Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Business
Organization
Nesco Holdings, Inc. (“Holdings”), a Delaware corporation, serves as the parent for our primary operating company, NESCO, LLC. NESCO, LLC, an Indiana limited liability company, and its wholly owned subsidiaries (collectively, “we,” “our,” “us,” “Nesco,” or the "Company"), is engaged in the business of providing a range of services and products to customers through rentals of specialty equipment, sales of parts related to the specialty equipment, and repair and maintenance services related to that equipment.
Holdings' wholly-owned subsidiaries include NESCO Holdings I, Inc. (which was the ultimate parent holding company prior to the transaction described below) ("Holdings I"), NESCO Finance Corporation, a Delaware corporation, NESCO Investments, LLC, a Delaware limited liability company, NESCO International, LLC, a Delaware limited liability company, and NESCO El Alquiler S. de R.L. de C.V., an operating company in Mexico.
We are a specialty equipment rental provider to the electric utility transmission and distribution, telecommunications and rail industries in North America. Our core business relates to our fleet of specialty rental equipment that is utilized by service providers in infrastructure improvement work. Specifically, 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 electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent and sell a broad range of new and used equipment, including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, and underground equipment, which forms our Equipment Rental and Sales ("ERS") segment. To complement our fleet, we also provide a one-stop shop for existing and prospective Nesco customers to purchase or rent parts, tools, and accessories needed to outfit their specialty truck fleet. These activities form our Parts, Tools, and Accessories (“PTA”) segment. We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories via our network of over 50 locations in the United States and Canada.
Merger with Capitol Investment Corp. IV
On April 7, 2019, Holdings I entered into a definitive agreement (as amended, the “Merger Agreement”) with Capitol Investment Corp. IV ("Capitol"), a public investment vehicle, whereby the parties agreed to merge, resulting in the parent of Holdings I becoming a publicly listed company. This merger closed on July 31, 2019 (“Merger”), which consummated as a result of the following (the “Transactions”):
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•
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Holders of 26,091,034 shares of Capitol Class A ordinary shares sold in its initial public offering exercised their rights to convert those shares to cash at a conversion price of $10.24 per share, or an aggregate of approximately $267.2 million. The per share conversion price of $10.24 for holders of public shares electing conversion was paid out of Capitol’s trust account, which had a balance immediately prior to the closing of approximately $412.3 million. Concurrently, NESCO Holdings, LP, a Delaware limited partnership controlled by Energy Capital Partners ("Nesco Owner") and the sole shareholder of Holdings I, purchased 4,500,000 newly-issued shares of common stock at a price of $10.00 per share in exchange for a combination of cash and full repayment of certain outstanding indebtedness, and the founders of Capitol (the "Capitol Sponsors") purchased in aggregate 1,000,000 newly-issued shares of common stock at a price of $10.00 per share, paid in cash (see Note 5).
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•
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Of the remaining funds in the trust account and amounts from the sale of the newly-issued common stock described above: (i) approximately $17.8 million was used to pay Capitol’s transaction expenses, (ii) $127.8 million was used to pay down Nesco's debt, and (iii) the balance of approximately $10.2 million was released to Nesco to be used to pay certain of Nesco's transaction-related costs. The amount remaining (after deducting direct equity issuance costs of $10.0 million) from the combination of the trust account funds and consideration received from Nesco Owner and the Capitol Sponsors discussed above of $172.3 million was reflected as contributed capital in the Company's Condensed Consolidated Statements of Stockholders' Deficit in the three months ended September 30, 2019.
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•
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In connection with the Merger, Capitol became Holdings by domesticating from the Cayman Islands as a corporation formed under the laws of the State of Delaware named Nesco Holdings, Inc.
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•
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Immediately after giving effect to the Transactions (including as a result of the conversions described above and certain forfeitures of Capitol common stock and warrants immediately prior to the closing), there were 49,033,903 shares of common stock issued
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and outstanding, which excludes the additional shares that Nesco Owner may be entitled to as further described below. Additionally, there were warrants to purchase 20,949,980 shares of common stock issued and outstanding.
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•
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Upon the closing, Capitol’s common stock, warrants and units ceased trading, and upon the opening of trading on August 1, 2019, Holdings' common stock and warrants began trading on the NYSE, respectively, under the symbol “NSCO” and “NSCO WS,” respectively.
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•
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Upon the completion of the Transactions, NESCO Holdings, LP, a Delaware limited partnership controlled by Energy Capital Partners ("Nesco Owner"), and certain members of management of the Company received 21,660,638 shares of Holdings and warrants to purchase 2,500,000 shares of Holdings, in exchange for all of the share capital. Nesco Owner also obtained the right to receive up to 3,451,798 additional common shares of the Company upon the occurrence of certain events.
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•
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At the closing of the Transactions, Nesco Owner and certain members of management of Holdings held approximately 53% of the issued and outstanding ordinary shares of Holdings and stockholders of Capitol held approximately 47% of the issued and outstanding shares of Holdings.
