Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Business and Organization
Organization
Custom Truck One Source, Inc., formerly Nesco Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries 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. Immediately following the acquisition by Nesco Holdings II, Inc. of Custom Truck One Source, L.P. (“Custom Truck LP”) as discussed in Note 3: Business Combinations, on April 1, 2021 (the “Acquisition”), Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of common stock (“Common Stock”) from “NSCO” to “CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.” Terms such as, “we,” “our,” “us,” or “the Company” refer to Nesco Holdings prior to the Acquisition, and to the combined company after the Acquisition. Unless the context otherwise requires, the term “Nesco” or “Nesco Holdings” as used in these financial statements means Nesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to and on the date of the Acquisition.
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. Following the Acquisition, we changed our reportable segments to be consistent with how we currently manage the business, representing 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 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.
COVID-19 and Supply Chain
Uncertainty remains regarding emerging variant strains of the Coronavirus Disease 2019 ("COVID-19") pandemic, and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted in the United States and the rest of the world, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to the U.S., and the Company has continued to meet the needs of customers during the pandemic. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. The ensuing economic impacts from restrictions put in place around the globe to address the COVID-19 pandemic, including shutdowns and workplace changes, have led to issues, broadly, in the global flow of goods and services (the “supply chain”). The Company continues to monitor the impact of the COVID-19 pandemic and related restrictions on our supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in our production and manufacturing processes. Supply chain disruptions, such as the ongoing semiconductor shortage, 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 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 consolidated financial position and results of operations and cash flows (including segment information) presented herein include those of Custom Truck One Source, Inc. as of March 31, 2022 and since the date of the Acquisition. Financial information presented for periods prior to the Acquisition represent those of Nesco Holdings and its subsidiaries.
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, 2021, 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 period. 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, 2021.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP, which requires us to use judgment to make estimates that directly affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates are used for items including, but not limited to, the useful lives and residual values of our rental equipment, and the allocation of purchase price related to business combinations. In addition, estimates are used to test both long-lived assets, goodwill, and indefinite-lived assets for impairment, and to determine the fair value of impaired assets, if any impairment exists. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances. We review our estimates on an ongoing basis using information currently available, and we revise our recorded estimates as updated information becomes available, facts and circumstances change, or actual amounts become determinable. Actual results could differ from our estimates.
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 was $12.8 million and $10.8 million as of March 31, 2022 and December 31, 2021, respectively, and is included in accounts receivable, net on our Condensed Consolidated Balance Sheets.
Note 3: Business Combinations
Acquisition of Custom Truck One Source, L.P.
On December 3, 2020, Nesco Holdings and Nesco Holdings II, Inc., a subsidiary of Nesco Holdings (the “Buyer” or the “Issuer”), entered into a Purchase and Sale Agreement (as amended, the “Purchase Agreement”) with certain affiliates of The Blackstone Group (“Blackstone”) and other direct and indirect equity holders (collectively, “Sellers”) of Custom Truck One Source, L.P., Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom Truck LP. In connection with the Acquisition, Nesco Holdings and certain Sellers entered into Rollover and Contribution Agreements (the “Rollover Agreements”), pursuant to which such Sellers agreed to contribute a portion of their equity interests in Custom Truck LP (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share. We believe the Acquisition creates a leading, one-stop shop for specialty equipment, serving highly attractive and growing infrastructure end markets, including transmission and distribution, telecom, rail and other national infrastructure initiatives.
Also on December 3, 2020, Nesco Holdings entered into a Common Stock Purchase Agreement (the “Investment Agreement”) with Platinum, relating to, among other things, the issuance and sale to Platinum (the “Subscription”) of shares of Common Stock, for an aggregate purchase price in the range of $700 million to $763 million, with the specific amount calculated in accordance with the Investment Agreement based upon the total equity funding required to fund the consideration paid pursuant to the terms of the Purchase Agreement. The shares of Common Stock issued and sold to Platinum had a purchase price of $5.00 per share. In accordance with the Investment Agreement, on December 21, 2020, Nesco Holdings entered into Subscription Agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”) to finance, in part, the Acquisition. Pursuant to the Subscription Agreements, concurrently with the closing of the transactions contemplated by the Investment Agreement, the PIPE Investors agreed to purchase an aggregate of 28,000,000 shares of Common Stock at $5.00 per share for an aggregate purchase price of $140 million (the “Supplemental Equity Financing”).
