Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Business and Organization
Organization
Custom Truck One Source, Inc., a Delaware corporation, and its wholly owned subsidiaries (“we,” “our,” “us,” or “the Company”) are engaged in the business of providing a range of products and services to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance and customization services related to that equipment.
We are a specialty equipment provider to the electric utility transmission and distribution, telecommunications, rail and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent, produce, sell and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. We manage the business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”).
Equipment Rental Solutions (“ERS”) Segment
We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end-user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet of the foregoing products.
Truck and Equipment Sales (“TES”) Segment
We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated sales force of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.
Aftermarket Parts and Services (“APS”) Segment
The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to our customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.
Supply Chain
The Company purchases raw materials, component parts and finished goods to be used in the manufacturing, sale and rental of its products. Uncertainty remains regarding supply chain disruptions, inflationary pressures, public health crises, and geopolitical risks that have led to issues, broadly, in the supply chain. Changes in the Company’s relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to suppliers
or customers, could have a material adverse effect on the Company’s ability to timely manufacture and market products. Increases in the costs of shipping and transportation, purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or the Company’s inability to market products. The unprecedented nature of the supply chain disruptions continues to make it difficult to predict the Company’s future business and financial performance. The Company continues to monitor the impact on its supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in the Company’s production and manufacturing processes and the ongoing semiconductor shortage, which could potentially limit the ability of these manufacturers to meet demand in future periods.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the accounting policies described below. Our condensed consolidated financial statements include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with GAAP requires that these Unaudited Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the current interim period ended or comparable prior period.
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and the Condensed Consolidated Balance Sheet at December 31, 2022, has been derived from the audited consolidated financial statements of Custom Truck One Source, Inc. at that date. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements, have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other periods. These interim statements should be read in conjunction with the Custom Truck One Source, Inc. audited consolidated financial statements included in the Custom Truck One Source, Inc. Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounting Pronouncements Recently Adopted
Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This ASU improves the comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination and requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amended guidance specifies for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities, thereby providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU was effective as of January 1, 2023. The Company will apply the guidance in ASU 2021-08 prospectively to any future business combinations occurring on or after the effective date.
Financing receivables. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326) (“ASU 2022-02”), which requires an entity to disclose current period gross write-offs by year of origination for financing receivables and net investment in leases. Gross write-off information must be included in the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit-quality indicator and class of financing receivable by year of origination. The adoption on January 1, 2023 of the ASU had no impact to the Company’s disclosures related to its financing receivables as the Company does not have net investment in leases assets.
Trade Receivables and Allowance for Credit Losses
We are exposed to credit losses from trade receivables generated through our leasing, sales and service businesses. We assess each customer’s ability to pay for the products and services by conducting a credit review. The credit review considers expected billing
exposure and timing for payment and the customer’s established credit rating. We perform a credit review of new customers at inception of the customer relationship and, for existing customers, when the customer transacts new leases or product orders after a period of dormancy. We also consider contract terms and conditions, country risk and business strategy in the evaluation.
We monitor ongoing credit exposure through an active review of customer balances against contract terms and due dates. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. The allowances for credit losses reflect the estimate of the amount of receivables that management assesses will be unable to be collected based on historical write-off experience and, as applicable, current conditions and reasonable and supportable forecasts that affect collectability. This estimate could require change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease the allowances. We review the adequacy of the allowance on a quarterly basis. The allowance for doubtful accounts is included in accounts receivable, net on our Condensed Consolidated Balance Sheets.
Accounts receivable, net consisted of the following:
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Accounts receivables | $ | 188,040 | | | $ | 212,347 | |
| Less: allowance for doubtful accounts | (20,400) | | | (19,241) | |
| Accounts receivable, net | $ | 167,640 | | | $ | 193,106 | |
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Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets and liabilities. These inputs can be readily observable, market corroborated, or generally unobservable.
