Alta Equipment Group Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; unaudited. Alta sells, services, and rents industrial and construction equipment. Its two reportable segments are Industrial Equipment and Construction Equipment.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $192.1 million | $135.9 million | $372.6 million | $238.2 million |
| Gross profit / margin | $46.3 million / 24.1% | $38.6 million / 28.4% | $93.4 million / 25.1% | $66.1 million / 27.7% |
| Operating income (loss) | $0.9 million | $5.1 million | ($4.1) million | $6.7 million |
| Net income (loss) | ($4.1) million | $0.4 million | ($21.1) million | ($2.2) million |
| Basic and diluted EPS | ($0.14) | $0.05 | ($0.88) | ($0.31) |
| Operating cash flow | Not presented by quarter | ($54.1) million | ($7.7) million |
Six-month investing cash flow was negative $123.4 million (prior year: negative $80.9 million); financing cash flow was positive $183.9 million (prior year: positive $87.1 million). Cash at June 30 was $6.4 million, versus zero at year-end 2019. The $80.5 million increase in inventories was a major operating cash use.
At June 30, total assets were $664.3 million and total liabilities were $550.1 million. Current assets of $343.1 million were below current liabilities of $375.4 million. Net long-term debt was $145.7 million; outstanding revolving credit and floor-plan borrowings totaled $275.9 million, excluding specified financing costs. The company reported $171.4 million of available borrowings under its revolving line and floor plans. The $155 million term loan bears interest at LIBOR plus 8% and had a 9.8% effective rate; the company said it was in compliance with financial covenants.
Changes and drivers versus prior periods
- Revenue rose 41.4% in Q2 and 56.4% for the six-month period, with acquisitions a significant contributor. The 2020 results include Flagler and Liftech from February and PeakLogix from June; 2019 included NITCO only from May. Comparisons therefore include substantial acquisition and period-comparability effects.
- Management reported approximately 10% organic growth in six-month new and used equipment sales, while organic parts and service revenue declined due to COVID-19.
- Gross margin contracted in both reported periods. Lower rental fleet utilization and fixed depreciation weighed on rental margins; segment mix and, in Construction, Flagler’s lower-margin service work also contributed.
- Six-month net loss included a $7.6 million debt-extinguishment loss. The company also cited $7.6 million of reverse-recapitalization transaction costs in corporate expenses. Interest expense increased with higher borrowings.
- The reverse recapitalization closed February 14, 2020, with $175.7 million of net equity proceeds. Alta refinanced debt, entered a new $155 million term loan, and increased revolving credit capacity from $110 million to $300 million.
Outlook, risks, and other items
- No quantified earnings or revenue guidance is provided. Management expected full-year 2020 results to be adversely affected by COVID-19, while noting that activity improved from mid-May through quarter-end as restrictions eased. It said liquidity was sufficient for the foreseeable future at then-current business conditions, but a renewed downturn or restrictions could lead to further cost reductions or additional financing.
- COVID-19 risks include reduced customer demand and equipment utilization, renewed operating restrictions, supply-chain disruption, and customer or supplier financial stress. Construction rental utilization remained below pre-pandemic levels at filing time.
- Cost measures included executive pay reductions, employee furloughs, and reductions in benefits and vehicle-related, marketing, and travel costs. Branches were operating by June 30; some administrative staff remained remote.
- Guarantee exposure was estimated at $2.5 million, with no amount accrued; management expected third-party lessees to pay. Routine legal matters were not expected to have a material financial effect.
- PeakLogix acquisition consideration included a $1.0 million note and a performance earn-out of $2.0 million to $3.7 million; the recorded earn-out liability was $2.3 million. Subsequent events included the July 1 Hilo acquisition for $17.3 million cash at closing plus potential earn-out payments, and a July 31 agreement to acquire Martin Implement, expected to close in Q3.
Investor verification priorities
- Separate acquisition-driven growth from organic performance, especially in equipment sales, parts, service, and rental utilization.
- Track gross-margin recovery, rental fleet utilization, and fixed depreciation absorption as COVID-19 and construction activity evolve.
- Reconcile cash use, inventory growth, available borrowing capacity, and debt service needs; monitor covenant compliance and financing terms.
- Confirm final purchase accounting and realized performance for Flagler, Liftech, PeakLogix, Hilo, and the proposed Martin Implement transaction.
- Assess the potential effects of renewed restrictions, supply-chain problems, customer credit deterioration, guarantees, and PeakLogix earn-out remeasurement.