On April 1, 2021 (the “Closing Date”), in connection with (i) the Rollovers, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors.
Purchase Price
The Company issued 20,100,000 shares of Common Stock to Custom Truck LP equity interest holders, as well as paid cash and repaid debt obligations as consideration for the Acquisition. The trading price of the Common Stock was $9.35 per share on the Closing Date. The purchase price has been determined to be as follows:
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| (in $000s, except share and per share data) | |
| Common stock issued | 20,100,000 | |
| Common stock per share price as of April 1, 2021 | $ | 9.35 | |
| Fair value of common stock issued | $ | 187,935 | |
| Cash consideration paid to equity interest holders | 790,324 | |
| Repayment of debt obligations | 552,600 | |
| Total purchase price | $ | 1,530,859 | |
During the year ended December 31, 2021, the Company transferred an additional $3.4 million of cash consideration to the Sellers related to certain customary closing adjustments set forth in the Purchase Agreement.
Opening Balance Sheet
The acquisition of Custom Truck One Source, L.P. has been accounted for using the acquisition method of accounting, and the Company is considered the accounting acquirer. Under the acquisition method of accounting, we are required to assign the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the purchase price over those fair values is recorded as goodwill. The total purchase price has been assigned to the underlying assets acquired and liabilities assumed based upon their fair values as of the Closing Date, 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 11: Fair Value Measurements).
The following table summarizes the April 1, 2021 fair values of the assets acquired and liabilities assumed. Since the Closing Date, the Company identified and recorded certain measurement period adjustments to the preliminary purchase price allocation, which are reflected in the table below. These adjustments were not significant and related primarily to rental equipment and current liabilities. The measurement period adjustments, coupled with the additional cash consideration discussed above, increased goodwill by approximately $15.6 million during the year ended December 31, 2021. The final assessment of the fair value of the Custom Truck LP assets acquired and liabilities assumed was complete as of March 31, 2022.
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| Accounts and financing receivables (a) | $ | 115,325 | |
| Inventory | 431,648 | |
| Other current assets | 13,201 | |
| Property and equipment (b) | 104,721 | |
| Rental equipment | 556,569 | |
| Intangible assets (c) | 301,018 | |
| Operating lease assets | 23,793 | |
| Other assets | 18,223 | |
| Total identifiable assets acquired | 1,564,498 | |
| Current liabilities | (410,276) | |
| Long-term debt | (28,607) | |
| Operating lease liabilities-noncurrent | (21,308) | |
| Deferred tax and other liabilities | (31,261) | |
| Total identifiable liabilities assumed | (491,452) | |
| Total net assets | 1,073,046 | |
| Goodwill (d) | 457,813 | |
| Net assets acquired (purchase price) | $ | 1,530,859 | |
a.The estimated fair value of accounts and financing receivables is $115.3 million, with the gross contractual amount being $122.4 million. The Company estimates approximately $7.0 million to be uncollectible.
b.Acquired property and equipment is primarily comprised of land, buildings and improvements with an estimated fair value of $67.9 million, and machinery, equipment and vehicles, with an estimated fair value of $31.1 million, as well as other property with an estimated fair value of $5.7 million.
c.The acquired identified intangible assets are comprised of trade names, with an estimated fair value of $151.0 million, and customer relationships, with an estimated fair value of $150.0 million. The weighted average useful lives of the trade names and the customer relationships are estimated to be 15 years and 12 years, respectively.
d.The goodwill recognized is attributable primarily to synergies and economies of scale provided by the acquired rental and new equipment sales businesses, as well as the assembled workforce of Custom Truck LP. Approximately $265.4 million of the goodwill is expected to be deductible for income tax purposes.
Goodwill attributable to the Acquisition is assigned to our Segments as follows:
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| (in $000s) | |
ERS | $ | 261,607 | |
TES | 167,307 | |
APS | 28,899 | |
Financing Transactions
On the Closing Date, the Issuer issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the “2029 Secured Notes”). The 2029 Secured Notes were issued pursuant to an indenture, dated as of April 1, 2021, by and among the Issuer, Wilmington Trust, National Association, as trustee, and the guarantors party thereto (the “Indenture”). The Issuer will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year, which commenced on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029. The notes were offered pursuant to a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside of the United States in reliance on Regulation S under the Securities Act. The proceeds from the issuance and sale of the 2029 Secured Notes were used to consummate the Acquisition and to repay the Senior Secured Notes due 2024 previously issued by Nesco Holdings, repay certain indebtedness of Custom Truck LP and pay certain fees and expenses related to the Acquisition and financing transactions.