Fair Value Hierarchy - In measuring fair value, we use observable market data when available and minimize the use of unobservable inputs. Unobservable inputs may be required to value certain financial instruments due to complexities in contract terms. Inputs used in fair value measurements are categorized into three fair value hierarchy levels for disclosure purposes. The entire fair value measurement is categorized based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are:
Level 1 - Inputs that reflect unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur with both sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Inputs that reflect quoted prices for similar assets and liabilities are available in active markets, and inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - Inputs that are generally less observable or from unobservable sources in which there is little or no market data. These inputs may be used with internally developed methodologies that result in our best estimate of fair value.
Valuation Techniques - Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
Market approach - Technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Income approach - Technique that converts future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing, and excess earnings models).
Cost approach - Technique that estimates the amount that would be required to replace the service capacity of an asset (i.e., replacement cost).
Assets and Liabilities with Recurring Fair Value Measurements - Certain assets and liabilities may be measured at fair value on an ongoing basis. We did not elect to apply the fair value option for recording financial assets and financial liabilities. Other than the warrants liability and an interest rate collar (which was settled in February 2022), we do not have any assets or liabilities which we measure at fair value on a recurring basis.
Assets and Liabilities with Nonrecurring Fair Value Measurements - Certain assets and liabilities are not measured at fair value on an ongoing basis. These assets and liabilities, which include long-lived assets, goodwill, and intangible assets, are subject to fair value adjustment in certain circumstances. From time to time, the fair value is determined on these assets as part of related impairment tests. For certain assets and liabilities acquired in business combinations, we record the fair value as of the acquisition date. Refer to Note 3: Acquisition, for the fair values of assets acquired and liabilities assumed in connection with our business combinations. Other than acquisition adjustments, no adjustments to fair value or fair value measurements were required for non-financial assets and liabilities for all periods presented. See Note 13: Fair Value Measurements for additional information.
Note 3: Acquisition
Acquisition of HiRail
On January 14, 2022, a subsidiary of the Company, CTOS Canada, Ltd., closed a Share Purchase Agreement with certain affiliates of Ontario Limited (d/b/a HiRail Leasing), Ontario Inc. (d/b/a Heavy Equipment Repairs), and Ontario Limited (d/b/a Northshore Rail Contracting) (collectively “HiRail”) to acquire 100% of the equity interests of HiRail. The acquisition of HiRail expands our presence in our strategic markets and deepens our relationships with key customers. HiRail, including the assignment of purchase accounting goodwill (see below), is included in the Company’s ERS segment.
Purchase Price
The Company paid $51.0 million, net of working capital adjustments, to HiRail equity interest holders and to repay debt obligations as consideration for the HiRail acquisition.
Opening Balance Sheet
The acquisition of HiRail has been accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the Company was required to assign the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of January 14, 2022. The excess of the purchase price over those fair values was recorded as goodwill and was attributable to expanded access to markets for the Company’s product and service offering, synergies, and broader product offerings to existing customers of HiRail. The total purchase price has been assigned to the underlying assets acquired and liabilities assumed based upon their fair values as of January 14, 2022, and the estimated fair values have been recorded based on independent valuations, discounted cash flow analysis, quoted market prices, contributory asset charges, and estimates made by management, which estimates fall under “Level 3” of the fair value hierarchy (as defined in Note 2: Summary of Significant Accounting Policies).
The following table summarizes the January 14, 2022 fair values of the assets acquired and liabilities assumed. The final assessment of the fair value of the HiRail assets acquired and liabilities assumed was complete as of December 31, 2022.
