Custom Truck One Source, Inc 8-K/A, filed May 6, 2021
Custom Truck One Source, Inc. (CTOS)
8-K/A
2021-05-06
For: 2021-04-01
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Added on
April 04, 2026
About this 8-K/A
Custom Truck One Source, Inc filed this 8-K/A on May 6, 2021, reporting on events of April 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event Reported): April 1, 2021
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||||||||||||||
| (Address of principal executive offices) | (Zip code) | |||||||||||||||||||
(816 ) 241-4888
(Registrant’s telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ||||||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17CFR 240.14a-12) | ||||||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ||||||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered | ||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
As previously reported in a Current Report on Form 8-K filed on April 2, 2021 (the “Initial Form 8-K”), on April 1, 2021, Custom Truck One Source, Inc. (formerly Nesco Holdings, Inc.) (the “Company”) completed its acquisition (the “Acquisition”) of 100% of the partnership interests of Custom Truck One Source, L.P. (“Custom Truck”). This Amendment No. 1 to Current Report on Form 8-K (“Amendment No. 1”) is being filed to amend and supplement the Initial Form 8-K to include the financial statements and pro forma financial information required by Items 9.01(a) and 9.01(b) of Form 8-K and should be read in conjunction with the Initial Form 8-K.
The pro forma financial information included in this Amendment No. 1 has been presented for informational purposes only, as required by Form 8-K. It does not purport to represent the actual results of operations that the Company and Custom Truck would have achieved had the companies been combined during the periods presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve after the Acquisition.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
The audited consolidated balance sheets of Custom Truck and subsidiaries as of December 31, 2020 and 2019, the consolidated statements of income, partners' equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes are filed herewith as Exhibit 99.1.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined balance sheet as of December 31, 2020, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, and the notes to unaudited pro forma condensed combined financial information, all giving effect to the Acquisition, are filed herewith as Exhibit 99.2.
(d) Exhibits
| Exhibit No. | Description | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: | May 5, 2021 | Custom Truck One Source, Inc. | ||||||
| /s/ Bradley Meader | ||||||||
| Bradley Meader Chief Financial Officer | ||||||||
Exhibit 99.1
Custom Truck One Source, L.P. and Subsidiaries
Consolidated Financial Statements
As of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018, and
Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT
To the Partners of Custom Truck One Source, L.P.:
We have audited the accompanying consolidated financial statements of Custom Truck One Source, L.P. and subsidiaries ("the Partnership"), which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of income, partners’ equity, and cash flows for each of the three years in the period ended December 31 2020, and the related notes to the consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Partnership's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Custom Truck One Source, L.P. and its subsidiaries as of December 31, 2020 and 2019, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Kansas City, MO
March 12, 2021
2
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Interests)
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 59,130 | $ | 34,177 | |||||||
| Accounts receivable (net of allowance of $4,749 and $4,612, respectively) | 108,744 | 100,906 | |||||||||
| Financing receivables, net | 19,123 | 12,047 | |||||||||
| Inventories, net | 444,402 | 605,984 | |||||||||
| Prepaid expenses and other | 3,850 | 3,223 | |||||||||
| Total current assets | 635,249 | 756,337 | |||||||||
| Property and equipment, net | 87,178 | 87,442 | |||||||||
| Rental equipment, net | 374,835 | 411,763 | |||||||||
| Intangibles, net | 72,803 | 81,123 | |||||||||
| Goodwill | 267,812 | 269,324 | |||||||||
| Other assets | 17,564 | 12,870 | |||||||||
| Total assets | $ | 1,455,441 | $ | 1,618,859 | |||||||
| Liabilities and Partners' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Trade accounts payable | $ | 38,997 | $ | 60,890 | |||||||
| Customer deposits | 19,765 | 10,902 | |||||||||
| Accrued expenses | 29,902 | 32,503 | |||||||||
| Floor plan payables - trade | 121,747 | 211,927 | |||||||||
| Floor plan payables - non-trade | 238,956 | 293,389 | |||||||||
| Current maturities of long-term debt | 16,594 | 27,596 | |||||||||
| Other liabilities | 1,377 | 1,530 | |||||||||
| Total current liabilities | 467,338 | 638,737 | |||||||||
| Long-term debt, net of current maturities | 622,960 | 627,867 | |||||||||
| Other long-term liabilities | 2,582 | 397 | |||||||||
| Total liabilities | $ | 1,092,880 | $ | 1,267,001 | |||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Partnership interests: | |||||||||||
| General partner interest - one interest issued and outstanding as of both December 31, 2020 and 2019 | |||||||||||
| Class A interest - $1 par value, unlimited interests authorized, 569,963,954 interests issued and outstanding as of December 31, 2020 and 2019 | 569,964 | 569,964 | |||||||||
| Class B interest - unlimited interests authorized; 42,221,942 and 37,507,414 interests issued as of December 31, 2020 and 2019, respectively; 23,035,715 and 17,977,882 outstanding as of December 31, 2020 and 2019, respectively | — | — | |||||||||
| Additional paid-in capital | 12,154 | 10,165 | |||||||||
| Retained deficit | (219,557) | (228,271) | |||||||||
| Total partners' equity | $ | 362,561 | $ | 351,858 | |||||||
| Total liabilities and partners' equity | $ | 1,455,441 | $ | 1,618,859 | |||||||
The accompanying notes are an integral part of these financial statements.
3
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenue | |||||||||||||||||
| Rental revenue | $ | 215,008 | $ | 233,522 | $ | 200,168 | |||||||||||
| New sales revenue | 602,608 | 599,923 | 492,049 | ||||||||||||||
| Used sales revenue | 161,694 | 117,549 | 99,328 | ||||||||||||||
| Parts and service revenue | 74,432 | 78,923 | 67,322 | ||||||||||||||
| Total revenue | 1,053,742 | 1,029,917 | 858,867 | ||||||||||||||
| Cost of revenue | |||||||||||||||||
| Cost of rental revenue | 50,641 | 44,330 | 36,469 | ||||||||||||||
| Deprecation of rental equipment | 97,653 | 105,548 | 99,380 | ||||||||||||||
| Cost of new sales | 533,889 | 525,518 | 425,733 | ||||||||||||||
| Cost of used sales | 122,732 | 86,527 | 76,998 | ||||||||||||||
| Cost of parts and service | 62,651 | 69,618 | 56,050 | ||||||||||||||
| Total cost of revenue | 867,566 | 831,541 | 694,630 | ||||||||||||||
| Gross profit | 186,176 | 198,376 | 164,237 | ||||||||||||||
| Selling, general and administrative | 119,814 | 124,742 | 103,530 | ||||||||||||||
| Depreciation and amortization: | |||||||||||||||||
| Non-rental depreciation | 4,722 | 4,263 | 3,307 | ||||||||||||||
| Amortization | 8,381 | 12,930 | 12,692 | ||||||||||||||
| Operating income | 53,259 | 56,441 | 44,708 | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Other income, net | 8,019 | 3,068 | 1,405 | ||||||||||||||
| Financing income | 4,180 | 2,710 | 1,893 | ||||||||||||||
| Interest expense | (56,505) | (70,507) | (56,259) | ||||||||||||||
| Net income (loss) | $ | 8,953 | $ | (8,288) | $ | (8,253) | |||||||||||
The accompanying notes are an integral part of these financial statements.
4
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
(In Thousands)
| Partnership Interests | Additional Paid-in Capital | Retained Deficit | Total Partners’ Equity | ||||||||||||||||||||||||||||||||||||||
| Class A Interests | Class B Interests | ||||||||||||||||||||||||||||||||||||||||
| Interests | Amount | Interests | Amount | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | 567,360 | $ | 567,360 | 8,649 | $ | — | $ | 2,689 | $ | (157,480) | $ | 412,569 | |||||||||||||||||||||||||||||
| Issuance of partnership interests | 1,404 | 1,404 | — | — | — | — | 1,404 | ||||||||||||||||||||||||||||||||||
| Equity issued pursuant to acquisitions | 1,200 | 1,200 | — | — | 300 | — | 1,500 | ||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | — | 5,349 | — | 5,349 | ||||||||||||||||||||||||||||||||||
| Vesting of Class B interests | — | — | 4,397 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of Class B interests | — | — | (92) | — | (13) | — | (13) | ||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | (53,777) | (53,777) | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,253) | (8,253) | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 569,964 | 569,964 | 12,954 | — | 8,325 | (219,510) | 358,779 | ||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | — | 1,933 | — | 1,933 | ||||||||||||||||||||||||||||||||||
| Vesting of Class B interests | — | — | 5,213 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of Class B interests | — | — | (189) | — | (93) | — | (93) | ||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | (473) | (473) | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,288) | (8,288) | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 569,964 | 569,964 | 17,978 | — | 10,165 | (228,271) | 351,858 | ||||||||||||||||||||||||||||||||||
| Equity-based compensation expense | — | — | — | — | 2,078 | — | 2,078 | ||||||||||||||||||||||||||||||||||
| Vesting of Class B interests | — | — | 5,201 | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of Class B interests | — | — | (143) | — | (89) | — | (89) | ||||||||||||||||||||||||||||||||||
| Distributions | — | — | — | — | — | (239) | (239) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 8,953 | 8,953 | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 569,964 | $ | 569,964 | 23,036 | $ | — | $ | 12,154 | $ | (219,557) | $ | 362,561 | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
5
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Cash Flows - Operating Activities | ||||||||||||||||||||
| Net income (loss) | $ | 8,953 | $ | (8,288) | $ | (8,253) | ||||||||||||||
| Adjustment to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 119,806 | 130,210 | 120,538 | |||||||||||||||||
| Amortization of debt issuance costs | 2,050 | 2,997 | 3,024 | |||||||||||||||||
| Write-off debt issuance costs | 2,261 | 48 | — | |||||||||||||||||
| Gain on Extinguishment of debt | — | (1,654) | — | |||||||||||||||||
| Provision for bad debt | 1,867 | 5,171 | 754 | |||||||||||||||||
| Equity-based compensation expense | 2,078 | 1,933 | 5,349 | |||||||||||||||||
| Inventory obsolescence | 1,779 | 3,538 | 1,121 | |||||||||||||||||
| Gain on sale of rental equipment | (29,722) | (18,125) | (14,710) | |||||||||||||||||
| (Gain) loss on sale of non-rental property and equipment | (710) | 63 | 100 | |||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Receivables | (8,679) | (27,259) | (4,882) | |||||||||||||||||
| Inventories | 154,607 | (210,104) | (110,301) | |||||||||||||||||
| Prepaid expenses and other | (609) | (819) | 525 | |||||||||||||||||
| Other assets | (6,710) | (8,745) | (2,392) | |||||||||||||||||
| Accounts payable | (21,535) | (631) | 28,370 | |||||||||||||||||
| Accrued expenses and other liabilities | (572) | 10,159 | 2,835 | |||||||||||||||||
| Customer deposits | 8,851 | (3,050) | (2,051) | |||||||||||||||||
| Floor plan payables - trade, net | (90,181) | 95,651 | 44,801 | |||||||||||||||||
| Total adjustments | 134,581 | (20,617) | 73,081 | |||||||||||||||||
| Net cash provided by (used in) operating activities | 143,534 | (28,905) | 64,828 | |||||||||||||||||
| Cash Flows - Investing Activities | ||||||||||||||||||||
| Business acquisitions, net of cash acquired | — | (394) | (3,200) | |||||||||||||||||
| Additions of rental equipment | (155,260) | (210,236) | (171,693) | |||||||||||||||||
| Proceeds from disposals of rental equipment | 121,067 | 86,811 | 65,471 | |||||||||||||||||
| Purchases of property and equipment | (10,730) | (10,593) | (21,767) | |||||||||||||||||
| Other investing activities, net | 1,195 | (62) | (703) | |||||||||||||||||
| Net cash used in investing activities | (43,728) | (134,474) | (131,892) | |||||||||||||||||
