Custom Truck One Source(CTOS) - 2020 Q4 - Annual Report

PART I Business Nesco provides specialized equipment rentals for North American utility, telecom, and rail industries, with a key growth strategy centered on the pending $1.475 billion acquisition of Custom Truck One Source - Nesco is one of the largest specialty equipment rental providers for the electric utility T&D, telecom, and rail industries in North America, with a fleet of over 4,500 units as of December 31, 2020[14][15] - The company operates through two primary segments: Equipment Rental and Sales (ERS) and Parts, Tools, and Accessories (PTA), offering a comprehensive solution to its customers[31][32] - On December 3, 2020, Nesco entered into an agreement to acquire Custom Truck One Source, L.P. for a base purchase price of $1.475 billion, which is expected to be financed through a new credit facility, equity financing, and senior secured notes[20][22] - Key growth strategies include investing in the fleet to meet unmet demand (over 6,000 rental opportunities turned away from 2017-2019), increasing PTA penetration, and pursuing strategic acquisitions like Custom Truck[57][59][64] Revenue by End-Market (FY 2020 vs. FY 2019) | End-Market | FY 2020 Revenue % | FY 2019 Revenue % | | :--- | :--- | :--- | | Electric Utility T&D | 75.8% | 76.4% | | Telecom | 13.6% | 12.9% | | Rail | 7.3% | 5.2% | | Other | 3.2% | 5.5% | Risk Factors The company faces significant risks from the COVID-19 pandemic, end-market cyclicality, competition, operational challenges, substantial indebtedness, and the pending acquisition of Custom Truck - The COVID-19 pandemic has negatively impacted the business through project delays and could lead to extended economic disruption, materially affecting financial results[92][93] - Demand for products and services is cyclical and vulnerable to downturns in the electric utility T&D, telecommunications, and rail industries, as well as the broader economy[94][95] - The pending acquisition of Custom Truck is subject to significant risks, including failure to complete the transaction, difficulties in integrating the two businesses, loss of key personnel, and failure to realize anticipated synergies and benefits[193][196][208] - The company requires a significant amount of cash to service its indebtedness and an inability to generate sufficient cash flow could lead to a default under its debt agreements, which contain significant operating and financial restrictions[149][153] - As of December 31, 2020, affiliates of ECP owned more than 50% of the common stock, giving them control over company affairs, which may create interests that differ from other shareholders[185] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[220] Properties The company operates from its headquarters in Indiana and 28 leased facilities across the U.S. and Canada, totaling approximately 300,000 square feet - The company's headquarters is in Fort Wayne, Indiana[221] - Nesco operates 28 leased facilities in the U.S. and Canada, totaling approximately 300,000 square feet, with leases expiring through 2030[80][223] Legal Proceedings The company is involved in various routine lawsuits and claims which are not expected to have a material adverse impact on its financial condition - In the normal course of business, the company is involved in various legal proceedings, which are not expected to have a material adverse impact on its financial results[224] Mine Safety Disclosures This item is not applicable to the company - Not applicable[225] PART II Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Nesco's common stock and warrants trade on the NYSE, and the company has never paid cash dividends, intending to retain earnings for business operations - Common stock and warrants trade on the NYSE under symbols "NSCO" and "NSCO WS"[227] - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future, with earnings intended for reinvestment[231] Selected Financial Data This section is not required for the reporting period - Not required[233] Management's Discussion and Analysis of Financial Condition and Results of Operations Financial performance in 2020 was impacted by COVID-19, with total revenue increasing 14.7% to $302.7 million while Adjusted EBITDA fell 7.0% to $118.6 million due to a lower-margin revenue mix Operating Results Total revenue for 2020 increased 14.7% to $302.7 million, driven by equipment and parts sales, while gross profit declined and net loss narrowed to $21.3 million - The increase in total revenue was primarily due to a significant rise in sales of new equipment (+$14.8M) and parts sales and services (+$18.6M), which was partially offset by a decrease in rental revenue (-$2.5M) due to COVID-19 related project delays[252] - The ERS segment revenue increased by 9.1% to $236.6 million in 2020, driven by higher sales of new and used equipment[276] - The PTA segment revenue increased by 40.1% to $66.2 million in 2020, primarily due to the acquisition of Truck Utilities in late 2019[281] Consolidated Operating Results (in thousands) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $302,739 | $264,035 | 14.7% | | Rental Revenue | $195,490 | $197,996 | (1.3)% | | Gross Profit | $76,443 | $86,548 | (11.7)% | | Operating Income | $17,248 | $36,018 | (52.1)% | | Net Loss | $(21,277) | $(27,052) | 21.3% | Financial Performance and Non-GAAP Measures Adjusted EBITDA decreased 7.0% to $118.6 million in 2020, and fleet utilization dropped to 74.6% due to a higher mix of sales and pandemic-related project delays - The decrease in Adjusted EBITDA was primarily due to a lower gross profit from a higher proportion of equipment and parts sales in the revenue mix (35.4% in 2020 vs 25.0% in 2019) and increased SG&A expenses[263] - Fleet utilization decreased significantly due to COVID-19 project delays combined with a larger fleet resulting from investments and acquisitions in the second half of 2019[271] Key Financial Performance Metrics | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $118.6M | $127.5M | (7.0)% | | Fleet Utilization | 74.6% | 84.7% | (11.9)% | | OEC on Rent Yield | 36.0% | 