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| (in $000s) | January 14, 2022 | | Changes | | December 31, 2022 |
| Current assets | $ | 2,891 | | | $ | 956 | | | $ | 3,847 | |
| Property, equipment and other assets | 819 | | | — | | | 819 | |
| Rental equipment | 34,224 | | | — | | | 34,224 | |
| Total identifiable assets acquired | 37,934 | | | 956 | | | 38,890 | |
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| Total identifiable liabilities assumed | (6,011) | | | (1,596) | | | (7,607) | |
| Total net assets | 31,923 | | | (640) | | | 31,283 | |
| Goodwill | 8,685 | | | (41) | | | 8,644 | |
| Intangible assets | 11,027 | | | — | | | 11,027 | |
| Net assets acquired (purchase price) | 51,635 | | | (681) | | | 50,954 | |
| Less: cash acquired | (1,122) | | | — | | | (1,122) | |
| Net cash paid | $ | 50,513 | | | $ | (681) | | | $ | 49,832 | |
HiRail generated $3.8 million of revenue and $1.3 million of pre-tax loss from January 14, 2022 through March 31, 2022, which were included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2022. Costs and expenses related to the acquisition were expensed as incurred and were not material. Additionally, pro forma information as if the acquisition of HiRail had occurred on January 1, 2021 is not being presented as the information is not considered material to the Company’s financial statements.
Note 4: Revenue
Revenue Disaggregation
Geographic Areas
The Company had total revenue in the following geographic areas:
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| Three Months Ended March 31, | | |
| (in $000s) | 2023 | | 2022 | | | | | | |
| United States | $ | 438,278 | | | $ | 356,897 | | | | | | | |
| Canada | 13,885 | | | 9,579 | | | | | | | |
| Total revenue | $ | 452,163 | | | $ | 366,476 | | | | | | | |
Major Product Lines and Services
Equipment leasing and equipment sales are the core businesses of the Company, with leasing complemented by the sale of rental units from the rental fleet. The Company’s revenue by major product and service line for the three months ended March 31, 2023 and 2022 are presented in the table below.
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| Three Months Ended March 31, | | Three Months Ended March 31, | | | | | | |
| 2023 | | 2022 | | | | | | |
| (in $000s) | Topic 842 | | Topic 606 | | Total | | Topic 842 | | Topic 606 | | Total | | | | | | |
| Rental: | | | | | | | | | | | | | | | | | |
| Rental | $ | 112,903 | | | $ | — | | | $ | 112,903 | | | $ | 105,135 | | | $ | — | | | $ | 105,135 | | | | | | | |
| Shipping and handling | — | | | 5,385 | | | 5,385 | | | — | | | 4,010 | | | 4,010 | | | | | | | |
| Total rental revenue | 112,903 | | | 5,385 | | | 118,288 | | | 105,135 | | | 4,010 | | | 109,145 | | | | | | | |
| Sales and services: | | | | | | | | | | | | | | | | | |
| Equipment sales | 17,708 | | | 283,582 | | | 301,290 | | | 12,237 | | | 214,949 | | | 227,186 | | | | | | | |
| Parts and services | 4,815 | | | 27,770 | | | 32,585 | | | 2,220 | | | 27,925 | | | 30,145 | | | | | | | |
| Total sales and services | 22,523 | | | 311,352 | | | 333,875 | | | 14,457 | | | 242,874 | | | 257,331 | | | | | | | |
| Total revenue | $ | 135,426 | | | $ | 316,737 | | | $ | 452,163 | | | $ | 119,592 | | | $ | 246,884 | | | $ | 366,476 | | | | | | | |
Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. Equipment sales recognized pursuant to sales-type leases are recorded within equipment sales revenue. Charges to customers for damaged rental equipment are recorded within parts and services revenue.
Receivables, Contract Assets and Liabilities
As of March 31, 2023 and December 31, 2022, the Company had receivables related to contracts with customers of $75.8 million and $98.0 million, respectively. As of March 31, 2023 and December 31, 2022, the Company had receivables related to rental contracts and other of $91.9 million and $95.1 million, respectively.
The Company manages credit risk associated with its accounts receivable at the customer level. Because the same customers generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and the Company's allowance for credit losses address the Company's total revenues.
The Company’s allowance for credit losses reflects its estimate of the amount of receivables that it will be unable to collect. The estimated losses are based upon a review of outstanding receivables, the related aging, including specific accounts if deemed necessary, and on the Company’s historical collection experience. The estimated losses are calculated using the loss rate method based upon a review of outstanding receivables, related aging, and historical collection experience. The Company's estimates reflect changing circumstances, including changes in the economy or in the particular circumstances of individual customers, and, as a result, the Company may be required to increase or decrease its allowance. See Note 2: Summary of Significant Accounting Policies for further information regarding allowance for credit losses.