| Cash Flows - Financing Activities | ||||||||||||||||||||
| Issuance of partnership interests | — | — | 1,404 | |||||||||||||||||
| Member distributions | (239) | (473) | (53,777) | |||||||||||||||||
| Repurchase of Class B interests | (89) | (93) | (13) | |||||||||||||||||
| Repayments under line-of-credit agreements | (38,731) | — | (25,000) | |||||||||||||||||
| Borrowings under line-of-credit agreements | — | 46,000 | 25,000 | |||||||||||||||||
| Acquisition of inventory through floor plan payables - non-trade | 325,567 | 485,457 | 349,318 | |||||||||||||||||
| Repayment of floor plan payables - non-trade | (380,000) | (392,833) | (279,607) | |||||||||||||||||
| Additions of debt issuance costs | (741) | (104) | (1,024) | |||||||||||||||||
| Principal payments on long-term debt | (29,273) | (22,415) | (6,448) | |||||||||||||||||
| Proceeds from issuance of long-term debt, net | 48,944 | 19,280 | 58,439 | |||||||||||||||||
| Principal payments on capital leases | (235) | (219) | (199) | |||||||||||||||||
| Net cash (used in) provided by financing activities | (74,797) | 134,600 | 68,093 | |||||||||||||||||
(Continued)
6
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In Thousands)
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Effect of exchange rate changes on cash | (56) | 38 | — | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 24,953 | (28,741) | 1,029 | |||||||||||||||||
| Cash and cash equivalents and restricted cash, beginning of period | 34,177 | 62,918 | 61,889 | |||||||||||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 59,130 | $ | 34,177 | $ | 62,918 | ||||||||||||||
| * Cash and cash equivalents and restricted cash at the end of year are comprised of the following: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 59,130 | $ | 34,177 | $ | 62,058 | ||||||||||||||
| Restricted cash, included in other assets | — | — | 860 | |||||||||||||||||
| $ | 59,130 | $ | 34,177 | $ | 62,918 | |||||||||||||||
| Supplemental Cash Flow Information - Cash Paid for Interest | $ | 53,124 | $ | 66,459 | $ | 52,612 | ||||||||||||||
| Non-cash Financing Activities | ||||||||||||||||||||
| Capital expenditures in accounts payable | $ | 269 | $ | 1,148 | $ | 385 | ||||||||||||||
| Assets acquired under capital lease | $ | — | $ | — | $ | 26 | ||||||||||||||
| Partnership interests issued related to business acquisitions | $ | — | $ | — | $ | 1,500 | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
7
CUSTOM TRUCK ONE SOURCE, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Nature of Operations
Organization – Custom Truck One Source, L.P. (“CTOS,” “Custom Truck,” the “Company,” “we,” “our,” or “us”) was formed as Utility One Source, L.P., a Delaware Limited Partnership, on January 7, 2015 by affiliates of the Blackstone Group, L.P. (“Blackstone”). We changed our name to Custom Truck One Source, L.P. in 2018. CTOS conducts its operations primarily through its indirect wholly owned subsidiaries, CTEC Holdings Co., LLC, and Custom Truck One Source Forestry Equipment, LLC, and their subsidiaries. Custom Truck is headquartered in Kansas City, Missouri.
On December 3, 2020, the Company and Nesco Holdings, Inc. (“Nesco”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”), under which Nesco will acquire 100% of the partnership interests of the Company (the “Acquisition”) for a base purchase price of $1,475.0 million, subject to customary working capital adjustments, indebtedness and transaction expenses of the Company as of the closing date, as well as an adjustment on the basis of the target original equipment cost of the rental equipment owned by the Company as of the closing date, if any. The Acquisition is expected to close in the second quarter of 2021. For the year ended December 31, 2020, the Company incurred approximately $3.1 million of Acquisition-related costs, all of which are reflected in Selling, general and administrative expenses in the Consolidated Statements of Income.
Nature of Operations – The Company earns revenues from renting, selling, assembling, upfitting, and servicing new and used heavy-duty trucks and cranes, as well as the sale of related parts. The majority of the Company’s rental and non-rental business is from operations generated in the United States with customers in the utility, construction, forestry, and rail industries.
Principles of Consolidation and Basis of Presentation – The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our consolidated financial statements include the financial position and results of operations of CTOS and its subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation.
COVID-19 Risks and Uncertainties – We continue to actively monitor developments of the COVID-19 pandemic. In response to the pandemic, we have undertaken efforts intended to maintain the safety and wellness of our employees and their families, ensure the Company’s continued financial and operational viability, and to continue our focus on meeting the needs of our customers.
The Company’s operations are classified as “essential businesses” and have remained operational while complying with health and safety guidelines and laws and regulations issued by governing authorities. Accordingly, the COVID-19 pandemic has had a nominal impact on our overall financial results during the year ended December 31, 2020.
Since the onset of the global pandemic, the Company has also implemented certain cost-reduction initiatives, which included efforts to reduce capital spending and non-essential travel, as well as limited headcount reductions. Through the pandemic, the Company has continued to make strategic investments in our rental fleet and infrastructure to better position the Company for long-term growth. While there is still some uncertainty about the duration and extent of the ongoing COVID-19 pandemic, given the Company’s financial performance for the year ended December 31, 2020, the Company does not anticipate the ongoing pandemic will have a significant impact on our future results of operations, financial condition and cash flows from operations.
Note 2 - Significant Accounting Policies
Estimates in Financial Statements – The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the presented amounts of assets and liabilities at the date of the consolidated financial statements, and the presented amounts of revenues and expenses during the period. These estimates are based on the Company’s best knowledge of current events and actions the Company may undertake in the future. Significant estimates and assumptions include the allowance for doubtful accounts, fair value of tangible and intangible assets and goodwill acquired, useful lives and salvage value, and lease classification, including the accounting for arrangements with rental purchase options (“RPOs”). Due to the inherent uncertainty involved in making estimates, actual results could differ from these estimates.
Cash and Cash Equivalents – Cash and cash equivalents consists of cash and short-term investments with remaining maturities of three months or less when acquired. The carrying amount of cash and cash equivalents approximates its fair value. The Company maintains deposits at financial institutions in excess of federally insured limits.
Accounts Receivables and Allowance for Doubtful Accounts – Trade accounts receivables are recorded at the invoiced amount and do not bear interest. All other receivables are recorded based on stipulated agreements and also do not bear interest. The Company provides an allowance for doubtful accounts, which is based upon a review of these outstanding receivables, historical collection
8
information, and existing economic conditions. After reasonable efforts to collect the amounts have been exhausted, balances are deemed uncollectible and are charged against the allowance for doubtful accounts. The Company wrote off or reserved for approximately $1.8 million and $5.2 million and $0.8 million in accounts receivables during the years ended December 31, 2020, 2019 and 2018, respectively, with the related loss included in Selling, general and administrative expense on the Consolidated Statements of Income.
Inventories – All inventories are stated at the lower of cost or net realizable value. Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, aerial lifts, digger derricks, dump bodies, etc.), and the in-process costs incurred in the final assembly of those units. As part of our business model, we sell unassembled individual whole goods and whole goods with varying levels of customization direct to consumers or other dealers. Cost is determined by specific identification for whole goods inventory. Parts and accessories inventory are recorded at average cost or standard cost, which approximates average cost. The Company periodically reviews inventories on hand and maintains reserves for slow-moving, excess, or obsolete inventories. During the years ended December 31, 2020, 2019 and 2018, respectively, the Company wrote off or reserved for approximately $1.8 million, $3.5 million and $1.1 million in inventories. The related loss was recorded in Cost of revenue.
Long-lived Assets and Goodwill
Rental Equipment – Rental equipment includes truck-mounted aerial lifts, cranes, trucks, trailers, and machinery and equipment. Rental equipment acquired through business combination is recorded at fair market value, and purchased rental equipment is recorded at cost. Generally, we depreciate rental equipment over a five-year useful life with a 15% salvage value. The Company reviews rental equipment for impairment whenever events or changes in business circumstances indicate the carrying values of the assets may not be recoverable, based on undiscounted cash flows. If the carrying value of the asset exceeds the undiscounted cash flows the asset is expected to generate over its estimated useful life, an impairment loss is recognized for the excess of the carrying value over the fair value of the asset. Included in Other income, net is $0.9 million of rental asset impairments for the year ended December 31, 2019. No such impairment was identified during the years ended December 31, 2020 or 2018.
Property and Equipment – Property and equipment acquired through business combination is recorded at fair market value, and purchased property and equipment is recorded at cost. Property and equipment is depreciated using the straight-line method over the estimated useful life of each specific asset. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements.
The estimated useful lives of property and equipment are as follows:
| Machinery and equipment | 4-15 years | ||||
| Furniture and fixtures | 3-7 years | ||||
| Vehicles | 4-5 years | ||||
| Buildings | 39.5 years | ||||
| Leasehold improvements | Lesser of lease term or useful life | ||||
Ordinary costs, including repair and maintenance and property taxes, are expensed when incurred. Any improvements that extend the useful life of these assets are capitalized in the period incurred. The Company reviews property and equipment for impairment whenever events or changes in business circumstances indicate the carrying values of the assets may not be recoverable, based on undiscounted cash flows. If the carrying value of the asset exceeds the undiscounted cash flows the asset is expected to generate over its estimated useful life, an impairment loss is recognized for the excess of the carrying value over the fair value of the asset. No impairment of property and equipment was recorded for any period presented.
Intangible Assets – Intangible assets include customer relationships, tradenames, product design, and software. Costs associated with internally developed software are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software (“ASC 350-40”), which provides guidance for the treatment of costs associated with computer software development and defines the types of costs to be capitalized and those to be expensed.
We review intangible assets for potential impairment whenever events or circumstances indicate that the carrying value may not be recoverable. All intangible assets are finite lived. No impairment of intangible assets has been recorded for any period presented.
Goodwill – We have made acquisitions that included recognition of goodwill. Goodwill represents the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair value of identifiable net assets acquired, as required by ASC 350, Intangibles-Goodwill and Other (“ASC 350”).
