Custom Truck One Source, Inc. quarterly report, Q3 FY2019

Business context and reporting period

The filing is for the quarter and nine months ended September 30, 2019. The registrant named in the filing is Nesco Holdings, Inc., a specialty equipment rental, sales, parts and services provider serving infrastructure industries in North America; this differs from the company name in the request metadata.

On July 31, 2019, Nesco completed a merger with Capitol Investment Corp. IV and began NYSE trading as NSCO. The transaction was accounted for as a reverse recapitalization, not an acquisition for accounting purposes.

Financial performance

Amounts below are in millions of dollars except per-share data and operating metrics.

• Q3 rental revenue rose 9.2% to $50.1 million, while total revenue fell 2.6%, chiefly because new-equipment sales declined. Parts and services revenue increased 59.1% to $7.7 million.
• For the nine months, revenue increased 5.2%, led by rental revenue (+5.2%) and parts and services (+50.2%); equipment sales decreased.
• Q3 operating margin was approximately 9.0%, down from 17.1%; nine-month operating margin was approximately 12.9%, versus 17.5%. The net loss widened substantially in both comparisons, reflecting higher interest and other expenses, transaction costs, debt-extinguishment costs and derivative fair-value expense.
• Q3 fleet utilization was 79.1% versus 80.5%; average equipment on rent increased 7.3% to $484.3 million. Average rental rate per day was $138.11, up 0.3%. For nine months, utilization was 80.4% versus 81.9%, and rental rate per day declined 1.5% to $137.42.

Liquidity, debt and cash flow

• At September 30, cash was $0.2 million, compared with $2.1 million at year-end 2018. Current assets were $89.0 million and current liabilities $60.7 million.
• Gross debt was $671.6 million, including $193.0 million drawn on the $350 million asset-based revolving facility and $475.0 million of 10% second-lien notes due 2024. Net debt after deferred financing fees was $656.7 million. Capital lease obligations were approximately $29.5 million.
• The revolver had $82.0 million of borrowing availability, subject to borrowing-base limits. The facility’s fixed-charge coverage covenant is tested if availability falls below specified thresholds. Management reported covenant compliance.
• Nine-month operating cash flow of $0.7 million was more than offset by $62.3 million of investing outflows, primarily $77.8 million of rental-fleet purchases. Financing provided $59.6 million, including merger proceeds; cash declined $1.9 million.
• The notes carry a 10% cash coupon, payable semi-annually beginning February 2020. Contractual obligations totaled $1.18 billion, including scheduled debt interest, purchase obligations and lease payments.

Changes, outlook, risks and unusual items

• Merger financing included issuance of the $475 million notes and a new revolving facility; legacy debt was repaid, generating a $4.0 million extinguishment loss. The merger contributed $147.3 million of net financing cash proceeds as reported in the cash-flow statement.
• Nesco began closing its Mexico operations on September 27 due to continued delays in Mexican government contracts. It recorded a $0.7 million equipment impairment and $0.2 million of employee termination benefits. Mexico generated a $3.8 million pretax loss for the nine months.
• The interest-rate collar was terminated in July and a new collar covering $170 million of variable-rate borrowings through July 2024 was entered into. The new collar was not designated as a hedge; its $2.6 million fair-value charge reduced reported earnings.
• After quarter-end, the company completed its acquisition of Truck Utilities, Inc. on November 4 for approximately $42.2 million, before approximately $3.6 million of capital-expenditure adjustments. It was financed by drawing on the revolver; the purchase-price allocation was still being prepared.
• Management gave no quantified revenue or earnings guidance. It said cash from operations, equipment sales and revolver availability should meet needs for the foreseeable future, while noting dependence on future performance and access to financing. Demand cyclicality, economic downturns, customer and supplier conditions, weather, regulation, interest rates and ability to service debt were among the cited risks.
• Disclosure controls and procedures were reported ineffective. A previously identified material weakness in controls over rental-equipment accounting remained under remediation; management expected to complete remediation by December 31, 2019, but gave no assurance of that timing.
• Management said ordinary-course legal matters were not expected to have a material adverse effect. Non-cancelable equipment and inventory purchase commitments were $10.6 million; additional cancelable agreements were $67.2 million.

Important facts for investors to verify

1. Confirm the intended issuer: this filing identifies Nesco Holdings, Inc., not Custom Truck One Source, Inc.
2. Track revolver availability, borrowing-base capacity, covenant headroom and the cost of the 10% notes, given low cash and substantial leverage.
3. Assess whether fleet investment converts into sustained rental growth, utilization and cash generation; nine-month operating cash flow was only $0.7 million.
4. Review the Mexico exit costs and whether closure activities or other impairments continue.
5. Verify completion of the rental-equipment accounting control remediation and the company’s subsequent control-effectiveness disclosures.
6. Review Truck Utilities’ final purchase-price allocation, integration results and impact on debt and liquidity.