When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of March 31, 2023 and December 31, 2022, the Company had approximately $2.5 million and $3.0 million, respectively, of deferred rental revenue. Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $28.8 million and $29.6 million in deposits as of March 31, 2023 and December 31, 2022, respectively. Of the $29.6
million deposit liability balance as of December 31, 2022, $23.0 million was recorded as revenue during the three months ended March 31, 2023 due to performance obligations being satisfied. The Company’s remaining performance obligations on its equipment deposit liabilities have original expected durations of one year or less.
The Company does not have material contract assets, and as such did not recognize any material impairments of any contract assets.
The primary costs to obtain contracts for new and rental unit sales with the Company's customers are commissions. The Company pays its sales force commissions related to the sale and rental of new and used units. For new unit and rental unit sales, the period benefited by each commission is less than one year. As a result, the Company has applied the practical expedient for incremental costs of obtaining a sales contract and expenses commissions as incurred.
Note 5: Sales-Type Leases
Revenue from sales-type leases was as follows:
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| Three Months Ended March 31, | | |
| (in $000s) | 2023 | | 2022 | | | | |
| Equipment sales | $ | 24,172 | | | $ | 12,237 | | | | | |
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| Cost of equipment sales | 23,225 | | | 10,370 | | | | | |
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| Gross profit (loss) | $ | 947 | | | $ | 1,867 | | | | | |
As these transactions remained under rental contracts, $7.2 million and $5.3 million for the three months ended March 31, 2023 and 2022, respectively, were billed under the contracts as rentals. Interest income from financing receivables was $3.4 million and $2.9 million for the three months ended March 31, 2023 and 2022, respectively.
Note 6: Inventory
Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, serial lifts, digger derricks, dump bodies, etc.) and the in-process costs incurred in the final assembly of those units. As part of the business model, the Company sells unassembled individual whole goods and whole goods with varying levels of customization direct to consumers or dealers. Whole goods inventory also includes new equipment purchased specifically for resale to customers. Inventory consisted of the following:
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Whole goods | $ | 585,218 | | | $ | 468,557 | |
| Aftermarket parts and services inventory | 129,136 | | | 128,167 | |
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| Inventory | $ | 714,354 | | | $ | 596,724 | |
Note 7: Floor Plan Financing
Floor plan payables represent financing arrangements to facilitate the Company’s purchase of new and used trucks, cranes, and construction equipment inventory. All floor plan payables are collateralized by the inventory financed. These payables become due and payable upon the sale, transfer, or reclassification of each unit of inventory. Certain floor plan arrangements require the Company to satisfy various financial ratios consistent with those under the ABL Facility. As of March 31, 2023, the Company was in compliance with these covenants.
The amounts owed under floor plan payables are summarized as follows (in thousands):
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Trade: | | | |
| Daimler Truck Financial | $ | 113,916 | | | $ | 105,447 | |
| PACCAR Financial Services | 45,113 | | | 31,187 | |
| Trade floor plan payables | $ | 159,029 | | | $ | 136,634 | |
| Non-trade: | | | |
| PNC Equipment Finance, LLC | $ | 312,470 | | | $ | 293,536 | |
| Non-trade floor plan payables | $ | 312,470 | | | $ | 293,536 | |
Interest on outstanding floor plan payable balances is due and payable monthly. Floor plan interest expense was $6.8 million and $1.7 million for the three months ended March 31, 2023 and March 31, 2022.
Trade Floor Plan Financing:
Daimler Truck Financial
The Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”) bears interest at a rate of U.S. Prime plus 0.80% after an initial interest free period of up to 150 days. The total borrowing capacity under the Daimler Facility is $175.0 million. The Daimler agreement is evergreen and is subject to termination by either party through written notice.