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The Company tests goodwill for impairment annually on October 1st or when indicators of potential impairment exist. These indicators would include a significant change in operating performance or a planned sale or disposition of a significant portion of the business, among other factors. The Company tests for goodwill impairment at the reporting unit level.
Per ASC 350, the Company may elect to perform a qualitative analysis for its reporting units to determine whether it is more likely than not that fair value of the reporting unit is greater than its carrying value. If the qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if the Company elects not to perform a qualitative analysis, the Company performs a quantitative analysis to determine whether a goodwill impairment exists. The Company elected to perform a quantitative analysis for impairment.
The quantitative impairment test for goodwill involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. As the fair value of the Company’s reporting units on the measurement date exceeded their respective carrying amounts in each period presented, no impairment was recorded for any period presented.
Cloud Computing Arrangement Implementation Costs – The Company has entered into certain cloud-based hosting agreements that are accounted for as service contracts. For internal-use software obtained through a hosting arrangement that is in the nature of a service contract, the Company capitalizes certain implementation costs incurred such as integrating, configuring, and software customization, which are consistent with costs incurred during the application development stage for on-premise software. These capitalized development costs are recorded in Other assets on the Consolidated Balance Sheets. Implementation costs capitalized during the years ended December 31, 2020, 2019, and 2018 were $6.9 million, $7.6 million, and $3.3 million, respectively. Capitalized implementation costs are amortized straight-line over the term of the hosting arrangement plus any reasonably certain renewal periods, which range from 3 years to 10 years. Amortization expense for these assets is included in Selling, general, and administrative expenses in the Consolidated Statements of Income. For the years ended December 31, 2020, 2019, and 2018, amortization of these costs were $1.8 million, $0.9 million, and $0.4 million, respectively.
Equity-based Compensation – In accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”), equity-based compensation with service conditions granted to employees is measured based on the grant date fair value of the awards and recognized as compensation expense in a straight-line pattern over the period during which the recipient is required to perform services in exchange for the award (the requisite service period). The Company estimates the fair value of interests issued at the date of grant using an option pricing model, which includes assumptions related to volatility, expected term, dividend yield and risk-free interest rate.
Business Combinations – The Company uses the acquisition method of accounting, as prescribed by ASC 805, Business Combinations (“ASC 805”), for the recognition of assets acquired and liabilities assumed by recording at their estimated fair values as of the date of acquisition. Any excess consideration transferred over the estimated fair values of the identifiable net assets acquired and liabilities assumed is recorded as goodwill. Long-lived assets, inventory, goodwill, and other intangible assets generally represent the largest components of our acquisitions. The intangible assets that we have acquired are primarily customer relationships and trade names, which are valued based on an excess earnings or income approach based on projected cash flows.
When we make an acquisition, we may also acquire other assets and assume liabilities. These other assets and liabilities typically include, but are not limited to, parts inventory, accounts receivable, accounts payable, and other working capital items. These other assets and liabilities are recorded at fair value.
While the Company uses its best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which is not to exceed one year from the date of acquisition, changes in the estimated fair values of the net assets recorded for the acquisitions likely result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to income.
Income Taxes – The Company’s income is taxed as a partnership under the relevant provisions of the Internal Revenue Code. Therefore, taxable income or loss is reported to the individual partners for inclusion in their respective tax returns for federal income tax purposes, and generally there is no provision for federal and state income taxes included in these consolidated financial statements. However, a limited number of states where the Company files an income tax return impose an entity-level tax on partnerships, resulting in income tax expense being incurred by the Company. Immaterial income taxes are recorded in Selling, general and administrative expenses in the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018.
To the extent of available cash, as determined by Utility One Source GP, LLC, an entity controlled by Blackstone, in its capacity as the general partner, the Company is required to make tax distributions to each partner to cover any tax shortfalls realized by its partners. For additional discussion regarding current year distributions, see Note 11.
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The Company has evaluated tax positions taken or expected to be taken in the course of preparing the Company’s tax returns and has not identified any material uncertain tax positions. The Company has no unrecognized tax benefits as of the end of the year. Income tax returns filed by the Company are subject to examination by the Internal Revenue Service (“IRS”) for three years after the date filed. Tax years from 2017 to 2020 remain open to examination by the IRS. The statute of limitations for state tax returns varies by jurisdiction but returns for tax years from 2017 to 2020 are generally open to examination by the state tax authorities.
Fair Value Measurement – ASC 820, Fair Vale Measurement and Disclosure (“ASC 820”) establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).
Determining which category an asset or liability falls within this hierarchy requires judgment. The Company applies the provisions of fair value measurement to various non-recurring measurements for its financial and non-financial assets and liabilities and evaluates its hierarchy disclosures.
Shipping and Handling – Freight associated with sales of equipment and parts and hauling rental units for customers are presented in the Consolidated Statements of Income as Revenues and Cost of revenue. Freight sales for the years ended December 31, 2020, 2019 and 2018 were $15.4 million, $15.8 million, and $13.0 million, respectively. Freight costs for these same periods were $20.2 million, $19.9 million, and $16.0 million, respectively.
Advertising Costs – Costs incurred for advertising are expensed as incurred and are recorded in Selling, general and administrative expenses in the Consolidated Statements of Income. Advertising expense was $2.5 million, $4.1 million, and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Consolidated Statement of Cash Flows – Acquisition of inventory through floor plan payables and repayments of floor plan payables to a lender unaffiliated with the manufacturer from which inventory is purchased are deemed non-trade and are classified as financing activities in the accompanying Consolidated Statements of Cash Flows, with acquisitions reflected separately from repayments. The net change in floor plan payables to a lender affiliated with the manufacturer from which the Company purchases inventory is deemed trade and is classified as an operating activity in the accompanying Consolidated Statements of Cash Flows.
Leases – The Company leases certain real estate properties and office equipment for use in its operations. These leases are generally classified as operating leases due to their short terms. The Company typically makes fixed rent payments on its operating leases and recognizes rent expense on a straight-line basis over the lease term.
Self-Insurance Reserves – The Company is self-insured for certain losses related to health, workers’ compensation, auto and general liability insurance. For self-insured employee medical claims, the Company has a stop loss limit of $0.3 million per year for the first claimant then $0.2 million per year for each claimant thereafter. The Company’s deductible or self-insured retention, as applicable, is limited to approximately $0.2 million per occurrence for workers’ compensation claims and $0.1 million per occurrence for auto and general liability claims. The Company also maintains an umbrella policy that covers liabilities in excess of the primary insurance policy limits. As of December 31, 2020 and 2019, the Company maintained insurance reserves of approximately $2.6 million and $2.4 million, respectively. These reserves are estimated by considering historical claims experience, estimated lag time to report and pay claims, average cost per claim and other actuarial factors.
Revenue Recognition – Upon the adoption of ASC 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2019, we recognize revenue in accordance with two different accounting standards: 1) ASC 606 and 2) ASC 840, Leases (“ASC 840”). As discussed below in “Recent Accounting Pronouncements” ASC 842 will supersede ASC 840 upon our adoption of ASC 842 on January 1, 2021.
Under ASC 606, revenue from contracts with customers is measured based on the consideration we expect to be entitled to under the contract with the customer. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. 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.
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Nature of Good or Service – The table below summarizes our revenue by type and by the applicable accounting standard (in thousands):
| March 31, | March 31, | March 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Topic 840 | Topic 606 | Total | Topic 840 | Topic 606 | Total | Topic 840 | Topic 606 | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Rental revenue | $205,820 | $9,188 | $215,008 | $223,651 | $9,871 | $233,522 | $191,301 | $8,867 | $200,168 | ||||||||||||||||||||||||||||||||||||||||||||
| New sales revenue | — | 602,608 | 602,608 | — | 599,923 | 599,923 | — | 492,049 | 492,049 | ||||||||||||||||||||||||||||||||||||||||||||
| Used sales revenue | 22,606 | 139,088 | 161,694 | — | 117,549 | 117,549 | — | 99,328 | 99,328 | ||||||||||||||||||||||||||||||||||||||||||||
| Parts and service revenue | — | 74,432 | 74,432 | — | 78,923 | 78,923 | — | 67,322 | 67,322 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Revenues | $ | 228,426 | $ | 825,316 | $ | 1,053,742 | $ | 223,651 | $ | 806,266 | $ | 1,029,917 | $ | 191,301 | $ | 667,566 | $ | 858,867 | |||||||||||||||||||||||||||||||||||
We believe that the disaggregation of our revenues from contracts with customers as reflected above, coupled with further discussion below, depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.
Lease revenues (ASC 840) –
Rental revenue: Rental income is recognized over the period of the related lease agreement. Revenue from leases is recognized on a straight-line basis over the lease term.
Used sales revenue: Certain leases contain RPOs and are classified as sales-type leases because the RPO purchase price, after giving consideration for credits earned based on the number of consecutive months rented, is considered to be below the estimated fair market value and thus qualifies as a bargain purchase option. Revenue on these particular leases is recognized at the point the Company has determined the sales price to the customer represents a bargain purchase. Financing income from sales-type leases is recorded on a month-to-month basis in Financing income in the Consolidated Statements of Income.
Revenues from contracts with customers (ASC 606) – The accounting for each revenue stream pursuant to ASC 606 is discussed below. Substantially all of our revenues under ASC 606 are recognized at a point-in-time rather than over time.
Rental revenue: Revenues for transporting rental equipment to and from the customer and other rental ancillary charges, are recognized at the time the services are completed.
New sales revenue: Revenues from the sales of new commercial vehicles and attachments are primarily recognized at the time of delivery to, or pick-up by the customer or the customer’s designee, which is when the customer obtains control of the promised good.
Used sales revenue: Revenues from the sales of used commercial vehicles, including used rental equipment, are recognized at the time of delivery to, or pick-up by the customer or the customer’s designee, which is when the customer obtains control of the promised good.
Parts and service revenue: Revenues from the sales of parts are recognized at the time of pick-up by the customer for parts counter sales transactions. Service revenue is derived primarily from maintenance and repair services. Service revenue includes parts sales needed to complete service work. We recognize service revenues over the time during which the service is performed. For the years ended December 31, 2020, 2019 and 2018, service revenue recognized over time totaled $36.1 million, $39.5 million, and $34.0 million, respectively.
Receivables and contract assets and liabilities – We manage credit risk associated with our accounts receivable at the customer level. Because the same customers typically generate the revenues that are accounted for under both ASC 606 and ASC 840, the discussion below on credit risk and allowances for doubtful accounts addresses our total revenues from ASC 606 and ASC 840.
Concentration of credit risk with respect to the Company's accounts receivable is limited because our customer base is comprised of a large number of geographically diverse customers. As of December 31, 2020 and 2019, no customer represented 10% or more of the outstanding accounts receivable balance. No one customer represented 10% or more of the company’s consolidated revenues for the years ended December 31, 2020, 2019 and 2018. The Company manages credit risk associated with its accounts receivable at the customer level through credit approvals, credit limits and other monitoring procedures. The Company maintains allowances for doubtful accounts that reflect the Company's estimate of the amount of receivables that the Company will be unable to collect based on existing economic conditions and its historical write-off experience.
