general and administrative | 48,625 | — | 48,625 | ||||||||||||||
| Amortization | 13,334 | — | 13,334 | ||||||||||||||
| Non-rental depreciation | 873 | — | 873 | ||||||||||||||
| Transaction expenses and other | 7,742 | — | 7,742 | ||||||||||||||
| Total operating expenses | 70,574 | — | 70,574 | ||||||||||||||
| Operating income (loss) | (5,322) | 7,426 | 2,104 | ||||||||||||||
| Interest expense, net | 19,045 | — | 19,045 | ||||||||||||||
| Finance and other expense (income) | (3,656) | — | (3,656) | ||||||||||||||
| Total other expense | 15,389 | — | 15,389 | ||||||||||||||
| Income (loss) before taxes | (20,711) | 7,426 | (13,285) | ||||||||||||||
| Taxes | (186) | 1,857 | c | 1,671 | |||||||||||||
| Net income (loss) | $ | (20,525) | $ | 5,569 | $ | (14,956) | |||||||||||
a.The pro forma adjustments give effect to the following as if they occurred on January 1, 2020: (i) the Acquisition, and (ii) the extinguishment of Nesco Holdings’ 2019 Credit Facility and the 2024 Secured Notes repaid in connection with the Acquisition. The adjustments also give effect to transaction expenses directly attributable to 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 three months ended September 30, 2021. The impact of the step-up is reflected as an adjustment to the comparable prior period ended September 30, 2020 as if the Acquisition had occurred on January 1, 2020.
c.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 Condensed Consolidated Statement of Net Income (Loss) — Nine Months Ended September 30, 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 | $ | 255,936 | $ | 51,973 | $ | — | $ | 307,909 | |||||||||||||||
| Equipment sales | 482,825 | 245,955 | — | 728,780 | |||||||||||||||||||
| Parts sales and services | 71,954 | 18,543 | — | 90,497 | |||||||||||||||||||
| Total revenue | 810,715 | 316,471 | — | 1,127,186 | |||||||||||||||||||
| Cost of revenue | 567,378 | 240,678 | (17,752) | b | 790,304 | ||||||||||||||||||
| Depreciation of rental equipment | 111,176 | 22,757 | 3,817 | c | 137,750 | ||||||||||||||||||
| Total cost of revenue | 678,554 | 263,435 | (13,935) | 928,054 | |||||||||||||||||||
| Gross profit | 132,161 | 53,036 | 13,935 | 199,132 | |||||||||||||||||||
| Selling, general and administrative | 111,939 | 34,428 | — | 146,367 | |||||||||||||||||||
| Amortization | 27,420 | 1,990 | 3,590 | d | 33,000 | ||||||||||||||||||
| Non-rental depreciation | 1,845 | 1,151 | (213) | d | 2,783 | ||||||||||||||||||
| Transaction expenses and other | 42,765 | 5,254 | (40,277) | e | 7,742 | ||||||||||||||||||
| Total operating expenses | 183,969 | 42,823 | (36,900) | 189,892 | |||||||||||||||||||
| Operating income (loss) | (51,808) | 10,213 | 50,835 | 9,240 | |||||||||||||||||||
| Loss on extinguishment of debt | 61,695 | — | (61,695) | f | — | ||||||||||||||||||
| Interest expense, net | 53,674 | 9,992 | (3,919) | g | 59,747 | ||||||||||||||||||
| Finance and other expense (income) | 143 | (2,346) | — | (2,203) | |||||||||||||||||||
| Total other expense | 115,512 | 7,646 | (65,614) | 57,544 | |||||||||||||||||||
| Income (loss) before taxes | (167,320) | 2,567 | 116,449 | (48,304) | |||||||||||||||||||
| Taxes | 10,468 | — | 29,112 | h | 39,580 | ||||||||||||||||||
| Net income (loss) | $ | (177,788) | $ | 2,567 | $ | 87,337 | $ | (87,884) | |||||||||||||||
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 a reduction to depreciation expense for the difference between historical depreciation and depreciation of the fair value of the property and equipment.
c.Represents the adjustment for depreciation of rental fleet relating to the 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 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 nine months ended September 30, 2021. The expenses were directly attributable to the Acquisition and are reflected as adjustments to the comparable prior period ended September 30, 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 nine months ended September 30, 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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Reconciliation of Actual (2022) or Pro Forma Net Income (Loss) (2021) to Actual or Pro Forma Adjusted EBITDA
The following table provides a reconciliation of actual or pro forma net income (loss) to actual or pro forma Adjusted EBITDA, as applicable:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2022 Actual | 2021 Pro Forma | 2022 Actual | 2021 Pro Forma | |||||||||||||||||||
| Net income (loss) | $ | (2,382) | $ | (14,956) | $ | 7,968 | $ | (87,884) | |||||||||||||||
| Interest expense | 19,338 | 17,324 | 54,833 | 53,426 | |||||||||||||||||||
| Income tax expense | 4,349 | 1,671 | 7,273 | 39,580 | |||||||||||||||||||
| Depreciation and amortization | 54,001 | 66,804 | 171,121 | 180,514 | |||||||||||||||||||
| EBITDA | 75,306 | 70,843 | 241,195 | 185,636 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Non-cash purchase accounting impact | 3,408 | (1,380) | 14,801 | 10,672 | |||||||||||||||||||
| Transaction and process improvement costs | 6,501 | 7,748 | 17,192 | 8,067 | |||||||||||||||||||
| Sales-type lease adjustment | 1,232 | 3,783 | 3,793 | 4,428 | |||||||||||||||||||
| Share-based payments | 4,378 | 4,856 | 9,526 | 13,273 | |||||||||||||||||||
| Change in fair value of derivative and warrants | 809 | (1,427) | (18,013) | 5,453 | |||||||||||||||||||
| Adjusted EBITDA | $ | 91,634 | $ | 84,423 | $ | 268,494 | $ | 227,529 | |||||||||||||||
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 the macro-economic environment, including the on-going supply chain issues on our business and the financial markets. As of September 30, 2022, we had $26.2 million in cash and cash equivalents compared to $35.9 million as of December 31, 2021. As of September 30, 2022, we had $447.0 million of outstanding borrowings under our ABL Facility compared to $394.9 million of outstanding borrowing under the ABL Facility as of December 31, 2021.