PACCAR
The Company has an Inventory Financing Agreement with PACCAR Financial Corp that provides the Company with a line of credit of $75.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Effective during the first quarter of 2023, amounts borrowed against this line of credit incur interest at a rate of U.S. Prime Rate minus 0.6%. Previously, amounts borrowed against this line of credit incur interest at a rate of LIBOR plus 2.4%. The PACCAR agreement extends automatically each April and is subject to termination by either party through written notice. References to the prime rate in the foregoing agreements represent the rate as published in The Wall Street Journal.
Non-Trade Floor Plan Financing:
PNC Equipment Finance, LLC
The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement as of March 31, 2023, provides the Company with a $315.0 million revolving credit facility, which matures on August 25, 2023 and bears interest at a three-month term secured overnight financing rate (“SOFR”) plus 3.25%. The facility was increased from $315.0 million to $370.0 million on April 17, 2023.
Note 8: Rental Equipment
Rental equipment, net consisted of the following:
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Rental equipment | $ | 1,367,852 | | | $ | 1,360,205 | |
| Less: accumulated depreciation | (473,295) | | | (476,531) | |
| Rental equipment, net | $ | 894,557 | | | $ | 883,674 | |
Note 9: Long-Term Debt
Debt obligations and associated interest rates consisted of the following:
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| (in $000s) | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| ABL Facility | $ | 462,400 | | | $ | 437,731 | | | 6.5% | | 6.1% |
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| 2029 Secured Notes | 920,000 | | | 920,000 | | | 5.5% | | 5.5% |
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| 2023 Credit Facility | 13,725 | | | — | | | 5.8% | | — |
| Notes payable | 29,716 | | | 31,661 | | | 3.1%-5.0% | | 3.1%-5.0% |
| Total debt outstanding | 1,425,841 | | | 1,389,392 | | | | | |
| Deferred financing fees | (26,559) | | | (27,686) | | | | | |
| Total debt excluding deferred financing fees | 1,399,282 | | | 1,361,706 | | | | | |
| Less: current maturities | (5,243) | | | (6,940) | | | | | |
| Long-term debt | $ | 1,394,039 | | | $ | 1,354,766 | | | | | |
As of March 31, 2023, borrowing availability under the ABL Facility was $284.5 million, and outstanding standby letters of credit were $3.1 million.
2023 Credit Facility
On January 13, 2023, the Company entered into a new credit agreement allowing for borrowings of up to $18.0 million (the “2023 Credit Facility”). Proceeds from the credit agreement were used to finance a portion of the Company’s acquisition of real property from a related party in December 2022. A portion of the loan proceeds will be used to finance improvements to the property. In connection with entering into the agreement, the Company received net proceeds of $13.7 million with the ability to draw an additional $4.2 million upon completion of certain construction milestones. Borrowings bear interest at a fixed rate of 5.75% per
annum and are required to be repaid monthly in an amount of approximately $0.1 million with a balloon payment due on the maturity date of January 13, 2028. Borrowings are secured by the real property and improvements.
Note 10: Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of shares of Common Stock outstanding. Diluted earnings (loss) per share includes the effects of potentially dilutive shares of Common Stock, if dilutive. Our potentially dilutive shares aggregated 30.0 million and 24.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, and included warrants, contingently issuable shares, and share-based compensation, and were not included in the computation of diluted earnings (loss) per share because they would be anti-dilutive.
The following tables set forth the computation of basic and dilutive earnings (loss) per share:
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| | Three Months Ended March 31, 2023 | | Three Months Ended March 31, 2022 | | | | | | |
| (in $000s, except per share data) | | Net Income (Loss) | | Weighted Average Shares | | Per Share Amount | | Net Income (Loss) | | Weighted Average Shares | | Per Share Amount | | | | | | |
| Basic earnings (loss) per share | | $ | 13,800 | | | 246,049 | | $ | 0.06 | | | $ | (3,273) | | | 247,058 | | $ | (0.01) | | | | | | | |
| Dilutive common share equivalents | | | | 1,004 | | | | | | — | | | | | | | | |
| Diluted earnings (loss) per share | | $ | 13,800 | | | 247,053 | | $ | 0.06 | | | $ | (3,273) | | | 247,058 | | $ | (0.01) | | | | | | | |
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Note 11: Equity
Preferred Stock
As of March 31, 2023 and December 31, 2022, we were authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share, with such designation, rights and preferences as may be determined from time to time by our board of directors. As of March 31, 2023 and December 31, 2022, there were no shares of preferred stock issued or outstanding.