The Company does not have material contract assets associated with customer contracts. We invoice in advance of recognizing the majority of new and commercial vehicle sales. Advance customer payments are recognized as a contract liability in Customer
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deposits in the Consolidated Balance Sheets and totaled $19.8 million and $10.9 million as of December 31, 2020 and 2019, respectively.
Performance obligations – Most of our ASC 606 revenue is recognized at a point-in-time, rather than over time. Accordingly, in any particular period, we do not generally recognize a significant amount of revenue from performance obligations satisfied (or partially satisfied) in previous periods, and the amount of such revenue recognized during the years ended December 31, 2020 and 2019 was not material. We also do not expect to recognize material revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied).
Payment terms – Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. Our contracts do not generally include a significant financing component. Our contracts with customers do not generally result in significant obligations associated with returns, refunds or warranties. See above for a discussion of how we manage credit risk.
Sales tax amounts collected from customers are recorded on a net basis.
Contract costs – We do not recognize any assets associated with the incremental costs of obtaining a contract with a customer (for example, a sales commission) that we expect to recover. As such, the incremental costs of obtaining a contract are expensed when incurred. For Rental revenue, any incremental costs of obtaining a lease are expensed.
Contract estimates and judgments – Our revenues accounted for under ASC 606 generally do not require significant estimates or judgments as the transaction price is generally fixed and stated on our contracts. Our contracts generally do not include multiple performance obligations, and accordingly do not generally require estimates of the standalone selling price for each performance obligation. Also, our revenues do not include material amounts of variable consideration. Substantially all of our revenues are recognized at a point-in-time and the timing of the satisfaction of the applicable performance obligations is readily determinable. As noted above, our ASC 606 revenues are generally recognized at the time of delivery to, or pick-up by, the customer.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new lease guidance requires that an entity should recognize assets and liabilities for leases with a term of greater than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. This guidance also provides accounting updates with respect to a lessor accounting under a lease arrangement. The new standard is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The impact of this guidance on the Company’s consolidated financial statements is currently being evaluated.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by removing the requirement to compare the implied fair value of goodwill with its carrying amount. Under this ASU, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.” This ASU also removes existing special requirements for reporting units with a zero or negative carrying amount. This ASU is effective prospectively. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The impact of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU were effective upon issuance and may be applied through December 31, 2022. Our debt agreement that utilizes LIBOR has not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt arrangements change to another accepted rate, we will utilize the relief available in this ASU.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2022. The Company is currently assessing the impact of this standard on its consolidated financial statements.
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Note 3 - Financing Receivables
The Company’s financing receivables are related to sales-type leases and are collateralized by a security interest in the underlying equipment. Financing receivables were as follows (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Gross investment in financing receivable | $ | 19,432 | $ | 12,244 | |||||||
| Less: Unearned income | (309) | (197) | |||||||||
| Financing receivables, net | $ | 19,123 | $ | 12,047 | |||||||
Note 4 - Inventories
At December 31, 2020 and 2019, inventories consisted of the following (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Whole goods | $ | 396,553 | $ | 552,816 | |||||||
| Parts and accessories | 50,755 | 55,179 | |||||||||
| Less: Reserves | (2,906) | (2,011) | |||||||||
| Inventories, net | $ | 444,402 | $ | 605,984 | |||||||
Inventories are pledged as collateral for debt. For detail on these collateral agreements, see Note 8.
Note 5 - Property and Equipment
At December 31, 2020 and 2019, property and equipment and related accumulated depreciation were as follows (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Buildings and leasehold improvements | $ | 73,185 | $ | 64,084 | |||||||
| Vehicles | 21,229 | 20,431 | |||||||||
| Land and improvements | 5,074 | 5,575 | |||||||||
| Machinery and equipment | 24,004 | 21,758 | |||||||||
| Furniture and fixtures | 7,611 | 6,797 | |||||||||
| Construction in progress | 780 | 3,418 | |||||||||
| 131,883 | 122,063 | ||||||||||
| Less: Accumulated depreciation | (44,705) | (34,621) | |||||||||
| Property and equipment, net | $ | 87,178 | $ | 87,442 | |||||||
Property and equipment are pledged as collateral for debt. For detail on these collateral agreements, see Note 8.
Depreciation expense on property and equipment was $12.0 million, $10.8 million, and $8.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. A portion of our depreciation expense represents inventoriable overhead costs.
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Note 6 - Rental Equipment
At December 31, 2020 and 2019, rental equipment and related accumulated depreciation were as follows (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Rental equipment | $ | 705,309 | $ | 709,713 | |||||||
| Less: Accumulated depreciation | (330,475) | (297,950) | |||||||||
| Rental equipment, net | $ | 374,835 | $ | 411,763 | |||||||
As of December 31, 2020, Rental equipment, net included rental assets with a combined net book value of approximately $8.3 million that were being actively marketed for sale. The net book value of rental assets being marketed for sale was not significant for any prior periods.
Depreciation expense on rental equipment was $97.7 million, $105.5 million and $99.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Note 7 - Intangibles and Goodwill
Intangibles
The following table provides the historical cost and accumulated amortization for each major class of intangible assets, excluding goodwill (in thousands):
| Dealership Reporting Unit | Rental Reporting Unit | Service Reporting Unit | Total | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Customer relationships | 15.3 | $ | 113,327 | $ | 35,400 | $ | 77,927 | ||||||||||||||||
| Trade name | 4.8 | 28,690 | 28,263 | 427 | |||||||||||||||||||
| Software | 4.3 | 448 | 268 | 180 | |||||||||||||||||||
| Product design | 7.0 | 2,900 | 311 | 2,589 | |||||||||||||||||||
| Total intangible assets | $ | 145,365 | $ | 64,242 | $ | 81,123 | |||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Customer relationships | 15.3 | $ | 113,327 | $ | 42,838 | $ | 70,489 | ||||||||||||||||
| Trade name | 4.8 | 28,690 | 28,690 | — | |||||||||||||||||||
| Software | 4.2 | 504 | 365 | 139 | |||||||||||||||||||
| Product design | 7.0 | 2,900 | 725 | 2,175 | |||||||||||||||||||
| Total intangible assets | $ | 145,421 | $ | 72,618 | $ | 72,803 | |||||||||||||||||
Amortization expense of acquired intangible assets was $8.4 million, $13.0 million and $12.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The estimated future amortization expense related to intangible assets held at December 31, 2020 is presented as follows (in thousands):
| 2021 | $ | 7,959 | |||
| 2022 | 7,879 | ||||
| 2023 | 7,857 | ||||
| 2024 | 7,852 | ||||
| 2025 | 7,852 | ||||
| Thereafter | 33,404 | ||||
| Total | $ | 72,803 | |||
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Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2020, 2019 and 2018, are as follows (in thousands):
| Dealership Reporting Unit | Rental Reporting Unit | Service Reporting Unit | Total | ||||||||||||||||||||
| Balance at December 31, 2017 | $ | 86,921 | $ | 106,110 | $ | 65,140 | $ | 258,171 | |||||||||||||||
| Acquisitions | 652 | 1,957 | 653 | 3,262 | |||||||||||||||||||
| Balance at December 31, 2018 | $ | 87,573 | $ | 108,067 | $ | 65,793 | $ | 261,433 | |||||||||||||||
| Acquisitions | — | — | 7,891 | 7,891 | |||||||||||||||||||
| Balance at December 31, 2019 | $ | 87,573 | $ | 108,067 | $ | 73,684 | $ | 269,324 | |||||||||||||||
| Purchase price allocation adjustment | — | — | (1,512) | (1,512) | |||||||||||||||||||
| Balance at December 31, 2020 | $ | 87,573 | $ | 108,067 | $ | 72,172 | $ | 267,812 | |||||||||||||||
Note 8 - Debt
Our total debt was comprised of the following (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Credit Agreement | |||||||||||
| Term Loan B | $ | 594,000 | $ | 556,489 | |||||||
| Revolver | 7,269 | 46,000 | |||||||||
| Construction loans | 23,733 | 19,818 | |||||||||
| Terex note payable | — | 17,832 | |||||||||
| Other debt | 16,174 | 18,596 | |||||||||
| Capital lease and lease financing obligations | 3,878 | 4,114 | |||||||||
| Total debt | $ | 645,054 | $ | 662,849 | |||||||
| Less: | |||||||||||
| Unamortized debt issuance costs and discounts | (5,500) | (7,386) | |||||||||
| Current maturities | (16,594) | (27,596) | |||||||||
| Debt, net of current maturities and unamortized issuance costs | $ | 622,960 | $ | 627,867 | |||||||
Maturities
The future principal payments due under our financing arrangements at December 31, 2020 are as follows (in thousands):
| 2021 | $ | 16,594 | |||
| 2022 | 13,941 | ||||
| 2023 | 25,956 | ||||
| 2024 | 16,792 | ||||
| 2025 | 571,771 | ||||
| Total | $ | 645,054 | |||
Credit Agreement
The Company has a Credit Agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc. and participating lenders. The Credit Agreement is collateralized by all inventories (except those pledged to floor plan facilities), property and equipment, rental equipment, accounts receivables, and financing receivables. The Credit Agreement contains conditions, representations and warranties, events of default, and indemnification provisions that are customary for financings of this type, including, but not limited to, mandatory prepayment obligations, a maximum net leverage ratio covenant, limitations on incurrence of debt, investments, capital
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expenditures, liens on assets, certain sale and leaseback transactions, transactions with affiliates, mergers, consolidations, purchases and sales of assets, and restricted payments.
The Credit Agreement outstanding includes a $600.0 million first-lien B term loan (“Term Loan B”), which requires annual amortization payments equal to 1% of the issued loan amount made quarterly and matures on April 18, 2025. The Term Loan B bears interest at the applicable LIBOR rate plus 4.25%. The outstanding balance on the Term Loan B as of December 31, 2020 and 2019 was $594.0 million and $556.5 million, respectively. Subsequent to year end, the Company paid down $40.0 million of the outstanding Term Loan B balance.
The Credit Agreement also provides a $125.0 million revolving credit facility (the “Revolver”), which matures on April 18, 2023 and bears interest at the applicable LIBOR rate plus up to 4.0%. The outstanding borrowings against the Revolver as of December 31, 2020 and 2019, were $7.3 million and $46.0 million, respectively. The remaining capacity on the Revolver totaled $117.7 million and $54.0 million as of December 31, 2020 and 2019, respectively. Subsequent to year end, the outstanding Revolver balance of $7.3 million was paid off in its entirety.
On February 19, 2020 the Credit Agreement was amended with Amendment No. 3 (the “Third Amendment”). The Third Amendment increased the aggregate principal balance of the Term Loan B by approximately $43.5 million to $600.0 million. Approximately $38.7 million of the proceeds from the Third Amendment were used to paydown the outstanding Revolver balance, with the remaining proceeds used for operations. In addition to the increase in principal, the maturity date was extended from April 18, 2023 to April 18, 2025, and the interest rate was decreased from the applicable LIBOR rate (subject to a floor of 1.0%) plus 5.5% to the applicable LIBOR rate (no longer subject to a floor of 1.0%) plus 4.25%. The Third Amendment increased the borrowing capacity under the Revolver by $25.0 million to $125.0 million and extended the maturity date of the Revolver from April 18, 2022 to April 18, 2023.