36.9% | (2.4)% | Liquidity and Capital Resources As of year-end 2020, the company had $97.0 million in liquidity, with operating cash flow increasing to $42.8 million due to improved working capital management - As of December 31, 2020, the company had $3.4 million in cash and $93.6 million in availability under its revolving credit facility[285] - The company's primary debt instruments are a $385.0 million asset-based revolving credit facility (2019 Credit Facility) and $475.0 million in Senior Secured Notes due 2024[287][289] Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Operating Activities | $42,829 | $18,792 | | Investing Activities | $(29,314) | $(129,679) | | Financing Activities | $(16,405) | $115,049 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on its variable-rate debt, which it partially hedges, and unhedged foreign exchange rate risk - The company's primary market risk is interest rate exposure from its variable-rate 2019 Credit Facility; a 12.5 basis point change would alter annual interest expense by about $0.5 million on a fully drawn facility[338] - Nesco utilizes an interest rate collar to hedge against interest rate fluctuations on $170.0 million of its variable-rate debt[339][484] - The company has foreign exchange rate risk from revenues denominated in Canadian dollars and Mexican pesos, which are not currently hedged[342] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2020, and accompanying notes - The financial statements were audited by Deloitte & Touche LLP, which issued an unqualified opinion[345][349] - Subsequent to year-end, on December 3, 2020, the company entered into a definitive agreement to acquire Custom Truck One Source for $1.475 billion, a transformative event for the company[555] - The company recorded a significant income tax benefit of $30.1 million in 2020, primarily due to a reduction in the valuation allowance on its deferred tax assets following changes in tax regulations (CARES Act) and a reassessment of future taxable income[538][542] Key Financial Statement Balances (as of Dec 31, 2020, in thousands) | Account | Amount | | :--- | :--- | | Total Assets | $768,404 | | Total Liabilities | $799,471 | | Total Stockholders' Deficit | $(31,067) | | Total Revenue (FY 2020) | $302,739 | | Net Loss (FY 2020) | $(21,277) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[561] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[563] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[566] Other Information The company reports no other information for this item - None[568] PART III Directors, Executive Officers and Corporate Governance This section details the company's leadership, board structure, and governance policies, noting that nine of its ten directors are independent - The executive team is led by Lee Jacobson, Chief Executive Officer, and Robert Blackadar, President[571] - The Board of Directors has standing Audit, Nominating, and Compensation committees, composed of independent directors[597] - The Board has determined that nine of its ten directors are independent under NYSE listing standards[665] Executive Compensation Executive compensation in 2020 included base salary, cash bonuses, and equity awards, with new CFO Joshua Boone receiving total compensation of $2.2 million - Executive compensation is designed to align with business objectives and stockholder value creation, consisting of base salary, annual cash incentives, and long-term equity awards[616][617] - Non-employee directors receive an annual cash fee of $50,000, with committee chairs receiving an additional $10,000, supplemented by equity awards[645] 2020 Summary Compensation for Named Executive Officers | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | Lee Jacobson | CEO | 586,621 | | Joshua Boone | CFO | 2,172,219 | | Robert Blackadar | President | 520,884 | | Bruce Heinemann | former CFO | 732,235 | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters As of March 1, 2021, ECP ControlCo, LLC was the largest beneficial owner with 54.6% of common stock, while directors and officers as a group owned 26.4% - As of March 1, 2021, ECP ControlCo, LLC was the beneficial owner of 54.6% of the company's common stock[653] - All current directors and executive officers as a group beneficially owned approximately 26.4% of the outstanding common stock[653] - As of December 31, 2020, there were 2,452,992 securities available for future issuance under equity compensation plans approved by security holders[657] Certain Relationships and Related Transactions, and Director Independence The company generated $9.2 million in revenue from transactions with an affiliate of major shareholder ECP, with all such transactions reviewed by the Audit Committee - Nesco generated $9.2 million in revenue in 2020 from transactions with a subsidiary of PLH Group, Inc., an affiliate of ECP[659] - The Audit Committee has a written policy to review and approve related party transactions exceeding $120,000[663] - The Board has determined that nine of the ten directors are independent[665] Principal Accountant Fees and Services Total fees paid to the independent auditor, Deloitte & Touche LLP, were $981,000 in 2020 and $837,000 in 2019, with all services pre-approved by the Audit Committee - The Audit Committee is required to pre-approve all auditing and permissible non-audit services performed by the independent auditor[670] Fees Paid to Deloitte & Touche LLP (in thousands) | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $672 | $642 | | Audit-Related Fees | $309 | $0 | | Tax Fees | $0 | $195 | | Total Fees | $981 | $837 | PART IV Financial Statement Schedule and Exhibits This section includes the condensed parent company financial information and lists all exhibits filed with the Form 10-K - This section contains the condensed parent-company-only financial statements for Nesco Holdings, Inc[674] - A comprehensive list of exhibits is provided, including the Agreement and Plan of Merger, Certificate of Incorporation, debt indentures, and executive employment agreements[697][699] Form 10-K Summary This item is not applicable - Not applicable[701]