Also on the Closing Date, the Buyer, its direct parent, and certain of its direct and indirect subsidiaries entered into a senior secured asset-based revolving credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent, and certain other lenders party thereto, consisting of a $750.0 million first lien senior secured asset-based revolving credit facility with a maturity of five years (the “ABL Facility”), which includes borrowing capacity for revolving loans (with a swingline sub-facility) and the issuance of letters of credit. Proceeds from the ABL Facility were used to finance the repayment of certain indebtedness of (i) Custom Truck LP under that certain Credit Agreement, dated as of April 18, 2017 (the “Custom Truck LP Credit Facility”), by and among Custom Truck LP, the other entities party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, and (ii) Buyer under that certain Credit Agreement, dated as of July 31, 2019 (the “2019 Credit Facility”), by and among Capitol Investment Merger Sub 2, LLC, the other entities party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as well as to pay fees and expenses related to the Acquisition and the financing transactions.
Pro Forma Information
The below pro forma information is presented for the three months ended March 31, 2021 and uses the estimated fair value of assets and liabilities on the Closing Date, and makes the following assumptions: (1) removes acquisition-related costs and charges that were recognized in the Company's consolidated financial statements in the three months ended March 31, 2021 and applies these costs and charges as if the Acquisition and related financing transactions had occurred on January 1, 2020; (2) adjusts for the impacts of purchase accounting in the three months ended March 31, 2021; (3) adjusts interest expense, including amortization of debt issuance costs, to reflect borrowings on the ABL Facility and issuance of the 2029 Secured Notes, as if the funds had been borrowed and the notes had been issued on January 1, 2020 and used to repay Nesco’s 2019 Credit Facility, Nesco’s Senior Secured Notes due 2024 and the Custom Truck LP Credit Facility and term loan; and (4) adjusts for the income tax effect using a tax rate of 25%. The pro forma information is not necessarily indicative of the Company’s results of operations had the Acquisition been completed on January 1, 2020, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies, synergies, or revenue opportunities that could result from the Acquisition.
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| | | | | Three Months Ended March 31, |
| (in $000s) | | | | | | | 2021 |
| Revenue | | | | | | | $ | 394,770 | |
| Net income (loss) | | | | | | | $ | (15,280) | |
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The following presents a summary of the pro forma adjustments that are directly attributable to the business combination:
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| | | | | | Three Months Ended March 31, |
| (in $000s) | | | | | | | | 2021 |
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| Increase (decrease) net income/loss: | | | | | | | | |
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| Impact of fair value mark-ups on rental fleet depreciation | a | | | | | | | $ | (3,817) | |
| Intangible asset amortization and other depreciation expense | b | | | | | | | (2,390) | |
| Transaction expenses | c | | | | | | | 15,702 | |
| Interest expense and amortization of debt issuance costs | d | | | | | | | 3,919 | |
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| Income tax expense | e | | | | | | | (3,354) | |
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a.Represents the adjustment for depreciation of rental fleet relating to the increase in the value of the rental fleet to its fair value.
b.Represents the differential in amortization and depreciation of non-rental equipment related to the respective fair values of the assets.
c.Represents adjustments for transaction expenses that are applied to the three months ended March 31, 2021.
d.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to our debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the Senior Secured Notes due 2024; (iv) repayment of the Custom Truck LP Credit Facility; and (v) the issuance of the 2029 Secured Notes.
e.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. This rate may vary from the actual effective rate of the historical and combined businesses.
Transaction Costs
The Company expensed approximately $10.4 million in transaction costs related to the Acquisition within Transaction expenses and other expense in the three months ended March 31, 2021.
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.
Purchase Price
The Company paid $51.6 million 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, we are 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 is recorded as goodwill and is attributable to expanded access to markets for our product and service offering, synergies, and broader product offerings to existing customers of HiRail. The total purchase price has been preliminarily assigned to the underlying assets acquired and liabilities assumed based upon their preliminary 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 11: Fair Value Measurements).
The following table summarizes as of 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, including estimates of fair values for inventory, property and equipment, rental equipment, certain intangible assets, deferred income taxes and the final assignment of goodwill to reporting units, was not complete as of March 31, 2022. The preliminary fair values are subject to change pending a final determination of the fair values of assets acquired and liabilities assumed as more information is received about their respective values. As of March 31, 2022, the Company is in the process of determining the value of intangible assets acquired including customer relationships, trade names, and other intangible assets.