In conjunction with the Third Amendment, the Company wrote off approximately $2.3 million of unamortized debt issuance costs related to lenders who did not participate in the amendment. In addition, the Company incurred approximately $1.6 million in issuance costs related to the Third Amendment, of which $1.1 million was allocated to the Term Loan B and $0.5 million was allocated to the Revolver. Of the amount allocated to the Term Loan B, the Company capitalized $0.3 million of issuance costs and expensed approximately $0.8 million which is included in Selling, general and administrative expenses for the year ended December 31, 2020. The Company capitalized the full amount of issuances costs allocated to the Revolver. The Company also recognized a $1.5 million discount on the Term Loan B.
New Markets Tax Credit
The Company has previously entered into financing transactions under the New Markets Tax Credit (“NMTC”) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 and is intended to induce capital investment in low-income communities. The NMTC program permits taxpayers to claim credits against their Federal income taxes for qualified investment in the equity of community development entities (“CDEs”). These investments were passed on to the Company from a CDE in the form of interest bearing notes with fixed interest rates ranging from approximately 4.14% to 4.875%, with maturities ranging from 2019 through 2042.
The transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase interest in the CDE for a nominal amount.
The first NMTC matured on September 30, 2019, and the full outstanding balance of $4.8 million was repaid. Immediately subsequent to the settlement of this loan, the Company exercised its option to repurchase the outstanding equity interests in the CDE. Concurrently with the exercise of this option, the remaining loan was extinguished and the Company recorded a gain of $1.7 million stemming from the unwinding of the new market tax credit structure. This gain is presented in Other income, net in the Consolidated Statements of Income.
Construction Loans
The Company has entered into financing transactions in order to fund renovations to its manufacturing and production facilitates. These financing transactions required that proceeds from the loans only be used to make pre-approved construction purchases up to a certain dollar threshold. Once construction is completed, these loans are converted to standard term loan agreements.
Outstanding construction loans had fixed interest ranging from 3.50% to 4.60%, with maturities beginning in 2021 through 2025.
Terex Note Payable
On April 24, 2019, in connection with the acquisition of machinery and parts businesses related to the production of boom trucks, truck cranes and crossover product lines from Terex Global GMBH, which is discussed further in Note 15, the Company entered into a
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promissory note payable with Terex USA, LLC. The promissory note is structured as a deferred purchase price for the acquisition in the amount of $26.7 million. The promissory note bears interest of 5% and is payable in 6 equal quarterly installments with the final installment being made during 2020.
Other Debt
On September 30, 2019, the Company entered into a $7.0 million promissory note with Security Bank of Kansas City. The promissory note has an interest rate of 4% with a maturity due in 2024. The proceeds from the note were used to support business activities.
The remaining other debt consists of loan agreements with Central Bank of the Midwest and Citizen’s Bank and Trust to support business activities as well as notes payable on company vehicles with maturities ranging from 2020 to 2025 with interest rates between 3.60% to 5.60%.
Capital Lease Obligations
The Company has historically entered into capital leases for non-rental equipment. Interest rates on these capital leases range from 3.99% to 7.82%, with maturities through 2024. Some of the Company’s capital leases provide the Company with the option to renew the leases for varying periods after the initial lease terms. These renewal options enable the Company to renew the leases based upon the fair rental values at the date of expiration of the initial lease. Depreciation related to the associated assets for the capital leases is included in Non-rental depreciation and amortization expense in the Consolidated Statements of Income.
Debt Issuance Costs
For term debt, we present debt issuance costs as a direct deduction from the carrying amount of the related debt liability. The debt issuance costs are amortized over the terms of each instrument using the effective interest method.
Debt issuance costs on the Revolver are amortized on a straight-line basis. As of December 31, 2020 and 2019, debt issuance costs of $0.9 million, and $0.8 million, respectively, are recorded in Other assets, net in the Consolidated Balance Sheets.
Amortization of debt issuance costs included in Interest expense in our Consolidated Statements of Income was $1.8 million, $2.7 million, and $2.7 million for each of the years ended December 31, 2020, 2019 and 2018, respectively. We reassess the carrying value of debt issuance costs when modifications are made to the related debt instruments.
Interest Expense
Interest expense on the Company’s lines-of-credit and long-term debt was $38.2 million, $48.1 million and $42.2 million during the years ended December 31, 2020, 2019 and 2018, respectively.
Note 9 - Floor Plan Payables
Floor plan payables are financing arrangements to facilitate the Company’s purchase of new and used trucks, cranes, and construction equipment inventory. All floor plan payables are collateralized by the inventory financed. These payables become due and payable upon the sale, transfer, or reclassification of each unit of inventory. Certain floor plan arrangements require the Company to satisfy various financial ratios, such as debt-service coverage ratio and debt-to-tangible net worth ratio if amounts drawn on the Revolver exceed 35% of our total capacity under the Revolver.
The amounts owed under floor plan payables are summarized as follows (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Trade | |||||||||||
| Daimler Truck Financial | $ | 101,671 | $ | 211,927 | |||||||
| PACCAR Financial Services | 20,076 | — | |||||||||
| Non-Trade | |||||||||||
| PNC Equipment Finance, LLC | 238,956 | 293,389 | |||||||||
| Total floor plan payable | $ | 360,703 | $ | 505,316 | |||||||
Interest on outstanding floor plan payable balances is due and payable monthly. Floor plan interest was $18.3 million, $19.3 million and $11.0 million for the years ended December 31, 2020, 2018 and 2018, respectively.
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PNC Equipment Finance, LLC
The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement provides the Company with a $295.0 million revolving credit facility, which matures on August 25, 2022 and bears interest at a rate of LIBOR plus 3.05%.
On August 5, 2019,and August 30, 2019, the credit facility was amended with the signing of the fifth and sixth amendments to the Loan Agreement. The fifth and sixth amendments increased the total capacity from $245.0 million to $265.0 million, and from $265.0 million to $295.0 million, respectively. The agreements also amended lender commitments which resulted in an immaterial amount of the existing unamortized debt issuance costs being expensed. In addition to these changes, the sixth amendment also extended the maturity date of the Loan Agreement from August 25, 2020 from August 25, 2022. The company incurred an additional immaterial amount of debt issuance costs in connection with these amendments. The interest rate was not impacted by any of the amendments.
Daimler Truck Financial
The Wholesale Financing Agreement with Daimler Truck Financial (“Daimler”) bears interest at a rate of Prime plus 0.80% after an initial interest free period of up to 150 days with a capacity of $94.5 million. On January 30, 2019 and March 30, 2020, the Daimler financing agreement was amended, increasing the total capacity to $120.0 million and $175.0 million, respectively. The maturity date and interest rate set forth in the original Loan Agreement were not impacted by these amendments. However, in response to economic pressures during 2020, Daimler notified the Company that it would be temporarily increasing the interest rate on its floorplan line to a rate of Prime plus 1.30% effective September 1, 2020. The increase in rate was repealed on January 1, 2021. As of December 31, 2020 and 2019, the total capacity under this agreement was $175 million and $120 million, respectively. The Company can request and receive funding in excess of this capacity without penalty.
PACCAR
On June 2, 2020 the Company entered into an Inventory Financing Agreement with PACCAR Financial Corp which provides the Company with a line of credit of $50.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of LIBOR plus 2.4%.
Floor Plan Debt Issuance Costs
As of December 31, 2020 and 2019, immaterial debt issuance costs related to the Company’s floor plan payables were included in Other assets, net in the Consolidated Balance Sheets and are being amortized to interest expense over the estimated life of the lines-of-credit using the straight-line method. Amortization of these debt issuance costs were not significant for any periods presented.
Note 10 - Fair Value Measurement
Short-term instruments – The carrying amounts reported in our Consolidated Balance Sheets for Cash and cash equivalents, Accounts receivable, Accounts payable, Accrued expenses, and Other liabilities (including Floor plan payables and the Revolver) approximate fair value due to the immediate- to short-term maturity of these financial instruments.
Term Loan B – The fair value of the Company’s Term Loan B is based on price quotations from the bank, and therefore categorized under Level 2 of the ASC 820 hierarchy. Based on indicative price quotations from the financial institution multiplied by the Term Loan B balance on the Company’s Consolidated Balance Sheets, the Company estimates the fair value of the Term Loan B as approximately $594.0 million as of December 31, 2020.
Other debt instruments and capital lease obligations – As the Company’s other loans do not have quoted prices, the fair value of these debt instruments and capital lease obligations were estimated using Level 2 “significant other observable inputs” primarily based on quoted market prices for the same or similar issuances. Each of these instruments did not have interest rates which were materially different than current market conditions and therefore, the fair value of each instrument approximated the respective carrying values.
Note 11 - Partners’ Equity
Per the limited partnership agreement, Blackstone is authorized to issue an unlimited number of Class A and/or Class B interests. Partners are entitled to one vote per Class A interest. Class B interests are non-voting. No partner is liable for debt, obligations, or liabilities of the Company beyond such partner’s capital contribution. No distributions can be made for any reason to Class B holders until all of the contributed equity has been returned to the Class A holders.
During the years ended December 31, 2020, 2019 and 2018, the Company made approximately $0.2 million, $0.5 million and $1.1 million, respectively, of tax distributions to its partners.
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During the year ended December 31, 2018, the Company made dividend distributions totaling $52.7 million to its partners. No such distributions were made during 2020 or 2019.
Note 12 – Equity-based Compensation
Beginning in 2015, certain CTOS employees were granted Class B interests in the Company with time-based vesting conditions for services rendered or to be rendered. Class B interests vest evenly over seven years on the anniversary of the effective vesting date. Any unvested Class B interests will automatically vest upon a change of control of the Company.
In accordance with ASC 718-10, the interests are classified as equity. The fair value of each Class B interest is determined on the grant date using an option pricing model. The Company has elected to account for forfeitures as they occur.
A summary of the Class B interest activity for the years ended December 31, 2020, 2019, and 2018 is presented below:
| Number of Non-vested Class B Interests | Weighted Average Grant Date Fair Value | ||||||||||
| Balance at December 31, 2017 | 21,193 | $ | 0.30 | ||||||||
| Granted | 8,248 | 0.53 | |||||||||
| Vested | (4,397) | 0.31 | |||||||||
| Forfeited | (567) | 0.31 | |||||||||
| Balance at December 31, 2018 | 24,477 | $ | 0.38 | ||||||||
| Granted | 475 | 0.37 | |||||||||
| Vested | (5,213) | 0.35 | |||||||||
| Forfeited | (398) | 0.42 | |||||||||
| Balance at December 31, 2019 | 19,341 | $ | 0.38 | ||||||||
| Granted | 5,386 | 0.51 | |||||||||
| Vested | (5,201) | 0.38 | |||||||||
| Forfeited | (339) | 0.35 | |||||||||
| Balance at December 31, 2020 | 19,186 | $ | 0.42 | ||||||||
The total fair value of Class B interests vested during the years ended December 31, 2020, 2019 and 2018 was $1.8 million, $1.8 million, and $1.4 million, respectively.