ABL Facility
As of September 30, 2022, borrowing availability under the ABL Facility was $300.1 million, and outstanding standby letters of credit were $2.9 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.
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.
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.
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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).
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 September 30, 2022, borrowings on the Daimler Facility were $61.2 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 $75.0 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 September 30, 2022, borrowings on the PACCAR line of credit were $20.2 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, 2023 and bears interest at a rate of three-month term SOFR plus 3.25%. As of September 30, 2022, borrowings on the Loan Agreement were $267.5 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 include (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:
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2022 | 2021 | |||||||||
| Net cash flow from operating activities | $ | 4,344 | $ | 112,755 | |||||||
| Net cash flow used in investing activities | (153,927) | (1,419,615) | |||||||||
| Net cash flow from financing activities | 141,860 | 1,324,534 | |||||||||
| Effect of exchange rate changes | (2,005) | — | |||||||||
| Net change in cash and cash equivalents | $ | (9,728) | $ | 17,674 | |||||||
As of September 30, 2022, we had cash and cash equivalents of $26.2 million, a decrease of $9.7 million from December 31, 2021. 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.
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Cash Flows from Operating Activities
Net cash provided by operating activities was $4.3 million for the nine months ended September 30, 2022, as compared to net cash provided by operating activities of $112.8 million in the same period of 2021. The use of cash in the current period is the result of our increased levels of inventory purchases and production.
Cash Flows from Investing Activities
Net cash used in investing activities was $153.9 million for the nine months ended September 30, 2022, as compared to cash used in investing activities of $1,419.6 million in 2021. The decrease is attributable to the cash paid to acquire Custom Truck LP on April 1, 2021.
Cash Flows from Financing Activities
Net cash provided by financing activities was $141.9 million for the nine months ended September 30, 2022, as compared to $1,324.5 million in 2021. The decrease is attributable to the cash proceeds provided by the sale of our common stock and placement of new debt, the funds from which were used to acquire Custom Truck LP on April 1, 2021.
Item 3. 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 September 30, 2022, we had $447.0 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 $0.6 million on an annual basis.
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. During the three months ended March 31, 2022, we settled 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.
Foreign currency exchange rate risk
During the nine months ended September 30, 2022, we generated $30.0 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.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q we carried out an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer. Based on that assessment, the Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2022, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting 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 completing the integration of policies, processes, people, technology and operations for the combined company. As part of this integration, we 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 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.
(b) 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 encompassed implementation of our new ERP system, which was completed in 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, we are 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.
(c) 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 September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On January 14, 2022, we completed the acquisition of Hi-Rail Leasing, Inc. (“Hi-Rail”). In conducting our evaluation of effectiveness of our internal control over financial reporting, we have elected to exclude Hi-Rail from our evaluation, as permitted under existing SEC rules.
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PART II - OTHER INFORMATION
Item 1. 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 1A. Risk Factors
Reference is made to Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, which sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Except as set forth below, there have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Uncertainty relating to macroeconomic conditions may reduce demand for our products and services, resulting in non-performance of contracts by our lessees, limit our ability to obtain additional capital to finance new investments, or have other unforeseen negative effects.
Uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and commodity price volatility, may create difficult operating environments for our lessees and also for our industry. Many factors, including factors that are beyond our control, may impact our operating results or financial condition and/or affect the lessees that form our customer base. A number of governments have implemented, or are considering implementing, a broad variety of governmental actions or new regulations for the financial markets. In addition, limitations on the availability of capital, higher costs of capital or financing expenditures or the desire to preserve liquidity, may cause our current or prospective customers to make reductions in future capital budgets and spending.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On August 2, 2022, our Board of Directors authorized a stock repurchase program for up to $30.0 million of the Company’s common stock. This authorization does not have an expiration date. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate needs. The following table contains information regarding our purchases of our common stock during the three months ended September 30, 2022:
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in $000s) | ||||||||||||||||||||||
| July 1, 2022 - July 31, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| August 1, 2022 - August 31, 2022 | — | $ | — | — | $ | 30,000 | ||||||||||||||||||||
| September 1, 2022 - September 30, 2022 | 274,595 | $ | 6.38 | 274,595 | $ | 28,248 | ||||||||||||||||||||
| Total | 274,595 | $ | 6.38 | 274,595 | ||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 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 or furnished herewith.
+Management contract or compensatory plan.
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SIGNATURES
Pursuant to the requirements 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: | November 8, 2022 | /s/ Fred Ross | ||||||
| Fred Ross, Chief Executive Officer | ||||||||
| Date: | November 8, 2022 | /s/ Christopher J. Eperjesy | ||||||
| Christopher J. Eperjesy, Chief Financial Officer | ||||||||