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| (in $000s) | |
| Current assets | $ | 2,891 | |
| Property, equipment and other assets | 819 | |
| Rental equipment | 34,224 | |
| Total identifiable assets acquired | 37,934 | |
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| Total identifiable liabilities assumed | (6,011) | |
| Total net assets | 31,923 | |
| Goodwill and intangible assets | 19,712 | |
| Net assets acquired (purchase price) | 51,635 | |
| Less: cash acquired | (1,122) | |
| Net cash paid | $ | 50,513 | |
HiRail has generated $3.8 million of revenue and $1.3 million of pre-tax loss since January 14, 2022, which are included in the Condensed Consolidated Statements of Net 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 our consolidated 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) | | | | | 2022 | | 2021 | | |
| United States | | | | | $ | 356,897 | | | $ | 77,466 | | | |
| Canada | | | | | 9,579 | | | 833 | | | |
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| Total revenue | | | | | $ | 366,476 | | | $ | 78,299 | | | |
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 month periods ended March 31, 2022 and 2021 are presented in the tables below.
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| Three Months Ended March 31, | | Three Months Ended March 31, | | |
| 2022 | | 2021 | | |
| (in $000s) | Topic 842 | | Topic 606 | | Total | | Topic 840 | | Topic 606 | | Total | | | | | | |
| Rental: | | | | | | | | | | | | | | | | | |
| Rental | $ | 105,135 | | | $ | — | | | $ | 105,135 | | | $ | 46,186 | | | $ | — | | | $ | 46,186 | | | | | | | |
| Shipping and handling | — | | | 4,010 | | | 4,010 | | | — | | | 2,103 | | | 2,103 | | | | | | | |
| Total rental revenue | 105,135 | | | 4,010 | | | 109,145 | | | 46,186 | | | 2,103 | | | 48,289 | | | | | | | |
| Sales and services: | | | | | | | | | | | | | | | | | |
| Equipment sales | 12,237 | | | 214,949 | | | 227,186 | | | — | | | 17,987 | | | 17,987 | | | | | | | |
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| Parts and services | 2,220 | | | 27,925 | | | 30,145 | | | — | | | 12,023 | | | 12,023 | | | | | | | |
| Total sales and services | 14,457 | | | 242,874 | | | 257,331 | | | — | | | 30,010 | | | 30,010 | | | | | | | |
| Total revenue | $ | 119,592 | | | $ | 246,884 | | | $ | 366,476 | | | $ | 46,186 | | | $ | 32,113 | | | $ | 78,299 | | | | | | | |
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
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. During the three months ended March 31, 2022, the Company recognized bad debt expense of $1.4 million, as reductions of rental revenue in accordance with the collectability provisions of Topic 842. During the three months ended March 31, 2022, the Company recognized $1.5 million within selling, general, and administrative expense in its Condensed Consolidated Statements of Net Income (Loss), which included changes in its allowances 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, 2022 and 2021, the Company had approximately $1.7 million and $1.0 million, respectively, of deferred rental revenue. Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $24.0 million in deposits as of March 31, 2022.
The Company does not have material contract assets, and it 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: Inventory
Inventory consisted of the following:
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| (in $000s) | March 31, 2022 | | December 31, 2021 |
| Whole goods | $ | 367,539 | | | $ | 326,641 | |
| Aftermarket parts and services inventory | 96,183 | | | 83,901 | |
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| Inventory | $ | 463,722 | | | $ | 410,542 | |
Note 6: Rental Equipment
Rental equipment, net consisted of the following:
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| (in $000s) | March 31, 2022 | | December 31, 2021 |
| Rental equipment | $ | 1,254,912 | | | $ | 1,247,375 | |
| Less: accumulated depreciation | (420,267) | | | (413,050) | |
| Rental equipment, net | $ | 834,645 | | | $ | 834,325 | |
Note 7: Long-Term Debt
Debt obligations and associated interest rates consisted of the following:
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| (in $000s) | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
| ABL Facility | $ | 410,100 | | | $ | 394,945 | | | 2.1% | | 1.8% |
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| 2029 Secured Notes | 920,000 | | | 920,000 | | | 5.5% | | 5.5% |
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| Notes payable | 30,864 | | | 32,619 | | | 3.0%-5.0% | | 3.0%-5.0% |
| Total debt outstanding | 1,360,964 | | | 1,347,564 | | | | | |
| Deferred finance fees | (31,618) | | | (32,945) | | | | | |
| Net debt | 1,329,346 | | | 1,314,619 | | | | | |
| Less: current maturities | (4,950) | | | (6,354) | | | | | |
| Long-term debt | $ | 1,324,396 | | | $ | 1,308,265 | | | | | |
As of March 31, 2022, borrowing availability under the ABL Facility was $330.9 million, and outstanding standby letters of credit were $4.8 million.