Common Stock
As of March 31, 2023 and December 31, 2022, the Company was authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share.
On August 2, 2022, the Company’s Board of Directors authorized a stock repurchase program, allowing for the repurchase of up to $30 million of the Company’s ordinary common shares. During the three months ended March 31, 2023, the Company repurchased approximately 0.2 million shares of its common stock, which are held in treasury, for a total of $1.1 million, including commission fees for the repurchase of its common stock. At March 31, 2023, $18.4 million was available under the stock repurchase program.
Contingently Issuable Shares
NESCO Holdings, LP is a Delaware limited partnership holding shares of our common stock. NESCO Holdings, LP is owned and controlled by Energy Capital Partners, and has the right to receive: (1) up to an additional 1,800,000 shares of common stock through July 31, 2024, in increments of 900,000 shares, if the trading price of the common stock exceeds $13.00 per share or $16.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock of the Company exceeds $13.00 per share or $16.00 per share, and (2) an additional 1,651,798 shares of common stock if during the seven-year period ending July 31, 2026, the trading price of common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
Note 12: Share-Based Compensation
The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units, performance share units and deferred compensation.
Share-based compensation expense recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) was $3.1 million and $3.4 million for the three months ended March 31, 2023 and March 31, 2022, respectively. As of March 31, 2023, there was approximately $29.7 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Amended and Restated 2019 Omnibus Incentive Plan.
Note 13: Fair Value Measurements
The FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.
The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:
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| Carrying Value | | Fair Value |
| (in $000s) | | | Level 1 | | Level 2 | | Level 3 |
| March 31, 2023 | | | | | | | |
| ABL Facility | $ | 462,400 | | | $ | — | | | $ | 462,400 | | | $ | — | |
| 2029 Secured Notes | 920,000 | | | — | | | 805,000 | | | — | |
| 2023 Credit Facility | 13,725 | | | — | | | 13,725 | | | — | |
| Other notes payable | 29,716 | | | — | | | 29,716 | | | — | |
| Warrant liabilities | 2,487 | | | — | | | — | | | 2,487 | |
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| December 31, 2022 | | | | | | | |
| ABL Facility | $ | 437,731 | | | $ | — | | | $ | 437,731 | | | $ | — | |
| 2029 Secured Notes | 920,000 | | | — | | | 814,200 | | | — | |
| Other notes payable | 31,661 | | | — | | | 31,661 | | | — | |
| Warrant liabilities | 3,012 | | | — | | | — | | | 3,012 | |
The carrying amounts of the ABL Facility and other notes payable approximated fair value as of March 31, 2023 and December 31, 2022 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the 2029 Secured Notes is calculated using Level 2 inputs, based on bid prices obtained from brokers. The Level 3 fair value presented above consists of the fair value of the Non-Public Warrants. The Company estimated the fair value using the Black-Scholes option-pricing model based on the market value of the underlying Common Stock, the remaining contractual term of the warrant, risk-free interest rates and expected dividends, and expected volatility of the price of the underlying Common Stock. The changes in the fair value of the warrant liabilities are recorded in Financing and other expense (income) in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows.
