Custom Truck One Source, Inc. — Q3 2020 Form 10-Q
Issuer in this filing: Nesco Holdings, Inc. (ticker NSCO). The unaudited quarter and year-to-date periods ended September 30, 2020; comparisons are to the corresponding 2019 periods. The company rents and sells specialty equipment and provides parts, tools, and services to electric utility, telecom, and rail infrastructure markets.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $69.3m | $62.4m | $219.5m | $186.8m |
| Gross profit / margin | $15.6m / 22.6% | $21.3m / 34.1% | $53.4m / 24.3% | $62.3m / 33.3% |
| Operating income | $5.0m | $5.6m | $14.3m | $24.1m |
| Net income (loss) | $15.2m | $(18.0)m | $(13.9)m | $(30.2)m |
| Adjusted EBITDA | $28.0m | $30.7m | $86.2m | $91.9m |
| Operating cash flow | Not presented quarterly | $14.9m | $0.7m |
Q3 revenue increased 10.9%, but gross profit fell as rental revenue declined and lower-margin equipment and parts sales made up more of revenue. Adjusted EBITDA decreased 8.6% in Q3 and 6.1% year to date. The Q3 net profit reflects a $25.5m income tax benefit despite a $10.3m pretax loss; the nine-month tax benefit was $25.8m despite a $39.8m pretax loss.
Balance sheet, debt, and liquidity
- At September 30, cash was $1.6m, versus $6.3m at year-end 2019. Current assets were $94.9m and current liabilities $40.9m.
- Debt outstanding was $746.6m before deferred financing fees; net debt carrying value was $734.6m. This included $475.0m of 10% senior secured notes due 2024 and $269.0m drawn on the revolving credit facility. Capital lease obligations were approximately $19.8m.
- The $385m revolving facility had $67.4m of availability, subject to a borrowing base. The company reported compliance with debt covenants. Its fixed-charge coverage covenant is tested if availability falls below specified thresholds.
- Nine-month investing cash outflow was $29.9m, including $59.2m of rental-fleet purchases and $26.1m of proceeds from equipment and parts sales. Financing cash inflow was $10.3m. Cash declined $4.7m over the period.
Operating trends and material changes
- COVID-19 project delays reduced Q3 average equipment on rent 4.1% year over year to $464.3m and utilization to 72.1% from 79.1%. Rental rates were nearly flat, down 0.7% to $137.16 per day.
- Demand improved from late August: equipment on rent reached $489.1m at quarter-end, more than 10% above the start of the quarter. Management reported a normal seasonal pickup in electric transmission work and continued relative stability in rail and telecom.
- Q3 rental revenue fell 7.9% to $46.1m. Parts and services revenue rose 51.2% to $11.6m, and new equipment sales rose to $6.0m from $1.2m. Truck Utilities, acquired in November 2019, contributed to growth, particularly in parts and services.
- Q3 gross margin contracted to 22.6% from 34.1%, with higher costs associated with increased equipment and parts sales and reduced high-margin rental revenue. Cost reductions lowered Q3 operating expenses; nine-month expenses were slightly higher year over year.
- Management reduced capital spending and working capital, undertook limited headcount reductions, and curtailed some fleet repairs during the downturn. It expected service costs to rise as equipment was prepared for redeployment and was developing a disciplined 2021 capital investment strategy.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management said customer backlogs and investment plans remained record or near-record, projects known to the company had been delayed rather than significantly canceled, and demand was increasing; it cautioned that pandemic effects remained difficult to predict.
- The $25.5m Q3 tax benefit arose from valuation-allowance reassessments involving deferred tax assets, including effects of the CARES Act and July 2020 tax regulations. The filing says related prior-period misstatements were not material. The benefit is not a measure of operating earnings and depends on expected realization of tax assets.
- The interest-rate collar liability rose to $7.9m from $1.7m; its fair-value changes are recorded in earnings. The company recorded $6.1m of collar-related expense for the first nine months, partly offset by $0.6m of income in Q3.
- The Truck Utilities purchase-price allocation remained preliminary; final valuation work was expected in Q4 2020 and could change future depreciation and amortization. The company was also closing its Mexico operations, citing delays in Mexican government contracts.
- Key disclosed risks include continued pandemic and cyclical demand weakness, ability to generate cash and service substantial debt, access to credit, interest-rate exposure, equipment costs and supply, acquisitions, impairment, and legal or safety liabilities. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the late-quarter demand recovery continued, and how utilization, rental revenue, and margins subsequently developed.
- Whether cash generation and borrowing-base availability remain adequate for debt service, operations, and planned fleet investment.
- The sustainability of earnings excluding the unusually large tax benefit, and the assumptions supporting realization of deferred tax assets.
- The final Truck Utilities purchase-price allocation and its effect on goodwill, depreciation, and amortization.
- The continuing cost and earnings effects of the interest-rate collar, floating-rate borrowings, COVID-related project delays, and Mexico exit activities.