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Accordingly, the Merger transactions were treated as the equivalent of Holdings I issuing stock for the net assets of Capitol. Consistent with SEC Topic 12, Reverse Acquisitions and Reverse Recapitalizations, the acquisition of a private operating company by a non-operating public shell corporation typically results in the owners and management of the private company having actual or effective voting control and operating control of the combined company. Therefore, the transaction is, in substance, a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that of a reverse acquisition, except that no goodwill or other intangible assets should be recorded. The net assets of Capitol as of July 31, 2019, were stated at historical cost, and no goodwill or other intangible assets were recorded.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
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 issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only 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 Holdings I’s audited financial statements for the year ended December 31, 2018, included in Capitol's final prospectus and definitive proxy statement filed with the Securities and Exchange Commission on June 4, 2019 (as supplemented on June 24, 2019 and July 11, 2019), and incorporated by reference in the Current Report on Form 8-K filed with the SEC on August 1, 2019.
The Transactions were accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Capitol was treated as the acquired company and Holdings I was treated as the acquirer for financial reporting purposes. Therefore, the consolidated financial results include information regarding Holdings I as Nesco Holdings, Inc.'s predecessor entity. Thus, the financial statements included in this report reflect: (i) the historical operating results of Holdings I prior to the Transactions; (ii) the combined results of Capitol and Holdings I following the Transactions (effectively, Nesco Holdings, Inc.); (iii) the assets, liabilities and stockholder's equity of Holdings I at their historical costs; and (iv) Nesco Holdings, Inc.’s equity and earnings per share presented for the period from the Closing Date of the Transactions.
Use of Estimates
These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include, but are not limited to, the useful lives and salvage values of our rental equipment. Actual results may differ from these estimates and assumptions.
In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018.
Recently Issued Accounting Pronouncements
Leases
The FASB’s new guidance to account for leases (“Topic 842”) by entities that are lessees, requires (1) recognition of lease assets and lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Topic 842 provides two classifications for leases: financing or operating.
Finance leases - The accounting and recognition for leases qualifying as finance leases is similar to the accounting and recognition required under ASC Topic 840, Leases (“Topic 840”), for capital leases. As of September 30, 2019, we have capital lease obligations of approximately $29.5 million. When we make our contractually required payments under the capital leases, we allocate a portion to reduce the capital lease obligation and a portion is recognized as interest expense. The assets leased under the capital leases are included in rental equipment, and depreciation thereon is recognized in cost of rental revenue.
Operating leases - Under Topic 842, operating leases result in the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, upon adoption of Topic 842, we will use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets will also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease that we are reasonably certain to exercise. Lease expense under Topic 842 will be recognized on a straight-line basis over the lease term. Upon adoption of Topic 842, we expect to recognize operating lease ROU assets and lease liabilities that reflect the present value of these future payments, which we currently estimate to be in the range of $8.0 million to $10.0 million.
In October 2019, the FASB approved its proposal to defer the effective date of Topic 842 by one year. Accordingly, we will adopt Topic 842 effective January 1, 2021, using the transition method that allows us to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We expect to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally expect to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component.
Under Topic 842, lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”), specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. On July 30, 2018, the FASB issued ASU 2018-11, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. We are currently in the process of evaluating whether our lease arrangements will meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which would alleviate the requirement upon adoption of Topic 842 that we reallocate or separately present lease and non-lease components.
Derivatives
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which includes changes to its accounting guidance for derivatives and hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Some changes resulting from this new guidance include the elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow hedges, changes to the recognition and presentation of changes in the fair value of the hedging instrument, enhancement of the ability to use the critical-terms-match method for the cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date, and the addition of new disclosure requirements and amendments to existing ones. This new guidance is effective for us as of January 1, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
Following the adoption of Topic 606, as of January 1, 2018, we recognized revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 840, which addresses lease accounting, for which we will adopt an update to this standard using the modified retrospective approach, as described herein. For the three and nine months ended September 30, 2019 and 2018, we recognized rental revenue in accordance with Topic 840 Leases, which is the lease accounting standard.
Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A “performance obligation” is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. As reflected below, most of our revenue is accounted for under Topic 840. Our contracts with customers generally do not include multiple performance obligations. The inset below presents our revenue types based on the accounting standard used to determine the accounting.
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Three Months Ended September 30,
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Three Months Ended September 30,
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2019
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2018
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(in $000s)
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Topic 840
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Topic 606
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Total
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Topic 840
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Topic 606
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Total
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Rental:
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Rental revenue
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$
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47,821
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$
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—
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$
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47,821
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$
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43,944
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$
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—
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$
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43,944
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Shipping and handling
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—
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2,282
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2,282
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—
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1,923
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1,923
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Total rental revenue
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47,821
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2,282
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50,103
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43,944
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1,923
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45,867
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Sales and services:
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Sales of rental equipment
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—
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3,436
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3,436
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—
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5,377
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5,377
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Sales of new equipment
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—
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1,246
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1,246
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—
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8,024
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8,024
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Parts and services
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—
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7,657
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7,657
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—
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4,814
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4,814
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Total sales and services
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—
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12,339
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12,339
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—
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18,215
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18,215
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Total revenue
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$
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47,821
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$
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14,621
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$
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62,442
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$
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43,944
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$
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20,138
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$
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64,082
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Nine Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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(in $000s)
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Topic 840
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Topic 606
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Total
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Topic 840
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Topic 606
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Total
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Rental:
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Rental revenue
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$
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137,194
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$
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—
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$
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137,194
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$
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130,905
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$
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—
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$
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130,905
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Shipping and handling
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—
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6,677
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6,677
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—
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5,873
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5,873
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Total rental revenue
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137,194
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6,677
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143,871
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130,905
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5,873
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136,778
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Sales and services:
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Sales of rental equipment
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—
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15,167
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15,167
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—
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15,562
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15,562
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Sales of new equipment
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—
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8,076
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8,076
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—
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12,167
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12,167
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Parts and services
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—
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19,675
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19,675
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—
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13,102
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13,102
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Total sales and services
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—
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42,918
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42,918
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—
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40,831
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40,831
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Total revenue
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$
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137,194
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$
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49,595
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$
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186,789
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$
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130,905
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$
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46,704
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|
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$
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177,609
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Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers as well as charges to customers for damaged equipment. Effective July 1, 2019, damage billings are classified in rental revenue, given that the amounts are directly related to the Company's rental arrangements with its customers. Amounts for damages in comparable prior periods have been reclassified to rental revenue from parts and services in the above table ($0.9 million and $2.5 million for the three and nine months ended September 30, 2018, respectively, and $3.2 million and $2.6 million for the years ended December 31, 2018 and 2017, respectively). Additionally, sales of equipment, which are presented separately between sales of rental equipment and new equipment, were previously presented on a combined basis as equipment sales. For the years ended December 31, 2018 and 2017, sales of rental equipment were $26.0 million and $17.2 million, respectively, and sales of new equipment were $18.4 million and $10.1 million, respectively.