Note 14: Income Taxes
We are subject to income taxes primarily in the U.S. and Canada. Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. As a result of acquisitions and other transactions that have resulted in changes in control, certain of our federal and state net operating loss and interest expense carryforwards (collectively, “Carryforward Assets”) are subject to limitations prescribed by U.S. Internal Revenue Code Section 382 (“Section 382”) and similar rules in state and local taxing jurisdictions. We record a valuation allowance against deferred tax assets, including Carryforward Assets, when we determine that it is more likely than not that all or a portion of a deferred tax asset will not be realized. For interim periods, we estimate our annual effective tax rate, exclusive of discrete items, which is derived primarily by our estimate of our valuation allowance as of the end of our fiscal year. The Company’s effective tax rate for the three months ended March 31, 2023 and 2022 differs from the U.S. federal statutory tax rate due to the recording of valuation allowances. We recorded an income tax expense of $0.9 million for the three months ended March 31, 2023 resulting in an effective tax rate of 5.9% compared to an income tax expense of $3.0 million for the comparable prior year period, at a negative effect tax rate of (1121.3)%. The change in the effective tax rate was primarily due to state tax expense recorded during the three month period ended March 31, 2023 as compared to the three month period ended March 31, 2022 and the near break-even pre-tax loss in the three month period ended March 31, 2022 that resulted in an exaggerated effective tax rate.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax for certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. The IRA is effective for tax years beginning after December 31, 2022. Based on our current analysis of the provisions, we do not believe this legislation will have a material effect on our consolidated financial statements. We will continue to monitor the additional guidance from the Internal Revenue Service (the “IRS”).
Note 15: Commitments and Contingencies
We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Legal Matters
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. At this time, no claims of these types, certain of which are covered by insurance policies, have had a material effect on the Company. Certain jurisdictions in which the Company operates do not allow insurance recoveries related to punitive damages.
From time to time, the Company is audited by state and local taxing authorities. These audits typically focus on the Company’s withholding of state-specific sales tax and rental-related taxes.
Custom Truck LP’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the IRS. The IRS issued an assessment on October 28, 2020 in an aggregate amount of $2.4 million for the 2015 periods, alleging that certain types of sold equipment are not eligible for the Mobile Machinery Exemption set forth in the Internal Revenue Code (the “Code”). An appeal was filed on January 28, 2021. Based on management’s understanding of the facts and circumstances, including the relevant provisions of the Code, and historical precedent, including previous successful appeals of similar assessments in prior years, management does not believe the likelihood of a loss resulting from the IRS assessment to be probable at this time.
While it is not possible to predict the outcome of the foregoing matters with certainty, it is the opinion of management that the final outcome of these matters will not have a material effect on the Company’s consolidated financial condition, results of operations and cash flows.
Purchase Commitments
We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. All of these agreements are cancellable within a specified notification period to the supplier.
Note 16: Related Parties
The Company has transactions with related parties as summarized below.
Rentals and Sales — The Company rents and sells equipment and provides services to R&M Equipment Rental, a business partially owned by members of the Company’s management. The Company also rents equipment and purchases inventory from R&M Equipment Rental.
Prior to August 1, 2022, Energy Capital Partners (“ECP”), a stockholder of the Company, and their affiliates had ownership interests in PLH Group, Inc., which was a customer of the Company.
Facilities Leases and Other — The Company has leased certain facilities, as well as purchased aircraft charter services, from entities owned by members of the Company’s management and their immediate families. Lease and charter services payments related to these transactions are immaterial. Rent and air travel expenses are recorded in selling, general, and administrative expenses. In December 2022, the Company terminated the lease agreements and purchased the facilities and land from these related parties for a purchase price of approximately $15.4 million.
Management Fees — The Company entered into the Corporate Advisory Services Agreement with Platinum effective in April 2021, under which management fees are payable to Platinum quarterly. The management fees are recorded in transaction expenses and other in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
A summary of the transactions with the foregoing related parties included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
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| Three Months Ended March 31, | | |
| (in $000s) | 2023 | | 2022 | | | | | | |
| Total revenues from transactions with related parties | $ | 8,455 | | | $ | 7,851 | | | | | | | |
| Expenses incurred from transactions with related parties included in cost of revenue | $ | 358 | | | $ | 1,297 | | | | | | | |
| Expenses incurred from transactions with related parties included in operating expenses | $ | 1,395 | | | $ | 1,631 | | | | | | | |
Amounts receivable from/payable to related parties included in the Condensed Consolidated Balance Sheets are as follows:
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Accounts receivable from related parties | $ | 2,280 | | | $ | 7,813 | |
| Accounts payable to related parties | $ | 199 | | | $ | 1,475 | |
Note 17: Segments
Our operations are primarily organized and managed by operating segment. Operating segment performance and resource allocations are primarily based on gross profit. The accounting policies of the reportable segments are consistent with those described in Note 2: Summary of Significant Accounting Policies to the condensed consolidated financial statements. Intersegment sales and any related profits are eliminated in consolidation. We manage the business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”). The segment operations are described in Note 1: Business and Organization to these financial statements.