Note 8: Earnings (Loss) Per Share
Diluted earnings (loss) per share includes the effects of potentially dilutive shares of Common Stock. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, and share-based compensation, all of which have been excluded from the calculation of diluted net earnings (loss) per share for the applicable periods because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. Our potentially dilutive shares aggregated 24.9 million and 28.0 million, respectively, for the three months ended March 31, 2022 and 2021.
The following tables set forth the computation of basic and dilutive loss per share:
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| | Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 | | |
| (in $000s, except share and 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 | | $ | (3,273) | | | 247,057,564 | | | $ | (0.01) | | | $ | (27,907) | | | 48,619,613 | | | $ | (0.57) | | | | | | | |
| Dilutive common share equivalents | | — | | | — | | | — | | | — | | | — | | — | | | | | | | |
| Diluted earnings (loss) per share | | $ | (3,273) | | | 247,057,564 | | | $ | (0.01) | | | $ | (27,907) | | | 48,619,613 | | | $ | (0.57) | | | | | | | |
Note 9: Equity
Preferred Stock
As of March 31, 2022 and December 31, 2021, we were authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share, respectively, with such designation, rights and preferences as may be determined from time to time by our board of directors. As of March 31, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.
Common Stock
As of March 31, 2022 and December 31, 2021, we were authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share, respectively.
During the period commencing on the date of the Acquisition and ending on the date that is eighteen months following the date of the Acquisition (the “Lockup Period” ), Platinum shall not transfer any shares of common stock beneficially owned or otherwise held by it other than transfers as allowed by the Amended and Restated Stockholder’s Agreement of Custom Truck One Source, Inc.
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 (x) 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 (y) 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 10: 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 Net Income (Loss) was $3.4 million and $0.7 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, there was approximately $20.8 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Plan. That cost is expected to be recognized over a weighted average period of 2.3 years. There were no share-based payment awards granted in the three months ended March 31, 2022.
Note 11: Fair Value Measurements
The Financial Accounting Standards Board (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, 2022 | | | | | | | |
| ABL Facility | $ | 410,100 | | | $ | — | | | $ | 410,100 | | | $ | — | |
| 2029 Secured Notes | 920,000 | | | — | | | 906,200 | | | — | |
| Other notes payable | 30,864 | | | — | | | 30,864 | | | — | |
| Warrant liabilities | 17,693 | | | — | | | — | | | 17,693 | |
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| December 31, 2021 | | | | | | | |
| ABL Facility | $ | 394,945 | | | $ | — | | | $ | 394,945 | | | $ | — | |
| 2029 Secured Notes | 920,000 | | | — | | | 949,900 | | | — | |
| Other notes payable | 32,619 | | | — | | | 32,619 | | | — | |
| Derivative and warrant liabilities | 24,164 | | | — | | | 2,388 | | | 21,776 | |
The carrying amounts of the ABL Facility and other notes payable approximated fair value as of March 31, 2022 and December 31, 2021 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 and Senior Secured Notes due 2024 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 (as defined in Note 12: Financial Instruments). 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.
Note 12: Financial Instruments
In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest rate exposure. These financial instruments are not used for trading or speculative purposes.
Warrants
Nesco Holding’s predecessor, Capitol Investment Corp. IV, an entity formed on May 1, 2017, as a special purpose acquisition company (“Capitol” or the “SPAC”), issued warrants for the purchase of approximately 7.5 million shares of the Company’s Common Stock pursuant to a private placement agreement (the “Non-Public Warrants”). In connection with the SPAC’s initial public offering, warrants for the purchase of approximately 13.4 million shares of the Company’s Common Stock were issued to public investors (the “Public Warrants”). The Public Warrants together with the Non-Public Warrants are hereafter referred to collectively as the “Warrants.”