Rental Equipment
Rental equipment consisted of the following:
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(in $000s)
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September 30, 2019
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December 31, 2018
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Rental equipment
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$
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603,506
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$
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541,529
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Less: accumulated depreciation
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(261,636
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)
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(220,807
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)
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Rental equipment, net
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$
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341,870
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$
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320,722
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We recorded a major repair disposal expense of $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively, related to units needing major repairs.
On September 27, 2019, we commenced closure of the Company's operations in Mexico due to continued delays in contracts from the Mexican government. An impairment loss of $0.7 million was recorded to reduce the carrying amount of rental equipment to its fair value, which was determined based on a recent analysis of market activity (i.e., Level 3 fair value as defined in Note 8 herein) for the equipment at these operations. The Company also recorded a $0.2 million charge for the statutorily-required minimum benefits to be be provided to employees due to their involuntary termination. These charges are included in Impairment loss and Selling, General, and Administrative expenses on the Unaudited Condensed Consolidated Statements of Operations, respectively.
Note 3: Segments
We operate and have two reportable business segments, Equipment Rental and Sales (“ERS”) and Parts, Tools, and Accessories (“PTA”). ERS provides rental solutions to utilities and contractors serving multiple infrastructure end-markets, including electric transmission and distribution, telecom, rail, lighting and signage. We rent and sell specialized equipment to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rental to the telecom, rail, lighting and signage end-markets. The majority of our existing equipment can be used across multiple end-markets and many of our customers operate in multiple end-markets. We rent and sell a broad range of new and used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted equipment and underground equipment. Our PTA segment offers customers sale and rental solutions for parts, tools, and accessories to complement our specialty equipment line.
Our reportable segments align with the information our chief operating decision maker (“CODM”) receives on a regular basis to evaluate the performance of the business and to allocate resources. The accounting principles applied at the operating segment level in determining gross profit are generally the same as those applied at the consolidated financial statement level. There are no inter-segment revenues, and cost allocations to operating segment cost of revenue are minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to each of the operating segments.The following tables present our financial information by segment:
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Three Months Ended September 30,
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Three Months Ended September 30,
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2019
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2018
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(in $000s)
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ERS
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PTA
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Total
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ERS
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PTA
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Total
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Rental revenue
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$
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46,174
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|
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$
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3,929
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|
|
$
|
50,103
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|
|
$
|
43,033
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|
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$
|
2,834
|
|
|
$
|
45,867
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|
|
Sales of rental equipment
|
3,436
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|
|
—
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|
|
3,436
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|
|
5,377
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|
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—
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|
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5,377
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Sales of new equipment
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1,246
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|
|
—
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|
|
1,246
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|
|
8,024
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|
|
—
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|
|
8,024
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Parts sales and services
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—
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|
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7,657
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7,657
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|
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—
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|
|
4,814
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|
|
4,814
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Total revenues
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$
|
50,856
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|
|
$
|
11,586
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|
|
$
|
62,442
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|
|
$
|
56,434
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|
|
$
|
7,648
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|
|
$
|
64,082
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Cost of revenue and sales, excluding depreciation
|
16,878
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|
|
6,393
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|
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23,271
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|
|
24,240
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|
|
4,420
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|
|
28,660
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Depreciation of rental equipment
|
16,849
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|
|
1,058
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|
|
17,907
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|
|
14,271
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|
|
937
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|
|
15,208
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Gross profit
|
$
|
17,129
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|
|
$
|
4,135
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|
|
$
|
21,264
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|
|
$
|
17,923
|
|
|
$
|
2,291
|
|
|
$
|
20,214
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|
|
|
|
|
|
|
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|
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|
|
|
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Nine Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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(in $000s)
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ERS
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|
PTA
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Total
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ERS
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PTA
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Total
|
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Rental revenue
|
$
|
132,735
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|
|
$
|
11,136
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|
|
$
|
143,871
|
|
|
$
|
128,363
|
|
|
$
|
8,415
|
|
|
$
|
136,778
|
|
|
Sales of rental equipment
|
15,167
|
|
|
—
|
|
|
15,167
|
|
|
15,562
|
|
|
—
|
|
|
15,562
|
|
|
Sales of new equipment
|
8,076
|
|
|
—
|
|
|
8,076
|
|
|
12,167
|
|
|
—
|
|
|
12,167
|
|
|
Parts sales and services
|
—
|
|
|
19,675
|
|
|
19,675
|
|
|
—
|
|
|
13,102
|
|
|
13,102
|
|
|
Total revenues
|
$
|
155,978
|
|
|
$
|
30,811
|
|
|
$
|
186,789
|
|
|
$
|
156,092
|
|
|
$
|
21,517
|
|
|
$
|
177,609
|
|
|
Cost of revenue and sales, excluding depreciation
|
54,663
|
|
|
17,853
|
|
|
72,516
|
|
|
59,265
|
|
|
12,247
|
|
|
71,512
|
|
|
Depreciation of rental equipment
|
48,829
|
|
|
3,183
|
|
|
52,012
|
|
|
43,888
|
|
|
2,629
|
|
|
46,517
|
|
|
Gross profit
|
$
|
52,486
|
|
|
$
|
9,775
|
|
|
$
|
62,261
|
|
|
$
|
52,939
|
|
|
$
|
6,641
|
|
|
$
|
59,580
|
|
Total assets by segment are not disclosed herein because asset by operating segment data is not reviewed by the CODM as the basis to assess performance and allocate resources. Goodwill related to our ERS segment and PTA segment was $223.5 million and $5.3 million, respectively, as of September 30, 2019 and December 31, 2018.
Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of segment gross profit to consolidated loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in $000s)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Gross profit
|
$
|
21,264
|
|
|
$
|
20,214
|
|
|
$
|
62,261
|
|
|
$
|
59,580
|
|
|
Transaction expenses
|
3,325
|
|
|
127
|
|
|
7,394
|
|
|
163
|
|
|
Selling, general and administrative expenses
|
10,514
|
|
|
8,369
|
|
|
26,634
|
|
|
26,085
|
|
|
Amortization expense
|
724
|
|
|
720
|
|
|
2,172
|
|
|
2,103
|
|
|
Non-rental depreciation
|
21
|
|
|
58
|
|
|
92
|
|
|
161
|
|
|
Asset impairment
|
657
|
|
|
—
|
|
|
657
|
|
|
—
|
|
|
Other operating expenses
|
434
|
|
|
—
|
|
|
1,213
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
4,005
|
|
|
—
|
|
|
4,005
|
|
|
—
|
|
|
Interest expense, net
|
16,533
|
|
|
14,196
|
|
|
46,376
|
|
|
41,649
|
|
|
Other (income) expense
|
2,567
|
|
|
(42
|
)
|
|
2,545
|
|
|
286
|
|
|
Loss before income taxes
|
$
|
(17,516
|
)
|
|
$
|
(3,214
|
)
|
|
$
|
(28,827
|
)
|
|
$
|
(10,867
|
)
|
We are positioned to serve all 50 U.S. states, 13 Canadian provinces and territories and 31 Mexican states using our network of locations in North America. The following tables present revenue by country and total assets by country:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in $000s)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
$
|
60,115
|
|
|
$
|
62,504
|
|
|
$
|
181,248
|
|
|
$
|
171,401
|
|
|
Canada
|
1,918
|
|
|
1,259
|
|
|
4,599
|
|
|
4,722
|
|
|
Mexico (1)
|
409
|
|
|
319
|
|
|
942
|
|
|
1,486
|
|
|
|
$
|
62,442
|
|
|
$
|
64,082
|
|
|
$
|
186,789
|
|
|
$
|
177,609
|
|
|
|
|
|
(1)
|
On September 27, 2019, the Company began commencing activities for the closure of its Mexican operations, which is part of the ERS segment. For the three and nine months ended September 30, 2019, Mexico generated a loss before income taxes of $2.0 million and $3.8 million, respectively, which includes an impairment loss of $0.7 million and a charge for statutorily required termination benefits of $0.2 million (see Note 1) in 2019. For the three and nine months ended September 30, 2018, Mexico generated a loss before income taxes of $0.3 million and $1.2 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
September 30, 2019
|
|
December 31, 2018
|
|
Assets:
|
|
|
|
|
United States
|
$
|
722,666
|
|
|
$
|
669,942
|
|
|
Canada
|
8,758
|
|
|
11,923
|
|
|
Mexico
|
7,609
|
|
|
9,691
|
|
|
|
$
|
739,033
|
|
|
$
|
691,556
|
|
Note 4: Debt
Debt obligations and associated interest rates consisted of the following as of September 30, 2019 and December 31, 2018 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in S000s)
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2019
|
|
December 31, 2018
|
|
2019 Credit Facility
|
$
|
193,000
|
|
|
$
|
—
|
|
|
4.1
|
%
|
|
|
|
Senior Secured Notes due 2024
|
475,000
|
|
|
—
|
|
|
10.0
|
%
|
|
|
|
Revolving Credit Facility (1)
|
—
|
|
|
209,000
|
|
|
|
|
5.2
|
%
|
|
Tranche B Revolving Credit Commitments (1)
|
—
|
|
|
25,000
|
|
|
|
|
9.5
|
%
|
|
Senior Secured Notes due 2021 (1)
|
—
|
|
|
525,000
|
|
|
|
|
6.9
|
%
|
|
Notes Payable
|
3,603
|
|
|
5,952
|
|
|
|
|
|
|
Total debt outstanding
|
671,603
|
|
|
764,952
|
|
|
|
|
|
|
Deferred finance fees
|
(14,927
|
)
|
|
(5,549
|
)
|
|
|
|
|
|
Net debt
|
656,676
|
|
|
759,403
|
|
|
|
|
|
|
Less current maturities
|
(1,280
|
)
|
|
(2,531
|
)
|
|
|
|
|
|
Long-term debt
|
$
|
655,396
|
|
|
$
|
756,872
|
|
|
|
|
|
|
(1) Repaid on July 31, 2019
|
|
|
|
|
|
|
|
On July 31, 2019, the amounts outstanding under the Revolving Credit Facility, Tranche B Revolving Credit Commitments, and Senior Secured Second Lien Notes due 2021 were extinguished. In connection with the extinguishment, unamortized deferred financing fees were written-off. The loss on extinguishment of debt aggregated $4.0 million.