For the years ended December 31, 2020 and 2019, compensation charges related to the Class B interests were $2.1 million and $1.9 million, respectively. For the year ended December 31, 2018, aggregated compensation charges related to the Class B interests were $5.3 million, of which an immaterial portion of this expense related to prior years. The expense for all periods is recorded in Selling, general and administrative expenses in the Consolidated Statements of Income. The unrecognized compensation cost as of December 31, 2020 was $8.1 million, which will be recognized over a weighted-average period of 3.9 years, assuming there is no change of control triggering vesting of all interests. Upon the closing of the Acquisition, which is discussed further in Note 1, any remaining unrecognized compensation cost would be accelerated.
The fair value of each interest granted was estimated using a pricing model with the assumptions below:
| 2020 | 2019 | 2018 | |||||||||||||||
| Dividend yield | — | % | — | % | — | % | |||||||||||
| Equity volatility | 40.0 | % | 33.0 | % | 32.0 | % | |||||||||||
| Risk-free rate | 2.0 | % | 2.6 | % | 2.5 | % | |||||||||||
| Term | 1.6 years | 1 year | 1.9 years | ||||||||||||||
| Marketability discount | 23.0 | % | 20.0 | % | 17.9 | % | |||||||||||
Note 13 - Defined Contribution Plan
The Company and its subsidiaries sponsor one defined contribution 401(k) plan. Employees are eligible to participate in the plan if they are 18 years of age or older and have completed three consecutive months of service. If the consecutive months of service
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requirement is not met within an individual’s first three consecutive months of employment, then the individual will be eligible to participate after one year of service.
For these plans, the Company’s contributions to the plan are determined annually by the board of directors. For the years ended December 31, 2020, 2019 and 2018, matching contributions made to the plan were $3.1 million, $2.8 million and $2.2 million, respectively.
Note 14 - Operating Leases
We have various cancellable and non-cancelable operating leases related to office building and real estate. Rental expense for all operating leases, including leases with a term of one month or less, was $5.1 million, $4.7 million and $4.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The majority of our future operating lease payments relate to real estate leases which may contain renewal options and escalation clauses. The Company recognizes lease expense on a straight-line basis over the expected term of the lease.
Our minimum annual payments under our operating lease agreements as of December 31, 2020 were (in thousands):
| 2021 | $ | 3,502 | |||
| 2022 | 2,748 | ||||
| 2023 | 2,202 | ||||
| 2024 | 1,608 | ||||
| 2025 | 1,018 | ||||
| Thereafter | 2,477 | ||||
| Total | $ | 13,555 | |||
Note 15 - Acquisitions
The following acquisitions, unless otherwise noted, were considered business combinations accounted for under ASC 805, Business Combinations. The purchase consideration was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The valuations consisted of discounted cash flow analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed.
All acquisitions were made to support the vision of becoming a leading provider of specialized and vocational equipment by gaining customer bases, economies of scale, geographical footprint, brand identity, assets, and talent. The operations of each of the acquisitions have been included in the Company’s Consolidated Statements of Income since the respective dates of the acquisitions. Below, we have summarized the estimated fair values of the assets acquired and liabilities assumed as of the acquisition dates.
Pro forma information is not included in accordance with ASC 805 as no acquisitions were considered material individually or in the aggregate.
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2019 Acquisitions
On April 24, 2019, the Company acquired a machinery and parts businesses related to the production of boom trucks, truck cranes and crossover product lines from Terex Global GMBH. The aggregate purchase price for this acquisition was $27.1 million which consisted of cash consideration of $0.4 million and $26.7 million in the form of a note payable as discussed in Note 8. The purchase price was allocated based on the fair values of the assets acquired, and liabilities assumed at the date of the acquisition, with the remainder being recorded to goodwill. In 2020, the Company finalized the purchase price allocation, which is summarized in the table below (in thousands):
| Amount Acquired | Weighted Average Life (in years) | ||||||||||
| Inventory | $ | 14,469 | |||||||||
| Property and equipment | 2,194 | ||||||||||
| Customer relationships | 1,200 | 15 | |||||||||
| Product design | 2,900 | 7 | |||||||||
| Total identifiable assets | 20,763 | ||||||||||
| Goodwill | 6,379 | ||||||||||
| Total identifiable assets and goodwill | $ | 27,142 | |||||||||
2018 Acquisitions
On September 5, 2018, the Company acquired a 100% interest in a wholly owned subsidiary of Great Pacific Equipment Inc., a distributor of construction and utility equipment located in California. The purchase price for this acquisition was $4.7 million and consisted of cash consideration of $3.2 million and equity consideration of $1.5 million. The purchase price was allocated based on the fair values of the assets acquired, and liabilities assumed at the date of the acquisition, with the remainder being recorded to goodwill. The final allocation is as follows (in thousands):
| Accounts receivable | $ | 374 | |||
| Inventory | 182 | ||||
| Prepaids | 32 | ||||
| Rental assets | 790 | ||||
| Property and equipment | 250 | ||||
| Accounts payable | (171) | ||||
| Accrued expenses | (19) | ||||
Note 16 – Commitments and Contingencies
In accordance with ASC 450, Contingencies, we account for loss or gain contingencies when it is probable that a liability or an asset is realizable and can be reasonably estimated.
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. While it is not possible to predict the outcome of these 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.
Sales Tax
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. Through December 31, 2018, the Company had accrued $1.1 million related to ongoing audits, with the corresponding $1.1 million expense running through Other income, net on the Consolidated Statements of Income. Using a probability weighted approach which considered, among other things, the Company’s understanding of the facts and circumstances surrounding these audits, the Company’s interpretations of the relevant state and local tax regulations, and any settlements proposed by the relevant taxing authorities, the Company recorded an additional $4.2 million during 2019, bringing the total accrual for ongoing audits to $5.3 million as of December 31, 2019. The increase in the accrual of $4.2 million is reflected in Other income, net in the Consolidated Statement of Income for the year ended December 31, 2019. During the year ended December
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31, 2020, the audits were completed, and related accruals were relieved, which resulted in a favorable adjustment of $1.8 million which is recorded in Other income, net on the Consolidated Statements of Income.
Federal Excise Tax
The Company’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the Internal Revenue Service (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 equipment sold by the Company are not eligible for the Mobile Machinery Exemption set forth in the Internal Revenue Code (IRC). The Company filed an appeal on January 28, 2021. Based on the Company’s understanding of the facts and circumstances, the Company’s understanding of the relevant provisions of the IRC, and historical precedent, including the Company’s own successful appeal of similar assessments in prior years, the Company does not believe the likelihood of a loss resulting from the IRS assessment to be probable at this time. Accordingly, the Company has made no accrual for such loss as of December 31, 2020.
Note 17 – Related-Party Transactions
Related-Party Receivables
The Company has a related-party note receivable from a partner that is being paid in monthly installments with the final payment due in 2028. The related-party note receivable balance related to this note was approximately $0.1 million and $0.2 million, as of December 31, 2020 and 2019, respectively, which is recorded in Accounts receivable in the Consolidated Balance Sheets.
The Company also has a related-party receivable from a partner for reimbursement of expenses originally paid by the Company on behalf of the partner in the amount of $0.1 million as of December 31, 2020 and 2019, which is recorded in Accounts receivable in the Consolidated Balance Sheets.
In addition, the Company also has a related-party receivable from a partner for certain taxes originally paid by the Company on behalf of the partner. The balance of the receivable outstanding is $0.5 million as of December 31, 2020 and 2019, which is recorded in Accounts receivable in the Consolidated Balance Sheets.
Related-Party Payables
The Company has related-party payables to Blackstone related to professional fees for monitoring services provided by Blackstone in 2016 and 2017. Payables related to these services are recorded in Accrued expenses in the Consolidated Balance Sheets in the amount of $2.6 million as of December 31, 2020 and 2019.
Related-Party Leases
The Company leases certain facilities from entities owned by partners. Rent expense paid to related-parties totaled $1.9 million, $2.1 million and $2.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. This rent expense is recorded in Selling, general, and administrative expenses in the Consolidated Statements of Income, with a portion allocated to inventoriable overhead costs.
Related Party Acquisitions
During the year ended December 31, 2020, the Company purchased a building owned by a partner. Total consideration paid for the purchase of this asset amounted to $2.3 million. During the year ended December 31, 2018, the Company purchased assets owned by a partner. Total consideration paid for the purchase of these assets amounted to $5.9 million. The assets acquired of the partner-owned entity were comprised entirely of land and buildings recorded at $1.6 million and $4.3 million, respectively. No such acquisitions were made during the year ended December 31, 2019.
Related-Party Revenue
The Company sells and rents equipment to R&M Equipment Rental, a partner-owned business. Total revenue attributable to renting equipment to R&M Equipment Rental for the years ended December 31, 2020, 2019 and 2018 was $1.5 million, $3.3 million, and $3.6 million, respectively, and is recorded in Rental revenue in our Consolidated Statements of Income. During the years ended December 31, 2020, 2019 and 2018, total revenue from sales of new equipment to R&M Equipment Rental was $12.4 million, $11.2 million, and $10.3 million, respectively, and is recorded in New sales revenue in the Consolidated Statements of Income. During the same periods, the Company also sold $1.4 million, $0.4 million, and $0.4 million of used equipment to R&M Equipment Rental, with the related revenue recorded in Used sales revenue in the Consolidated Statements of Income. Additionally, the Company performs service on equipment rented and sold to R&M Equipment Rental. For the year ended December 31, 2020, revenue for the services performed was $0.6 million and was immaterial for the years ended December 31, 2019 and 2018. Service revenue related to R&M
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Equipment Rental is recorded in Parts and service revenue in the Consolidated Statements of Income. Amounts due from R&M Equipment Rental were $0.3 million and $0.4 million as of December 31, 2020 and 2019, respectively, which are recorded in Trade accounts receivable in the Consolidated Balance Sheets.
Revenue from transactions with other affiliates of partners or partner-owned entities not explicitly mentioned above were less than $0.1 million for the years ended December 31, 2020, 2019, and 2018 with immaterial revenue amounts from these transaction reflected in each of our revenue streams in the Consolidated Statements of Income.