The Company’s segment results are presented in the tables below:
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| Three Months Ended March 31, |
| 2023 |
| (in $000s) | ERS | | TES | | APS | | Total |
| Revenue: | | | | | | | |
| Rental | $ | 113,784 | | | $ | — | | | $ | 4,504 | | | $ | 118,288 | |
| Equipment sales | 92,136 | | | 209,154 | | | — | | | 301,290 | |
| Parts and services | — | | | — | | | 32,585 | | | 32,585 | |
| Total revenue | 205,920 | | | 209,154 | | | 37,089 | | | 452,163 | |
| Cost of revenue: | | | | | | | |
| Rentals/parts and services | 29,060 | | | — | | | 26,987 | | | 56,047 | |
| Equipment sales | 71,081 | | | 175,044 | | | — | | | 246,125 | |
| Depreciation of rental equipment | 39,512 | | | — | | | 818 | | | 40,330 | |
| Total cost of revenue | 139,653 | | | 175,044 | | | 27,805 | | | 342,502 | |
| Gross profit | $ | 66,267 | | | $ | 34,110 | | | $ | 9,284 | | | $ | 109,661 | |
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| Three Months Ended March 31, |
| 2022 |
| (in $000s) | ERS | | TES | | APS | | Total |
| Revenue: | | | | | | | |
| Rental | $ | 105,561 | | | $ | — | | | $ | 3,584 | | | $ | 109,145 | |
| Equipment sales | 59,353 | | | 167,833 | | | — | | | 227,186 | |
| Parts and services | — | | | — | | | 30,145 | | | 30,145 | |
| Total revenue | 164,914 | | | 167,833 | | | 33,729 | | | 366,476 | |
| Cost of revenue: | | | | | | | |
| Rentals/parts and services | 24,791 | | | — | | | 24,950 | | | 49,741 | |
| Equipment sales | 43,230 | | | 144,048 | | | — | | | 187,278 | |
| Depreciation of rental equipment | 43,966 | | | — | | | 998 | | | 44,964 | |
| Total cost of revenue | 111,987 | | | 144,048 | | | 25,948 | | | 281,983 | |
| Gross profit | $ | 52,927 | | | $ | 23,785 | | | $ | 7,781 | | | $ | 84,493 | |
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Total assets by operating segment are not disclosed herein because asset by operating segment data is not reviewed by the chief operating decision-maker (“CODM”) to assess performance and allocate resources.
Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of consolidated gross profit to consolidated income (loss) before income taxes:
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| Three Months Ended March 31, | | |
| (in $000s) | 2023 | | 2022 | | | | | | |
| Gross Profit | $ | 109,661 | | | $ | 84,493 | | | | | | | |
| Selling, general and administrative expenses | 56,991 | | | 53,655 | | | | | | | |
| Amortization | 6,672 | | | 13,335 | | | | | | | |
| Non-rental depreciation | 2,650 | | | 3,047 | | | | | | | |
| Transaction expenses and other | 3,460 | | | 4,648 | | | | | | | |
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| Interest expense, net | 29,176 | | | 19,156 | | | | | | | |
| Financing and other expense (income) | (3,951) | | | (9,080) | | | | | | | |
| Income (Loss) Before Income Taxes | $ | 14,663 | | | $ | (268) | | | | | | | |
The following table presents total assets by country:
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| (in $000s) | March 31, 2023 | | December 31, 2022 |
| Assets: | | | |
| United States | $ | 2,950,122 | | | $ | 2,830,958 | |
| Canada | 119,261 | | | 107,254 | |
| $ | 3,069,383 | | | $ | 2,938,212 | |