2019 Credit Facility
On June 26, 2019, the Company entered into a secured asset based loan agreement ("2019 Credit Facility"), consisting of a $350.0 million first lien senior secured asset based revolving credit facility with a maturity of five years, which includes borrowing capacity available for letters of credit and borrowings on same-day notice.
The Company incurred $4.8 million in connection with the closing of the 2019 Credit Facility. This amount has been recorded as a reduction to the carrying value in the Unaudited Condensed Consolidated Balance Sheets and will be amortized over the term of the 2019 Credit Facility.
Borrowing under the 2019 Credit Facility are limited to certain borrowing base calculations that vary with eligible accounts receivable, inventory, and eligible rental equipment. As of September 30, 2019, there was $82.0 million in borrowing availability under the 2019 Credit Facility.
The interest rate per annum applicable to loans under the 2019 Credit Facility is, at the Company's option, equal to either an alternate base rate or an adjusted LIBOR rate (which, at the Company's option is available for a one-, two-, three-, or six- month interest period, or a twelve-month or period of less than one month if available from all relevant affected lenders) in each case, plus an applicable margin (such applicable margin to vary with the amount outstanding under the 2019 Credit Facility). The alternate base rate will be the greater of (i) the prime commercial lending rate published by The Wall Street Journal, (ii) the Federal Funds Effective Rate, plus 0.50%, (iii) the adjusted LIBOR rate for an interest period of one month plus 1.00% and (iv) 1.00%. The adjusted LIBOR rate will be the London interbank offered rate for eurodollar deposits for a period equal to the applicable interest period on the Reuters Screen LIBOR01 or LIBOR02 Page, as applicable, adjusted for statutory reserve requirements for eurocurrency liabilities and in no event, shall the adjusted LIBOR Rate be less than 0.00%. The ability to draw under the 2019 Credit Facility or issue letters of credit thereunder will be conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability to reaffirm the representations and warranties contained in in the 2019 Credit Facility agreement and the absence of any default or event of default under the 2019 Credit Facility.
The Company is required to pay a commitment fee to the lenders under the 2019 Credit Facility with respect to the unutilized commitments thereunder at a rate equal to 0.375% per annum (subject to reductions based upon the amount outstanding under the 2019 Credit Facility). The Company will also pay customary letter of credit and agency fees.
The balance outstanding on the 2019 Credit Facility will be payable on the earlier of July 31, 2024 or, if the Senior Secured Notes due 2024 remain outstanding and are outstanding on May 1, 2024, May 1, 2024. The Company will be required to repay outstanding loans under the 2019 Credit Facility if the outstanding loans under the 2019 Credit Facility exceed the lesser of (x) the borrowing base and (y) the commitments under the 2019 Credit Facility (the “Line Cap”). Additionally, the Company may voluntarily repay outstanding loans under the 2019 Credit Facility at any time without premium or penalty other than customary “breakage” costs with respect to eurocurrency loans.
All obligations under the 2019 Credit Facility are unconditionally guaranteed by each of the Company’s existing and future direct and indirect wholly owned domestic restricted subsidiaries (the “2019 Credit Facility Guarantors”), in each case subject to certain exceptions and permitted liens. All obligations under the 2019 Credit Facility and the guarantees of those obligations (as well as any interest-hedging or other swap agreements and cash management arrangements with the lenders and/or their affiliates under the 2019 Credit Facility) are secured by (subject to certain exceptions): (i) a first priority pledge by the Company of all of the equity interests of restricted subsidiaries directly owned by the Company and the 2019 Credit Facility Guarantors (limited to 65% of voting capital stock in the case of foreign subsidiaries owned directly by a U.S. subsidiary and subject to certain other exceptions) and subject to certain exceptions in the case of non-wholly owned subsidiaries and (ii) a first priority security interest in substantially all of the Company's present and after-acquired assets, as well as those of each of the 2019 Credit Facility Guarantors, all of the Company's proceeds and the proceeds of the 2019 Credit Facility Guarantors and all intercompany indebtedness owed to the Company and the 2019 Credit Facility Guarantors.