The Warrants provide for the purchase of approximately 20.9 million shares of the Company’s Common Stock. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $11.50 per share, subject to certain adjustments. The Warrants are currently exercisable and terminate on the earlier to occur of (i) July 31, 2024, and (ii) the redemption date. The Company may redeem the Public Warrants at a price of $0.01 per Public Warrant upon providing 30-days’ notice, only in the event that the last sale price of the Common Stock is at least $18.00 per share for any 20 trading days within a 30-trading day period ending on the third day prior to the date on which notice of redemption is given. If the Company elects to redeem the Public Warrants as described above, the Public Warrant may be exercised on a “cashless basis.” The redemption rights do not apply to the Non-Public Warrants if, at the time of the redemption, such Non-Public Warrants continue to be held by the initial holders as of July 31, 2019, or their affiliates or permitted transferees; however, once such Non-Public Warrants are transferred (other than to an affiliate or permitted transferee), the Company may redeem those Non-Public Warrants that have been transferred in a manner similar to any Public Warrants.
The Public Warrants are accounted for as freestanding equity-classified instruments because the Company has the ability to settle with holders of the Public Warrants either by net-share or physical settlement. Because the Non-Public Warrants do not meet the “indexed to the entity’s stock” condition, they have been accounted for as a derivative liability and remeasured at their estimated fair value each period. For the three months ended March 31, 2022, the Company recognized income of $4.1 million in Other (income) expense in its Condensed Consolidated Statements of Net Income (Loss) related to the fair value remeasurement.
Derivatives Not Designated as Hedges
On July 17, 2019, we entered into an interest rate collar (the “Collar”) agreement to mitigate the risk of changes in the interest rate paid during the contract period for $170.0 million of the Company’s variable rate loans. Under the Collar, we are required to pay the counterparty to the agreement an amount equal to the difference between a monthly LIBOR-based interest rate and a defined interest rate floor; conversely, we are entitled to receive from the counterparty an amount equal to the excess of a LIBOR-based interest rate and a defined interest rate cap. The required payments due to or due from the counterparty are calculated by applying the interest rate differential to the notional amount ($170.0 million) and are determined monthly through July 31, 2024. The Collar expires in July 2024 and has not been designated as a cash flow hedge. The Collar is carried at fair value and reported in Derivative and warrant liabilities on the Company's Consolidated Balance Sheets ($2.4 million as of December 31, 2021) as a Level 2 measurement (see Note 11: Fair Value Measurements). The change in fair value of the Collar is recognized in Other expense (income), net in our Condensed Consolidated Statements of Net Income (Loss) and totaled $(1.7) million and $(1.8) million for the three months ended March 31, 2022 and 2021, respectively. During the first quarter of 2022 the Company settled the Collar for no gain or loss.
Note 13: Income Taxes
We are subject to taxation in all jurisdictions in which we operate within the United States and Canada. Substantially all of our income before income taxes for all periods presented is U.S. sourced.
We record a valuation allowance against deferred tax 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. The valuation allowance primarily relates to federal and state net operating loss carryforwards, as well as disallowed interest expense deduction carryforwards. While the Acquisition resulted in a significant increase in deferred tax liabilities, these tax liabilities, which give rise to future taxable income against which tax carryforwards may be applied, are subject to limitations. Federal and state income tax limitation rules are expected to limit the application of our carryforwards and, accordingly, we record a valuation allowance to reduce our deferred tax assets to amounts expect to be realized. The Company's effective tax rate for the three months ended March 31, 2022 and 2021 differs from the U.S. federal statutory tax rate due primarily to the recording of valuation allowances. During three months ended March 31, 2022, the tax rate also differed from the U.S. federal statutory tax rate as a result of state tax expense recorded during the period. The increase in the effective tax rate in three months ended March 31, 2022 as compared to three months ended March 31, 2021 is primarily due to the near break-even pre-tax loss in the current period.
Note 14: 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. For matters pertaining to the pre-Acquisition activities of Custom Truck LP, Sellers have agreed to indemnify Nesco and Buyer for losses arising out of the breach of Sellers’ pre-closing covenants in the Purchase Agreement and certain indemnified tax matters, with recourse limited to a $10 million and $8.5 million escrow account, respectively.
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 Internal Revenue Service (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 15: Related Parties
The Company has transactions with related parties as summarized below.
