Alta Equipment Group Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollar amounts are in millions except per-share data. Alta sells, rents, services, and supplies parts for material-handling, construction, and environmental-processing equipment across the U.S. and Canada.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $466.2 | $405.0 | $1,355.3 | $1,143.2 |
| Gross profit / margin | $126.1 / 27.0% | $111.6 / 27.6% | $374.2 / 27.6% | $308.8 / 27.0% |
| Operating income | $13.9 | $13.7 | $42.2 | $31.3 |
| Net income | $7.4 | $5.1 | $10.8 | $10.0 |
| Net income available to common stockholders | $6.7 | $4.4 | $8.6 | $7.8 |
| Diluted EPS | $0.20 | $0.14 | $0.26 | $0.24 |
- Revenue grew 15.1% in Q3 and 18.6% year to date. Organic revenue growth, a company-defined non-GAAP measure excluding certain acquisition effects, was 9.5% and 10.6%, respectively.
- Q3 revenue growth reflected improved equipment availability, demand, pricing, and acquisition contributions. New and used equipment sales rose 20.7% in Q3 and 25.7% year to date; parts, service, and rental revenue also increased. Rental-equipment sales fell 13.6% year to date.
- Gross margin declined 60 basis points in Q3, mainly due to rental depreciation and fleet growth, but increased 60 basis points year to date. Q3 operating expenses rose 14.6%, while nine-month expenses rose 19.6%, reflecting acquisitions, hiring and labor costs, and growth-related spending.
- Interest expense on new-equipment floor plans was $2.4 in Q3 and $5.8 year to date, versus $0.8 and $1.6 in the comparable periods. Total other expense increased to $13.8 in Q3 and $38.3 year to date, driven primarily by higher rates and debt balances.
Cash flow, balance sheet, debt, and liquidity
- For the first nine months, operating activities used $19.4 of cash, compared with $18.3 provided in 2022. Inventory purchases and growth were significant uses of working capital; inventory increased to $492.8 at September 30 from $399.7 at year-end. Cash was $1.4.
- Investing activities used $60.6, including $48.7 of rental-equipment expenditures and $8.6 of property and equipment expenditures. Financing activities provided $78.2. Rental-equipment proceeds were $90.7; $143.0 of inventory was transferred to the rental fleet.
- Total assets were $1,480.4, compared with $1,290.6 at December 31, 2022. Stockholders’ equity was $147.5 and total liabilities were $1,332.9.
- At September 30, gross outstanding borrowings included $305.3 on the ABL revolving facility, $364.8 under floor-plan facilities, and $315.0 of second-lien notes due 2026. Finance lease obligations were $32.8. The filing reports $195.2 of available borrowings under the revolving line and floor-plan facilities. The company said it was in compliance with debt covenants and expected available cash, operating cash flow, and borrowing capacity to meet needs for at least 12 months.
- Variable-rate debt creates material rate exposure: management estimated that a 1 percentage-point rate increase would reduce annual pretax earnings by $4.8, or $2.8 after the interest-rate-cap hedge, based on September 30 balances.
Changes, outlook, risks, and unusual items
- Management cited easing equipment supply constraints, a strong end-market demand backdrop, continued backlog, and growth in product-support revenues. It also noted higher interest rates, inflation, and tight labor markets as headwinds. No quantified revenue or earnings guidance was provided.
- The $7.3 Q3 income-tax benefit (and $6.9 benefit year to date) primarily reflected a $7.4 discrete release of valuation allowance on U.S. deferred tax assets, supported by sustained profitability and anticipated future earnings. The benefit materially supported reported net income; Q3 pretax income was $0.1.
- On June 28, 2023, Alta increased ABL capacity from $430.0 to $485.0 and first-lien floor-plan capacity from $60.0 to $70.0. Borrowing balances and interest rates increased year over year.
- After quarter-end, Alta acquired Burris Equipment for $15.2 cash on October 13 and Ault Industries for $39.9 on November 1, including cash, a seller note, and shares. Their reported trailing-twelve-month revenue was approximately $40.6 and $50.3, respectively. Purchase-price adjustments remain possible.
- Management reported that a previously disclosed material weakness in sales-process controls had not been fully remediated as of September 30; accordingly, disclosure controls and procedures were deemed ineffective. Remediation efforts were ongoing, and effectiveness must be demonstrated through testing over time.
- Management said ordinary-course legal matters and third-party performance guarantees were not expected to have a material financial effect. The filing identifies risks including supplier and customer viability, economic conditions, acquisitions, labor availability, financing costs, and cybersecurity.
Most important facts for investors to verify
- Whether the sales-process material weakness is remediated and controls are operating effectively.
- Whether operating cash generation improves as inventory and rental-fleet investment continue, and how much usable borrowing capacity remains.
- How higher variable borrowing costs affect earnings, liquidity, and debt-service capacity.
- How much Q3 and year-to-date earnings depended on the deferred-tax valuation-allowance release, and whether future profitability supports realization of those tax assets.
- Whether demand, backlog, margins, and rental-fleet returns hold up as equipment availability and pricing conditions change; assess acquisition integration and funding needs for Burris and Ault.