Related-Party Goods and Services
The Company rents equipment from R&M Equipment Rental, a partner-owned business that re-sells and re-rents equipment as a minority-owned business. Total rent expense from R&M Equipment Rental for the years ended December 31, 2020 and 2019 was $4.6 million and $3.4 million, respectively, and was immaterial for the year ended December 31, 2018. This re-rent expense is recorded in Cost of rental revenue in the Consolidated Statements of Income. In addition to re-rent expense, the Company also made purchases of inventory from R&M Equipment Rental totaling $1.4 million and $0.5 million during the years ended December 31, 2020 and 2019, respectively. No such inventory purchases were made from R&M Equipment during the year ended December 31, 2018. Amounts due to R&M Equipment Rental are recorded in Trade accounts payable in the Consolidated Balance Sheets and totaled $0.3 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2020, the Company incurred $0.4 million, in professional fees for certain services provided by Blackstone. During the year ended December 31, 2018, the Company incurred $0.2 million in professional fees for monitoring services provided by Blackstone. The Company incurred no such fees during 2019. These fees are recorded in Selling, general and administrative expenses in the Consolidated Statements of Income.
Note 18 – Subsequent Events
The Company has performed an evaluation of subsequent events through March 12, 2021, which is the date these financial statements were available to be issued. The Company does not have any material undisclosed reportable subsequent events.
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Exhibit 99.2
Custom Truck One Source, Inc.
Unaudited Pro Forma Condensed Combined Financial Information
December 31, 2020
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 3, 2020, the Company and NESCO Holdings II, Inc., a subsidiary of the Company (“Buyer” or “Issuer”), entered into a Purchase and Sale Agreement (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. (“Custom Truck”), Blackstone Capital Partners VI-NQ L.P. and PE One Source Holdings, LLC, an affiliate of Platinum Equity (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom Truck. In connection with the Acquisition, the Company 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 (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of the Company’s common stock, par value $0.0001 per share, valued at $5.00 per share.
Also on December 3, 2020, the Company entered into a Common Stock Purchase Agreement (the “Investment Agreement”) with Platinum, relating to, among other things, the issuance and sale (the “Subscription”) to Platinum of Common Stock, for an aggregate purchase price in the range of $700 million to $763 million, with the specific amount to be calculated in accordance with the Investment Agreement based upon the total equity funding required to fund the consideration to be 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, the Company 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, 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. Following the completion of these transactions, as of April 1, 2021 the Company had 245,919,383 shares of Common Stock issued and outstanding. The trading price of the Common Stock was $9.35 per share on the closing date.
On April 1, 2021 (the “Closing Date”), Nesco Holdings II, Inc. issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the “Notes”). The Notes were issued pursuant to an indenture, dated as of April 1, 2021, between 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, commencing on October 15, 2021. Unless earlier redeemed, the Notes will mature on April 15, 2029. The Notes were offered in 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 Notes were used to consummate the Acquisition and to repay the Existing Secured Notes (as defined below), repay certain indebtedness of Custom Truck and pay certain fees and expenses related to the Acquisition and financing transactions.
On the Closing Date, Buyer, its direct parent, and certain of its direct and indirect subsidiaries entered into a senior secured asset based revolving credit agreement (the “New ABL Facility”) 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, which includes borrowing capacity for revolving loans (with a swingline sub-facility) and the issuance of letters of credit. Proceeds from the New ABL Facility were used to finance the repayment of certain indebtedness of Custom Truck, as well as to pay fees and expenses related to the Acquisition and the financing.
Immediately following the Acquisition of Custom Truck, "Nesco Holdings, Inc." changed its name to “Custom Truck One Source, Inc.” The unaudited pro forma condensed combined financial information presented herein, is based on the historical financial statements of the Company and Custom Truck before the Acquisition. The historical financial information of the Company as used in this pro forma presentation is referred to as "Nesco" or "historical Nesco" and the unaudited pro forma condensed combined financial information presented herein gives effect to the following transactions:
•the Subscription;
•the Supplemental Equity Financing;
•the extinguishment of Nesco’s asset-based revolving credit facility (the "2019 Credit Facility") and its 10% Senior Secured Second Lien Notes due 2024 (the "Existing Secured Notes") and the contemporaneous issuance of the Notes and the New
2
ABL Facility (the "Debt Financing," and together with the Subscription and the Supplemental Equity Financing, the “Financing”); and
•the estimated effects of the Acquisition, inclusive of the estimated effects of debt repaid and the Rollover (collectively, the "Transaction Accounting Adjustments").
The following unaudited pro forma condensed combined financial information is based on the historical financial statements of Nesco and Custom Truck described below. In preparing the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, certain reclassifications were made to conform the historical reported financial information of Custom Truck to the reporting presentation of Nesco.
The unaudited pro forma condensed combined balance sheet as of December 31, 2020 and unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 is based on, derived from, and should be read in conjunction with, Nesco’s historical audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020. The aforementioned unaudited pro forma financial information is also based on, derived from, and should be read in conjunction with Custom Truck’s historical audited consolidated financial statements for the year ended December 31, 2020 (see Exhibit 99.1 to this Amendment No. 1 to Current Report on Form 8-K/A).
The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 assumes that the transactions described above occurred on January 1, 2020. The unaudited pro forma condensed combined balance sheet as of December 31, 2020 assumes that the Transaction occurred on December 31, 2020. The historical financial statements of Nesco and Custom Truck have been adjusted in the accompanying unaudited pro forma condensed combined financial information to give effect to pro forma events that are transaction accounting adjustments which are necessary to account for the Acquisition and related to the financing of the Acquisition, in accordance with U.S. GAAP.
The unaudited pro forma condensed combined financial information has been prepared for illustrative purposes only and does not purport to represent or be indicative of the combined financial position or results of operations that would have been realized had the transactions occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations of the combined company. In addition, the unaudited pro forma condensed combined financial information does not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies, or any other synergies that may result from the Transaction.
3
Custom Truck One Source, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2020
| (in $000s) | Historical Nesco | Historical Custom Truck reclassified (Note 3) | Transaction Accounting Adjustments - Financing (Note 4) | Transaction Accounting Adjustments - Acquisition (Note 5) | Pro Forma Combined | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Current Assets | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 3,412 | $ | 59,130 | $ | 1,372,917 | 4.a(i) | $ | (1,413,304) | 5.a(i) | $ | 22,155 | |||||||||||||||||
| Accounts receivable, net | 60,933 | 108,744 | — | — | 169,677 | ||||||||||||||||||||||||
| Financing receivables, net | — | 19,123 | — | — | 19,123 | ||||||||||||||||||||||||
| Inventory | 31,367 | 444,402 | — | 35,950 | 5.a(ii) | 511,719 | |||||||||||||||||||||||
| Prepaid expenses and other | 7,530 | 3,850 | — | — | 11,380 | ||||||||||||||||||||||||
| Total current assets | 103,242 | 635,249 | 1,372,917 | (1,377,354) | 734,054 | ||||||||||||||||||||||||
| Property and equipment, net | 6,269 | 87,178 | — | — | 93,447 | ||||||||||||||||||||||||
| Rental equipment, net | 335,812 | 374,835 | — | 211,690 | 5.a(iii) | 922,337 | |||||||||||||||||||||||
| Goodwill and other intangibles, net | 305,631 | 340,615 | — | 353,332 | 5.a(iv) | 999,578 | |||||||||||||||||||||||
| Deferred income taxes | 16,952 | — | — | — | 16,952 | ||||||||||||||||||||||||
| Notes receivable | 498 | — | — | — | 498 | ||||||||||||||||||||||||
| Other assets | — | 17,564 | 11,250 | 4.a(ii) | (900) | 5.a(v) | 27,914 | ||||||||||||||||||||||
| Total Assets | $ | 768,404 | $ | 1,455,441 | $ | 1,384,167 | $ | (813,232) | $ | 2,794,780 | |||||||||||||||||||
| Liabilities and Stockholders' Deficit | |||||||||||||||||||||||||||||
| Current Liabilities | |||||||||||||||||||||||||||||
| Accounts payable | $ | 31,829 | $ | 38,997 | $ | — | $ | — | $ | 70,826 | |||||||||||||||||||
| Accrued expenses | 31,991 | 29,902 | (17,762) | 4.a(iii) | (8,837) | 5.a(vi) | 35,294 | ||||||||||||||||||||||
| Deferred income and deposits | 975 | 19,765 | — | — | 20,740 | ||||||||||||||||||||||||
| Floor plan payables - trade | — | 121,747 | — | — | 121,747 | ||||||||||||||||||||||||
| Floor plan payables - non-trade | — | 238,956 | — | — | 238,956 | ||||||||||||||||||||||||
| Current maturities of long-term debt | 1,280 | 16,334 | — | — | 17,614 | ||||||||||||||||||||||||
| Current portion of capital lease obligations | 5,276 | 260 | — | — | 5,536 | ||||||||||||||||||||||||
| Other liabilities | — | 1,377 | — | — | 1,377 | ||||||||||||||||||||||||
| Total current liabilities | 71,351 | 467,338 | (17,762) | (8,837) | 512,090 | ||||||||||||||||||||||||
| Long-term debt, net | 715,858 | 619,342 | 584,141 | 4.a(iv) | (595,769) | 5.a(vii) | 1,323,572 | ||||||||||||||||||||||
| Capital leases | 5,250 | 3,618 | — | — | 8,868 | ||||||||||||||||||||||||
| Deferred income taxes | — | — | — | — | — | ||||||||||||||||||||||||
| Other liabilities | 7,012 | 2,582 | — | — | 9,594 | ||||||||||||||||||||||||
| Total long-term liabilities | 728,120 | 625,542 | 584,141 | (595,769) | 1,342,034 | ||||||||||||||||||||||||
| Stockholders' Equity | |||||||||||||||||||||||||||||
| Common stock | 5 | — | 18 | 4.a(v) | 2 | 5.a(viii) | 25 | ||||||||||||||||||||||
| Class A interest | — | 569,964 | — | (569,964) | 5.a(viii) | — | |||||||||||||||||||||||
| Additional paid-in capital | 434,917 | 12,154 | 882,982 | 4.a(v) | 175,779 | 5.a(viii) | 1,505,832 | ||||||||||||||||||||||
| Accumulated deficit | (465,989) | (219,557) | (65,212) | 4.a(v) | 185,557 | 5.a(viii) | (565,201) | ||||||||||||||||||||||
| Total stockholders' equity | (31,067) | 362,561 | 817,788 | (208,626) | 940,656 | ||||||||||||||||||||||||
| Total Liabilities and Stockholders' Equity | $ | 768,404 | $ | 1,455,441 | $ | 1,384,167 | $ | (813,232) | $ | 2,794,780 | |||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
4
Custom Truck One Source, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2020
| (in $000s, except share and per share data) | Historical Nesco | Historical Custom Truck reclassified (Note 3) | Transaction Accounting Adjustments - Financing (Note 4) | Transaction Accounting Adjustments - Acquisition (Note 5) | Pro Forma Combined | ||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||
| Rental revenue | $ | 195,490 | $ | 215,008 | $ | — | $ | — | $ | 410,498 | |||||||||||||||||||