The 2019 Credit Facility is subject to covenants that, among other things, limit the Company's ability and its restricted subsidiaries’ ability to: incur additional indebtedness; pay dividends, redeem stock or make other distributions; repurchase, prepay or redeem subordinated indebtedness; make investments; create restrictions on the ability of the Company's restricted subsidiaries to pay dividends to the Company; create liens; transfer or sell assets; consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; enter into certain transactions with the Company's affiliates; and designate subsidiaries as unrestricted subsidiaries. In addition, the 2019 Credit Facility will require the Company to comply with a financial maintenance covenant requiring the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00; provided that this covenant shall only be tested if availability under the
2019 Credit Facility is less than the greater of (i) 10% of the Line Cap and (ii) $30 million and shall be tested until availability is no longer less than such amounts for 20 consecutive calendar days.
Senior Secured Notes due 2024
In connection with the closing of the Transactions, on July 31, 2019 we completed a private offering for Senior Secured Second Lien Notes due 2024 (the "Senior Secured Notes") issued by Capitol Investment Merger Sub 2, LLC, our wholly owned and indirect subsidiary (the "Issuer"). The aggregate principal amount of the Senior Secured Notes was $475.0 million. The Senior Secured Notes bear interest at a rate of 10.0% per annum payable semi-annually, in cash in arrears, on February 1 and August 1 of each year, commencing on February 1, 2020. The Senior Secured Notes do not have registration rights.
A summary of the key provisions are as follows:
Guarantors - The Senior Secured Notes are guaranteed (the “Guarantees”) by Capitol Intermediate Holdings, LLC, our wholly owned subsidiary ("Holdings") and the wholly owned domestic subsidiaries of the Issuer (together, "Guarantors") that guarantee obligations under the 2019 Credit Facility or any future debt of Nesco or any other Guarantors.
Security - The Senior Secured Notes and the Guarantees are secured on a second-priority basis by all assets of Nesco and the Guarantors that secure our obligations under the 2019 Credit Facility.
Ranking - The Senior Secured Notes and the Guarantees are general senior secured obligations. The Senior Secured Notes rank equally in right of payment with all of our existing and future senior debt and rank senior in right of payment to all of our future subordinated obligations. The Guarantees rank equally in right of payment with all of the Guarantors’ existing and future senior obligations and rank senior in right of payment to all of the Guarantors’ existing and future subordinated obligations. The Senior Secured Notes and the Guarantees rank effectively subordinated to all of the Guarantors’ and our first-priority secured debt, including borrowings under the 2019 Credit Facility.
Redemption and Repurchase - The Senior Secured Notes are redeemable, in whole or in part, at any time on or after the Closing Date at specified redemption prices. At any time prior to August 1, 2021, we may redeem all or part of the notes at a redemption price equal to 100.0% of the principal amount, plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem some or all of the notes: from August 1, 2021, but before July 31, 2022, at a redemption price of 105.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; from August 1, 2022, but before July 31, 2023, at a redemption price of 102.5% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; and after August 1, 2023, at a redemption price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 40.0% of the Senior Secured Notes until August 1, 2021, at a redemption price of 110.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from one or more equity offerings. In addition, we may be required to make an offer to purchase the Senior Secured Notes upon the sale of certain assets and upon a change of control.
Covenants - The Senior Secured Notes contain various restrictive covenants.
As of September 30, 2019, we believe we were in compliance with all of the covenants and other provisions of the 2019 Credit Facility and the indenture governing the Senior Secured Notes disclosed above. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.
As of September 30, 2019, the principal payments of debt outstanding over the next five years and thereafter were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
Notes Payable
|
|
Long-Term Debt
|
|
2020
|
$
|
1,280
|
|
|
$
|
—
|
|
|
2021
|
1,280
|
|
|
—
|
|
|
2022
|
627
|
|
|
—
|
|
|
2023
|
416
|
|
|
—
|
|
|
2024
|
—
|
|
|
668,000
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
Total
|
3,603
|
|
|
668,000
|
|
|
Less unamortized discount and issuance costs
|
—
|
|
|
(14,927
|
)
|
|
|
$
|
3,603
|
|
|
$
|
653,073
|
|
Note 5: Equity
Preferred Stock
The Company is authorized to issue 5,000,000 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 the Company's board of directors. As of September 30, 2019 and December 31, 2018, there are no shares of preferred stock issued or outstanding.
Common Stock
The Company is authorized to issue 250,000,000 shares of common stock with a par value of $0.0001 per share.
The sponsors of Capitol agreed to sale restrictions on 3,148,202 of the shares of common stock issued to them in exchange for their Class B ordinary shares of Capitol upon consummation of the Transactions. The parties agreed to a restriction on transfers of their respective shares of Nesco until the 180-day anniversary of the closing of the Transactions, subject to certain permitted transfers.
Concurrently with the Merger, and in a private placement, Nesco Owner and its affiliates purchased 4,500,000 newly-issued shares of common stock at a price of $10.00 per share in exchange for a combination of cash and full repayment of the Company's Tranche B Revolving Credit Commitments, and Capitol Sponsors purchased in aggregate 1,000,000 newly-issued shares of common stock at a price of $10.00 per share, paid in cash.
Warrants
There are outstanding warrants to purchase 20,949,980 shares of our common stock. As part of the Transactions, Nesco Owner and certain members of Nesco's management received warrants to purchase 2,500,000 shares of our common stock (such warrants, together with warrants held by the Capitol Sponsor, the "Non-Public Warrants"). On the date of the Transactions, each warrant had a fair value of $1.04.
