Alta Equipment Group Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Figures are in millions of dollars except per-share data. The company sells, services and rents industrial and construction equipment. Results reflect the February 2020 reverse recapitalization and multiple acquisitions; year-over-year comparisons are therefore not purely organic.
Financial results and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | $220.6 in 2020; $149.8 in 2019, up 47.3% | $593.2 in 2020; $388.0 in 2019, up 52.9% |
| Gross profit / margin | $56.7 / 25.7%; $44.2 / 29.5% in 2019 | $150.1 / 25.3%; $110.3 / 28.4% in 2019 |
| Operating income (loss) | $(3.5); $6.2 in 2019 | $(7.6); $12.9 in 2019 |
| Net income (loss) | $0.3; $(27.4) in 2019 | $(20.8); $(29.6) in 2019 |
| Operating cash flow | Not provided for the quarter | $(44.7); $(4.0) in 2019 |
| Investing / financing cash flow | Not provided for the quarter | $(166.3) / $211.1 |
- Q3 revenue increased across all categories. Management reported organic year-over-year growth of approximately 11% in new and used equipment sales, 7.5% in parts and 4.2% in service; organic rental revenue declined approximately 13% as utilization remained below prior-year levels.
- G&A was $60.2 in Q3 and $157.7 for nine months, up 58.4% and 61.9%, respectively. Growth reflected acquisitions, business expansion and, for the nine-month period, $7.6 of reverse-recapitalization transaction costs.
- Q3 net income included $8.0 of life-insurance proceeds following the death of the Construction Group President. The company also recorded $3.2 of share-based compensation in Q3, including $3.0 related to accelerated vesting of his restricted stock units. The company repurchased the resulting 390,000 shares for $3.0.
- At September 30, cash was $0.1. Current assets were $357.2 and current liabilities $411.4. The resulting working-capital deficit was $54.2.
- Credit facilities and floor plans: $295.5 outstanding in total, excluding certain costs; this included $140.5 outstanding on the ABL and $155.0 on floor plans. Reported available borrowings under the revolving line and floor plans were $197.6. The ABL capacity was $300 and aggregate floor-plan indebtedness was capped at $225.
- Term-loan principal was $151.1, with a 9.8% effective interest rate and an August 2025 initial maturity. Balance-sheet long-term debt, net of discounts, issuance costs and current maturities, was $136.4. The company reported compliance with debt covenants at quarter-end.
- Operating cash use reflected, among other items, a $102.8 inventory increase and $32.6 of net payments on manufacturer floor plans. Investing cash use included $128.8 for acquisitions and $38.5 for rental and other property and equipment.
Material changes and unusual items
- Five 2020 acquisitions—Flagler, Liftech, PeakLogix, Hilo and Martin—contributed to reported growth. Nine-month acquisition spending, net of cash acquired, was $128.8. Pro forma information for Flagler showed nine-month 2020 revenue of $619.0 and net loss of $20.9 as if acquired January 1.
- The company completed a reverse recapitalization in February, raising $175.7 of net equity proceeds. It refinanced debt, entered a $155.0 term loan, and recorded a $7.6 debt-extinguishment loss. The 2019 comparison included a $28.3 warrant fair-value expense; the prior warrant liability was extinguished in 2020.
- Although Q3 net income was positive, operations generated a $3.5 loss. The $8.0 insurance proceeds were a significant non-operating item; excluding them, reported Q3 net income would not have been positive.
- Gross margin declined year over year, particularly in rental operations. Management cited weaker fleet utilization, fixed depreciation, repair and maintenance costs, and acquisition-related fleet mix. Construction Equipment reported a Q3 operating loss of $5.9, while Industrial Equipment reported operating income of $4.2.
Outlook, management commentary and risks
- The filing provides no numerical full-year earnings or revenue guidance. Management expected full-year 2020 results to be adversely affected by COVID-19 and said the impact into Q4 and 2021 was uncertain.
- Branches were fully operational at September 30, and sales and service activity had returned near pre-COVID levels, but rental utilization continued to lag. Management said it would adjust rental fleet levels to expected demand and believed liquidity was sufficient for foreseeable operations if business conditions remained at then-current levels.
- Renewed stay-at-home restrictions, weaker customer demand, supply-chain disruption, and adverse economic conditions could further affect revenue, utilization, asset values and liquidity. Management noted that further cost reductions or additional financing could be needed if conditions worsened.
- Potential guarantees were estimated at $2.6 and were not accrued because management expected third-party lessees to repay. Routine legal matters were not expected to have a material financial effect. The company reported no material off-balance-sheet arrangements.
- Subsequent to quarter-end, the company acquired Howell Tractor and Equipment on October 30 for $23.3 cash, subject to adjustments, and issued 507,143 shares; stated enterprise value was approximately $23.8, excluding eligible inventory.
Important facts for investors to verify
- How much of reported revenue growth is attributable to acquisitions versus sustainable organic demand, particularly in equipment sales, parts and service?
- Whether rental utilization and rental gross margins recover, and how planned fleet rationalization affects revenue, cash generation and resale values.
- Liquidity headroom and covenant compliance under the ABL, floor-plan facilities and term loan, especially if cash use or borrowing costs rise.
- The sustainability of profitability absent the one-time $8.0 life-insurance proceeds, and the level of acquisition, integration and share-based compensation costs.
- Whether acquired businesses meet expected performance and earn-out assumptions, and the cash and dilution effects of subsequent acquisitions, including Howell.