Alta Equipment Group Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Alta sells, rents, and services material-handling and construction equipment, operating through Material Handling and Construction Equipment segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $295.0 | $220.6 | $856.5 | $593.2 |
| Gross profit | $81.1 | $56.7 | $225.3 | $150.1 |
| Gross margin | 27.5% | 25.7% | 26.3% | 25.3% |
| Operating income (loss) | $6.0 | $(3.5) | $9.6 | $(7.6) |
| Net income (loss) | $0.2 | $0.3 | $(20.1) | $(20.8) |
| Net income (loss) available to common shareholders | $(0.5) | $0.3 | $(21.9) | $(20.8) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.1 | $(44.8) |
Q3 revenue grew 33.7% year over year; nine-month revenue grew 44.4%. Growth reflected 2020 acquisitions, improved business conditions and organic gains. Management reported strong demand but said new-equipment supply constraints and extended OEM lead times limited sales throughput and contributed to a large order backlog. Rental utilization and rates improved, and sales of rental equipment increased.
Q3 net income was $0.2 million, but preferred dividends of $0.7 million resulted in a $0.5 million loss attributable to common shareholders. Nine-month results included an $11.9 million loss on debt extinguishment. The company recorded a full valuation allowance against deferred tax assets after concluding they were more likely than not not to be realized.
At September 30, cash was $1.2 million; current assets were $395.9 million and current liabilities $324.5 million. Total assets were $787.4 million, total liabilities $651.5 million, and stockholders’ equity $135.9 million. Long-term debt, net of current portion, was $309.7 million, principally the new notes. Borrowings included $47.8 million on the ABL facility and $149.6 million under floor-plan facilities. Management reported $371.6 million of available borrowings under the revolving line and floor plans and stated it believed liquidity would meet foreseeable needs, while noting that future cash generation and financing access are not assured.
Material changes versus prior comparable periods
- Q3 gross margin increased 1.8 percentage points year over year; nine-month gross margin increased 1.0 point. Management cited stronger equipment pricing, improved rental utilization and rates, and a change in rental-equipment depreciation. Service margins declined in some areas, including because of a change in technician labor-cost allocation.
- Operating results improved to income from an operating loss in both comparisons. However, nine-month net loss remained $20.1 million, with the debt-extinguishment charge and tax valuation allowance among the notable items.
- Nine-month operating cash flow improved to $4.1 million from cash use of $44.8 million. Working-capital demands included inventory movements and higher receivables; rental-equipment sale proceeds and increases in payables, accrued expenses and customer deposits supported cash flow.
- On April 1, Alta issued $315 million of 5.625% senior secured second-lien notes due 2026 and repaid its prior term loan. The refinancing resulted in the $11.9 million debt-extinguishment loss. The ABL borrowing capacity increased to $350 million, subject to the borrowing base, and the first-lien floor-plan facility provides up to $40 million.
- Common shares outstanding increased to 32.4 million from 30.0 million at December 31, 2020, including approximately 2.28 million shares issued in exchange for warrants.
Outlook, risks and other notable items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management said business activity had generally recovered to or exceeded pre-pandemic levels, but uncertainty remained around COVID-19 and its variants.
- Management identified OEM supply-chain constraints and extended lead times as risks to equipment availability and results. Other cited risks include inflation and labor pressures, customer and supplier financial health, economic and public-infrastructure spending conditions, acquisition integration, skilled-technician retention, competition, cybersecurity, and access to capital.
- Alta changed useful-life assumptions for certain rental equipment prospectively in 2021, including extending lift-truck lives to 84 months and certain aerial and crane equipment lives to 120 months, and applying straight-line depreciation to qualifying underutilized construction assets. The change contributed to improved rental gross margin.
- Alta completed the ScottTech and Baron acquisitions during the period. On October 1, 2021, after quarter-end, it acquired Gibson Machinery assets for a stated purchase price of $15.5 million, including $11.1 million cash and $4.4 million of assumed equipment financing.
- Potential exposure under third-party lease guarantees was estimated at $1.7 million, with no liability accrued. The company reported $1.4 million in letters of credit. Management said ordinary-course legal matters were not expected to have a material financial effect and reported no material off-balance-sheet arrangements.
- The company was in compliance with debt financial covenants as of September 30, 2021. It disclosed that LIBOR-based borrowings expose it to reference-rate reform, but did not expect a significant impact from the transition.
Important facts for investors to verify
- Whether the reported order backlog converts to deliveries and revenue despite continued OEM supply constraints.
- How much revenue and margin growth is organic versus attributable to acquisitions, and whether rental utilization and pricing remain favorable.
- Whether operating cash flow can support working capital, rental-fleet investment, preferred dividends and debt service, given cash of $1.2 million.
- The borrowing-base availability and covenant headroom under the ABL and floor-plan facilities, as well as the refinancing’s ongoing interest and maturity implications.
- Whether the deferred tax asset valuation allowance, depreciation-life changes, and subsequent Gibson acquisition materially affect future reported earnings or cash requirements.