Custom Truck One Source, Inc. (Nesco Holdings, Inc.) — Q1 2020 Form 10-Q
Filing identity: The supplied filing is for Nesco Holdings, Inc., which operated as a specialty equipment rental, sales, parts and services provider. It is not filed under the name Custom Truck One Source, Inc. Reporting period: three months ended March 31, 2020; figures below are unaudited and in U.S. dollars.
Business context and reporting period
Nesco served electric utility transmission and distribution, telecommunications and rail customers through Equipment Rental and Sales (ERS) and Parts, Tools and Accessories (PTA). Results include Truck Utilities, acquired in November 2019; it contributed $12.5 million of Q1 2020 revenue. The comparison with Q1 2019 is also affected by the 2019 merger and by changes in revenue presentation.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $81.7 million | $61.5 million |
| Gross profit / margin | $21.4 million / 26.2% | $20.4 million / 33.1% |
| Operating income / margin | $6.8 million / 8.3% | $8.7 million / 14.1% |
| Net loss | $16.0 million | $6.7 million |
| Basic and diluted loss per share | $0.33 | $0.31 |
| Adjusted EBITDA (non-GAAP) | $32.1 million | $30.4 million |
| Cash from operating activities | $(2.8) million | $3.9 million |
| Cash used in investing activities | $(27.2) million | $(6.9) million |
At March 31, 2020, cash was $10.2 million. Total debt outstanding was $764.2 million ($750.7 million net of deferred financing fees); the balance sheet reported long-term debt, net, of $749.1 million. The company had $285.7 million drawn on its asset-based revolving facility and reported $75.4 million of additional availability, subject to the borrowing base. Current assets were $116.5 million and current liabilities were $54.0 million.
Average equipment on rent rose 10.5% to $499.8 million and average fleet count increased 18.2% to 4,627 units. Average utilization fell to 75.9% from 82.2%; average rental rate per day was nearly unchanged at $137.77. The company reported fleet age of 3.4 years.
Material changes versus the prior comparable period
- Revenue grew 32.9%. Rental revenue rose 11.7%; new equipment sales increased to $7.6 million from $2.4 million, and parts and services revenue more than doubled to $14.1 million.
- ERS revenue increased 21.0%, but segment gross profit declined 4.9% to $17.4 million, reflecting higher costs and lower equipment-sale margins. PTA revenue grew 103.7% and gross profit rose 96.6% to $4.0 million, with Truck Utilities contributing significantly.
- Gross margin declined to 26.2% from 33.1%, while operating income fell despite higher revenue. SG&A increased by $4.0 million, partly reflecting the acquisition, public-company costs and higher commissions.
- Net loss widened, including a $6.0 million non-cash fair-value expense on the interest-rate collar and higher interest expense. Operating cash flow turned negative, with working-capital outflows contributing to the decrease.
- Revolving-facility borrowings increased by $35.7 million during the quarter. The facility commitment was increased by $35.0 million to $385.0 million in March.
Outlook, commentary, risks and unusual items
- Management said it could not predict the financial impact or duration of COVID-19. Customers delayed projects and equipment purchases; some PTA projects were postponed. The company said its markets were considered critical and its service locations remained open, while it implemented safety measures.
- Management reduced planned 2020 capital expenditures and inventory investment, and reduced headcount and other SG&A expenses. Planned 2020 net capital expenditures were approximately half of 2019 net capital expenditures. No earnings or revenue guidance was provided.
- Management stated that cash, operating cash flows and facility availability were expected to be sufficient for operating, debt-service and capital needs over the next 12 months, while noting continued monitoring of COVID-19 and financial markets.
- Debt included $475.0 million of 10.0% senior secured notes due 2024 and variable-rate revolving borrowings. The company reported compliance with debt covenants at quarter-end. A fixed-charge coverage covenant applies if facility availability falls below specified thresholds.
- The interest-rate collar was not designated as a hedge; its $6.0 million quarterly fair-value loss was recorded in earnings. The collar liability rose to $7.7 million from $1.7 million at year-end.
- Management performed an interim qualitative impairment assessment in light of COVID-19 and the decline in market capitalization and concluded goodwill and indefinite-lived intangible assets were not impaired as of March 31, 2020. Future conditions could change that assessment.
- The company was winding down its Mexican operations. Mexico generated $0.5 million of pretax loss in Q1 2020, versus $1.3 million in Q1 2019. Routine legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer: this filing names Nesco Holdings, Inc.; verify whether it is the intended company for the Custom Truck One Source request.
- Assess liquidity and refinancing risk against the $764.2 million total debt, high interest burden, negative operating cash flow and borrowing-base-dependent availability.
- Track COVID-19 effects on customer project timing, utilization, equipment demand, collections and management’s reduced capital-spending plans.
- Separate acquisition-driven growth from underlying performance and review the decline in gross margin and utilization.
- Review the interest-rate collar’s valuation and earnings volatility, as well as any subsequent goodwill or intangible-asset impairment indicators.
- Consider comparability limitations: Truck Utilities was acquired in November 2019, 2019 share counts differ following the merger, and certain revenue and segment amounts were reclassified.