Each warrant entitles the holder to purchase one common share at a price of $11.50 per share, subject to certain adjustments. The warrants are exercisable commencing on the later of 30 days after the Merger and terminate on the earlier to occur of (i) July 31, 2024, and (ii) the redemption date. Except for the Non-Public Warrants, the Company may redeem the warrants at a price of $0.01 per warrant upon 30 days’ notice, only in the event that the last sale price of the common shares 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 redeems the warrants as described above, the holder may elect to exercise a warrant 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 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 the Non-Public Warrants.
The Company accounts for the warrants as freestanding equity-classified instruments because the Company has the ability to settle with holders of the warrants either by net-share or physical settlement.
Contingently Issuable Shares
Nesco Owner also has the right to receive: (1) up to an additional 1,800,000 shares of Common Stock for a period of five years following the closing of the Transactions, 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 combined company occurs in which the consideration paid per share to holders of Common Stock of the combined 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 following the closing of the Transactions, 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 combined company occurs in which the consideration paid per share to holders of Common Stock exceeds $19.00 per share.
Note 6: Earnings per Share
The Transactions were accounted for as a reverse recapitalization. Earnings per share has been recast for all historical periods to reflect the Company's capital structure for all comparative periods.
Diluted net income (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 income (loss) per share because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. The share amounts of our potentially dilutive shares excluded aggregated 26.6 million.
The following table sets forth the computation of basic and dilutive loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net loss (in $000s)
|
$
|
(18,010
|
)
|
|
$
|
(3,677
|
)
|
|
$
|
(30,157
|
)
|
|
$
|
(12,120
|
)
|
|
Weighted-average basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
Shares issued in reverse capitalization
|
21,660,638
|
|
21,660,638
|
|
21,660,638
|
|
21,660,638
|
|
Shares outstanding post-recapitalization
|
49,033,903
|
|
|
—
|
|
|
49,033,903
|
|
|
—
|
|
|
Weighted-average basic and diluted shares outstanding
|
39,909,481
|
|
|
21,660,638
|
|
|
27,743,586
|
|
|
21,660,638
|
|
|
Basic and diluted net loss per share
|
$
|
(0.45
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.56
|
)
|
Note 7: Share-Based Compensation
During the second quarter ended June 30, 2019, the Company approved the 2019 Omnibus Incentive Plan ("the Plan"), which authorized up to 3,150,000 shares of common stock of Nesco Holdings, Inc. for issuance in accordance with the plan’s terms, subject to certain adjustments. The purpose of the Plan is to provide the Company's and its subsidiaries’ officers, directors, employees and consultants who, by their position, ability and diligence, are able to make important contributions to the Company’s growth and profitability, with an incentive to assist the Company in achieving its long-term corporate objectives, to attract and retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest in the Company. To accomplish these objectives, the Plan provides for awards of equity‑based incentives through granting of restricted stock units, stock options, stock appreciation rights and other stock or cash based awards. At September 30, 2019, there were 1,636,666 shares in the share reserve still available for issuance.
Prior to the completion of the Transactions, Holdings I had awards issued to certain employees comprised of phantom shares and profits interests in Former Nesco Owner. Substantially all of these awards were canceled on the Closing Date.
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 ("RSUs"), performance share units ("PSUs"), and deferred compensation.
Compensation Expense
Share-based compensation expense was $0.3 million for the three and nine months ended September 30, 2019, and is included in selling, general, and administrative expenses within the unaudited condensed consolidated statements of operations.
Stock Options / RSUs
Eligible participants may receive (i) stock options, (ii) RSUs or (iii) a combination of both stock options and RSUs. Grants issued during the nine months ended September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
Number granted
|
|
Weighted-average fair value per award
|
|
Stock options
|
1,513,334
|
|
|
$
|
3.14
|
|
|
RSUs
|
656,666
|
|
|
$
|
6.98
|
|
The fair value of each of the Company's stock option and RSU awards is expensed on a straight-line basis over the required service period, which is generally the three-year vesting period.
The average fair value of the stock options granted is determined using the Black-Scholes and binomial lattice option-pricing models. The following assumptions were used during the nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Dividend yield
|
|
|
|
|
|
0.00
|
%
|
|
Volatility
|
|
|
|
|
|
47.00
|
%
|
|
Risk-free rate of return
|
|
|
|
1.58
|
%
|
|
Expected life, in years
|
|
|
|
6
|
|
Expected volatility is based on the weighted-average combination of the Company's historic volatility and of the implied volatility of a group of the Company’s peers. The risk-free rate of return is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. The expected life of the Company’s stock option awards is derived from the simplified approach based on the weighted-average time to vest and the remaining contractual term and represents the period of time that awards are expected to be outstanding.
Note 8: Fair Value Measurements
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. Levels within the hierarchy are defined as follows:
|
|
|
|
•
|
Level 1 - Unadjusted quoted prices for identical assets and liabilities in active markets;
|
|
|
|
|
•
|
Level 2 - Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and
|
|
|
|
|
•
|
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
(in $000s)
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
2019 Credit Facility
|
$
|
193,000
|
|
|
$
|
—
|
|
|
$
|
193,000
|
|
|
$
|
—
|
|
|
Senior Secured Notes due 2024
|
475,000
|
|
|
—
|
|
|
494,000
|
|
|
—
|
|
|
Notes Payable
|
3,603
|
|
|
—
|
|
|
3,650
|
|
|
—
|
|
|
Derivative
|
2,552
|
|
|
—
|
|
|
2,552
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
$
|
209,000
|
|
|
$
|
—
|
|
|
$
|
209,000
|
|
|
$
|
—
|
|
|
Tranche B Revolving Credit Commitments
|
25,000
|
|
|
—
|
|
|
25,000
|
|
|
—
|
|
|
Senior Secured Second Lien Notes due 2021
|
525,000
|
|
|
—
|
|
|
443,625
|
|
|
—
|
|
|
Notes Payable
|
5,952
|
|
|
—
|
|
|
6,221
|
|
|
—
|
|
|
Derivative
|
396
|
|
|
—
|
|
|
396
|
|
|
—
|
|
Note 9: 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.
The fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset / (Liability) Derivatives
|
|
(in $000s)
|
|
Balance Sheet Caption
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
Interest rate collar
|
|
Other liabilities
|
|
$
|
2,552
|
|
|
$
|
422
|
|
|
Total derivative instruments
|
|
|
|
$
|
2,552
|
|
|
$
|
422
|
|
Derivatives Instruments Designated as Hedges
When a derivative contract is entered into, the Company may designate the derivative instrument as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability or as an undesignated derivative. When a derivative is designated, the Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.
The fair market value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.
The Company assesses at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be an effective hedge, the fair market value changes of the instrument are recorded to accumulated other comprehensive loss and subsequently reclassified into net loss when the hedged transaction affects earnings. Changes in the fair market value of derivatives not deemed to be an effective hedge are recorded in net loss in the period of change. If the hedging relationship ceases to be effective subsequent to inception, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in net loss.
We entered into an interest rate collar on December 4, 2018, to hedge the interest rate risk associated with our previous Revolving Credit Facility, which was repaid on the date of the Merger. The interest rate collar was designated as a cash flow hedge and had a term extending to September 30, 2020. In contemplation of the Transactions, on July 17, 2019, we terminated the interest rate collar, which resulted in the hedge becoming undesignated. Accordingly, $0.8 million (net of income taxes of $0.3 million) was reclassified from accumulated other comprehensive loss to Other income (expense) net, in our Condensed Consolidated Statements of Operations during the three months ended September 30, 2019.
The Company recorded in its Unaudited Condensed Consolidated Statements of Operations and Unaudited Condensed Consolidated Balance Sheets the following amounts related to its derivative instruments designated as hedges for the three and nine months ended September 30,:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Loss
|
|
Location of Gain (Loss) Recognized in Net Loss
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss and Recognized in Net Loss
|
|
(in $000s)
|
|
|
|
|
Type of Derivative
|
|
2019
|
|
2018
|
|
|
|
2019
|
|
2018
|
|
Interest rate collar
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other (income) expense
|
|
$
|
(1,069
|
)
|
|
$
|
—
|
|
Derivatives Not Designated as Hedges
Interest Rate Collar
On July 17, 2019, we entered into an interest rate 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 2019 Credit Facility. Under the terms of the interest rate 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 interest rate collar expires in July 2024 and has not been designated as a cash flow hedge. Consequently, the change in fair value of the interest rate collar ($2.6 million in the three and nine months ended September 30, 2019) is recognized in our Unaudited Condensed Consolidated Statements of Operations.
Concentration of Credit Risk
The counterparty to the Company’s interest rate collar is an investment grade major international financial institution. The Company could be exposed to losses in the event of nonperformance by the counterparty; however, the credit rating and the concentration of risk in this financial institution are monitored on a continuous basis and present no significant credit risk to the Company.
Note 10: 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
We are subject to various claims and legal actions that arise primarily in the ordinary course of business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, property, and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, and contract and real estate matters. We maintain insurance coverage for our operations and employees. Our major policies include coverage for property, general liability, auto, directors and officers, health, and workers’ compensation insurances. The ultimate legal and financial liability with respect to such matters generally cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements against us. Estimates for losses from litigation are made after consultation with outside legal counsel. In our opinion, after consultation with legal counsel, the disposition or ultimate resolution of such claims and actions will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Purchase Commitments
We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. The majority of these agreements are cancelable within a specified notification period to the supplier. As of September 30, 2019, we had non-cancelable purchase commitments of $10.6 million and cancelable purchase agreements $67.2 million related to these purchases. These items are scheduled for delivery in the remainder of 2019 and through 2020. We have no purchase commitments beyond 2025.
Note 11: Subsequent Events
Acquisition
On September 20, 2019, we entered into a stock purchase agreement with Truck Utilities, Inc. and transferred $1.7 million in cash to an escrow account for the benefit of the sellers. Truck Utilities, Inc. is a specialty rentals, service, and truck upfitting company serving the electric transmission, distribution, telecom, and other regional end-markets. The consummation of the acquisition remained pending for the completion of customary pre-closing activities, which activities concluded on November 4, 2019. Accordingly, on November 4, 2019, we closed on the acquisition for a purchase price of approximately $42.2 million, prior to certain capital expenditure adjustments of approximately $3.6 million. The transaction was financed by drawing on the 2019 Credit Facility.
As of the date of this report, we were in the beginning phase of preparing the valuation of the assets acquired and liabilities assumed. Accordingly, the purchase price allocation for this acquisition is not presented herein. Completion of the purchase price allocation will encompass the finalization of valuations for contingent consideration, acquisition-date working capital, intangible assets, property and equipment, as well as completion of acquisition-related income tax assessments.