Rentals and Sales — Energy Capital Partners (“ECP”), a stockholder in the Company, and their affiliates have ownership interests in a broad range of companies. The Company has entered into commercial transactions with subsidiaries of PLH Group, Inc., a company partially owned by an affiliate of ECP.
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. During the three months ended March 31, 2022, the Company purchased no rental equipment from R&M Equipment Rental.
Facilities Leases and Other — The Company leases certain facilities, as well as purchases aircraft charter services, from entities owned by members of the Company’s management and their immediate families. Payments to the related parties for these transactions are immaterial. Rent and air travel expenses are recorded in selling, general, and administrative expenses.
Management Fees — The Company entered into the Corporate Advisory Services Agreement with Platinum effective as of the Closing Date, under which management fees are payable to Platinum quarterly.
A summary of the transactions with the foregoing related parties included in the Condensed Consolidated Statements of Net Income (Loss) is as follows:
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| | | Three Months Ended March 31, |
| (in $000s) | | | | | 2022 | | 2021 | | |
| Total revenues from transactions with related parties | | | | | $ | 7,851 | | | $ | 2,124 | | | |
| Expenses incurred from transactions with related parties included in cost of revenue | | | | | $ | 1,297 | | | $ | — | | | |
| Expenses incurred from transactions with related parties included in operating expenses | | | | | $ | 1,631 | | | $ | — | | | |
Amounts receivable from/payable to related parties included in the Consolidated Balance Sheets are as follows:
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| (in $000s) | March 31, 2022 | | December 31, 2021 |
| Accounts receivable from related parties | $ | 7,813 | | | $ | 5,145 | |
| Accounts payable to related parties | $ | 1,475 | | | $ | 26 | |
Note 16: 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 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. Segment information presented below has been adjusted for all prior periods, consistent with the current reportable segment presentation.
The Company’s segment results are presented in the tables below:
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| 2022 |
| (in $000s) | ERS | | TES | | APS | | Total |
| Revenue: | | | | | | | |
| Rental | $ | 105,561 | | | $ | — | | | $ | 3,584 | | | $ | 109,145 | |
| Equipment sales | 59,353 | | | 167,833 | | | — | | | 227,186 | |
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| Parts and services | — | | | — | | | 30,145 | | | 30,145 | |
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| 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 | |
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| 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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| Three Months Ended March 31, |
| 2021 |
| (in $000s) | ERS | | TES | | APS | | Total |
| Revenue: | | | | | | | |
| Rental | $ | 44,730 | | | $ | — | | | $ | 3,559 | | | $ | 48,289 | |
| Equipment sales | 10,485 | | | 7,502 | | | — | | | 17,987 | |
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| Parts and services | — | | | — | | | 12,023 | | | 12,023 | |
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| Total revenue | 55,215 | | | 7,502 | | | 15,582 | | | 78,299 | |
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| Rentals/parts and services | 15,537 | | | — | | | 11,034 | | | 26,571 | |
| Equipment sales | 6,740 | | | 6,925 | | | — | | | 13,665 | |
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| Depreciation of rental equipment | 16,885 | | | — | | | 959 | | | 17,844 | |
| Total cost of revenue | 39,162 | | | 6,925 | | | 11,993 | | | 58,080 | |
| Gross profit | $ | 16,053 | | | $ | 577 | | | $ | 3,589 | | | $ | 20,219 | |
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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 loss before income taxes:
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| | | Three Months Ended March 31, |
| (in $000s) | | | | | 2022 | | 2021 | | |
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| Gross Profit | | | | | $ | 84,493 | | | $ | 20,219 | | | |
| Selling, general and administrative expenses | | | | | 53,655 | | | 12,050 | | | |
| Amortization | | | | | 13,335 | | | 754 | | | |
| Non-rental depreciation | | | | | 3,047 | | | 21 | | | |
| Transaction expenses | | | | | 4,648 | | | 10,448 | | | |
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| Interest expense, net | | | | | 19,156 | | | 14,906 | | | |
| Financing and other expense (income) | | | | | (9,080) | | | 5,857 | | | |
| Income (Loss) Before Income Taxes | | | | | $ | (268) | | | $ | (23,817) | | | |
The following table presents total assets by country:
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| (in $000s) | March 31, 2022 | | December 31, 2021 |
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| United States | $ | 2,655,329 | | | $ | 2,653,058 | |
| Canada | 90,750 | | | 30,708 | |
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| $ | 2,746,079 | | | $ | 2,683,766 | |