| Sales of rental equipment | 31,533 | 161,694 | — | — | 193,227 | ||||||||||||||||||||||||
| Sales of new equipment | 25,099 | 602,608 | — | — | 627,707 | ||||||||||||||||||||||||
| Parts sales and services | 50,617 | 74,432 | — | — | 125,049 | ||||||||||||||||||||||||
| Total revenue | 302,739 | 1,053,742 | — | — | 1,356,481 | ||||||||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||||||||
| Cost of rental revenue | 59,030 | 50,641 | — | 4,080 | 5.b(ii) | 113,751 | |||||||||||||||||||||||
| Depreciation of rental equipment | 78,532 | 97,653 | — | 19,652 | 5.b(i) | 195,837 | |||||||||||||||||||||||
| Cost of rental equipment sales | 25,615 | 122,732 | — | 1,461 | 5.b(ii) | 149,808 | |||||||||||||||||||||||
| Cost of new equipment sales | 21,792 | 533,889 | — | 16,661 | 5.b(ii) | 572,342 | |||||||||||||||||||||||
| Cost of parts sales and services | 39,150 | 62,651 | — | 7,707 | 5.b(ii) | 109,508 | |||||||||||||||||||||||
| Major repair disposals | 2,177 | — | — | — | 2,177 | ||||||||||||||||||||||||
| Total cost of revenue | 226,296 | 867,566 | — | 49,561 | 1,143,423 | ||||||||||||||||||||||||
| Gross Profit | 76,443 | 186,176 | — | (49,561) | 213,058 | ||||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 43,464 | 113,272 | — | — | 156,736 | ||||||||||||||||||||||||
| Licensing and titling expenses | 2,945 | 3,423 | — | — | 6,368 | ||||||||||||||||||||||||
| Amortization and non-rental depreciation | 3,248 | 13,103 | — | 9,969 | 5.b(iii) | 26,320 | |||||||||||||||||||||||
| Transaction expenses | 6,627 | 3,119 | — | 34,000 | 5.b(iv) | 43,746 | |||||||||||||||||||||||
| Asset impairment | — | — | — | — | — | ||||||||||||||||||||||||
| Other operating expenses | 2,911 | — | 5,000 | 4.b(iii) | — | 7,911 | |||||||||||||||||||||||
| Total operating expenses | 59,195 | 132,917 | 5,000 | 43,969 | 241,081 | ||||||||||||||||||||||||
| Operating Income | 17,248 | 53,259 | (5,000) | (93,530) | (28,023) | ||||||||||||||||||||||||
| Other Expense | |||||||||||||||||||||||||||||
| Loss (gain) on extinguishment of debt | — | 2,261 | 50,212 | 4.b(ii) | — | 52,473 | |||||||||||||||||||||||
| Interest expense, net | 63,200 | 54,244 | 20,165 | 4.b(i) | (35,370) | 5.b(v) | 102,239 | ||||||||||||||||||||||
| Other (income) expense, net | 5,399 | (12,199) | — | — | (6,800) | ||||||||||||||||||||||||
| Total other expense | 68,599 | 44,306 | 70,377 | (35,370) | 147,912 | ||||||||||||||||||||||||
| Loss Before Income Taxes | (51,351) | 8,953 | (75,377) | (58,160) | (175,935) | ||||||||||||||||||||||||
| Income Tax Expense (Benefit) | (30,074) | — | (18,090) | 4.b(iv) | (13,958) | 5.b(vi) | (62,122) | ||||||||||||||||||||||
| Net Income (Loss) | $ | (21,277) | $ | 8,953 | $ | (57,287) | $ | (44,202) | $ | (113,813) | |||||||||||||||||||
| Earnings (Loss) Per Share: | |||||||||||||||||||||||||||||
| Basic and diluted | $ | (0.43) | $ | (0.46) | |||||||||||||||||||||||||
| Weighted-Average Common Shares Outstanding (Note 6): | |||||||||||||||||||||||||||||
| Basic and diluted | 49,064,615 | 245,764,615 | |||||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial information.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined financial information and related notes were prepared in accordance with Article 11 of Regulation S-X, "Pro Forma Financial Information," as amended by the Securities and Exchange Commission's Final Rule Release No. 33-10786, "Amendments to Financial Disclosures About Acquired and Disposed Businesses," as adopted on May 21, 2020 ("Article 11"). The amended Article 11 was effective on January 1, 2021. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 combine the historical consolidated statements of operations of Nesco and Custom Truck, giving effect to the transactions as if they had been completed on January 1, 2020. The unaudited pro forma condensed combined balance sheet as of December 31, 2020 combines the historical consolidated balance sheets of Nesco and Custom Truck, giving effect to the transactions as if they had been completed on December 31, 2020.
Nesco’s and Custom Truck’s historical financial statements were prepared in accordance with U.S. GAAP, presented in U.S. dollars, and there were no material intercompany transactions and balances between Nesco and Custom Truck as of and for the year ended December 31, 2020. As discussed in Note 3, certain reclassifications were made to align Nesco’s and Custom Truck’s financial statement presentation. The Company has not identified all adjustments necessary to conform Custom Truck’s accounting policies to Nesco’s accounting policies. Upon completion of the transactions, or as more information becomes available, the Company will complete a more detailed review of Custom Truck’s accounting policies. As a result of that review, further differences could be identified between the accounting policies of the two companies.
The accompanying unaudited pro forma condensed combined financial statements and related notes were prepared using the acquisition method of accounting under the provisions of ASC 805, with the Company as the accounting acquirer of Custom Truck. In identifying the Company as the accounting acquirer, management considered the structure of the transaction and other actions contemplated by the Purchase Agreement, including the composition of purchase consideration issued to the selling equity holders of Custom Truck (consisting of cash from the Company and its common stock). The Company also considered the relative outstanding share ownership and the composition of the combined company board of directors following completion of the Acquisition. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined balance sheet, the estimated purchase consideration has been allocated to the assets acquired and liabilities assumed of Custom Truck based upon management’s preliminary estimate of their fair values as of December 31, 2020. The Company has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair value of the Custom Truck's assets to be acquired or liabilities assumed, other than a preliminary estimate for inventory, rental equipment and certain intangible assets. Accordingly, apart from these assets, Custom Truck's assets and liabilities are presented at their respective carrying amounts and should be treated as preliminary values. Any differences between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed will be recorded as goodwill. Accordingly, the purchase price allocation and related adjustments reflected in this unaudited pro forma condensed combined financial information are preliminary and subject to revision based on a final determination of fair values.
All amounts presented within these notes to the unaudited pro forma condensed combined financial information are in thousands, except share and per share data.
2. The Acquisition
On December 3, 2020, the parties entered into the Purchase Agreement, pursuant to which the Company's wholly owned subsidiary, Nesco Holdings II, Inc., agreed to acquire 100% of the partnership interests of Custom Truck. The cash consideration presented herein may be adjusted for customary adjustments in respect of the cash, indebtedness, net working capital, and transaction expenses of Custom Truck as of the closing of the Acquisition, as well as an adjustment on the basis of the original equipment cost of the rental fleet inventory owned by Custom Truck as of the Closing Date. These adjustments, if any, will affect the preliminary estimated total acquisition consideration presented herein.
6
Estimated total acquisition consideration
| (in $000s, except share and per share data) | Shares | Nesco share price April 1, 2021 | Amount | |||||||||||||||||
Cash consideration(i) | $ | 769,198 | ||||||||||||||||||
Repayment of Custom Truck debt(ii) | 547,357 | |||||||||||||||||||
Value of Nesco common stock to be issued to Custom Truck equity holders(iii) | 20,100,000 | $ | 9.35 | 187,935 | ||||||||||||||||
| Preliminary estimated fair value of total acquisition consideration | $ | 1,504,490 | ||||||||||||||||||
i.The cash consideration paid by Nesco for the outstanding partnership interests of Custom Truck.
ii.The cash paid by Nesco to retire Custom Truck's Term Loan B indebtedness (which balance was $594.0 million at December 31, 2020), borrowings on the Custom Truck Revolver (which balance was $7.3 million at December 31, 2020) and accrued interest thereon (which balance was $218 at December 31, 2020), net of a reduction to the outstanding principal of $54.1 million to reflect the application of Custom Truck's December 31, 2020 cash and cash equivalents balance to further reduce the indebtedness. Pursuant to the terms of the Purchase Agreement, the Sellers have agreed to a closing cash amount, as defined in the agreement, equal to or less than $5.0 million, such that Custom Truck's excess cash reduces indebtedness on or before the Closing Date.
iii.20,100,000 shares of Nesco newly issued common stock issued as pursuant to the Rollover Agreements to certain Sellers. For purposes of the unaudited pro forma condensed combined balance sheet, the estimated value of Nesco common stock for the acquisition consideration is based upon the $9.35 per share closing Nesco common stock price as of April 1, 2021.
Preliminary purchase price allocation
The estimated total acquisition consideration as shown above is allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. As mentioned in Note 1, the Company has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair value of the Custom Truck's assets to be acquired or liabilities assumed, other than a preliminary estimate for inventory, rental equipment and certain intangible assets. Such fair values are based on currently available information and certain assumptions that the Company believes are reasonable. The estimates and underlying assumptions will be revised as additional information becomes available and those changes could be significant. Accordingly, certain assets acquired and liabilities assumed are presented at their respective carrying amounts as of December 31, 2020, and should be treated as preliminary values. The final determination of these estimated fair values, the assets’ useful lives and the amortization methods are subject to completion of an ongoing assessment and will be available as soon as practicable but no later than one year after the consummation of the Acquisition.
The following table summarizes the preliminary purchase price allocation, as if the Acquisition had been completed on December 31, 2020:
| (in $000s) | |||||
| Inventory | $ | 480,352 | |||
| Current assets (excluding inventory) | 136,717 | ||||
| Property and equipment | 87,178 | ||||
| Rental equipment | 586,525 | ||||
Intangible assets(i) | 352,314 | ||||
| Other assets | 16,664 | ||||
| Total identifiable assets acquired | 1,659,750 | ||||
| Current liabilities | (467,120) | ||||
| Long-term debt | (23,573) | ||||
| Other liabilities | (6,200) | ||||
| Total identifiable liabilities assumed | (496,893) | ||||
| Goodwill | 341,633 | ||||
| Purchase price | $ | 1,504,490 | |||
i.Refer to Note 5.a(iv) for information on the intangible assets acquired.
3. Accounting Policies and Reclassifications
7
During the preparation of this unaudited pro forma condensed combined financial information, the Company performed a preliminary assessment of Custom Truck’s financial information to identify differences in accounting policies as compared to those of Nesco and differences in financial statement presentation as compared to the presentation of Nesco. At the time of preparing this unaudited pro forma condensed combined financial information, the Company has not identified all adjustments necessary to conform Custom Truck’s accounting policies to Nesco’s accounting policies. Following the Acquisition, the combined company will finalize the review of accounting policies, which could be materially different from the amounts set forth in the unaudited pro forma condensed combined financial information presented herein.
8
Refer to the table below for a summary of adjustments made to present Custom Truck’s balance sheet as of December 31, 2020 to conform with that of Nesco:
(in $000s) Nesco Presentation | Custom Truck Presentation | Historical Custom Truck as of December 31, 2020 | Accounting policy and reclassification adjustments | Note | Historical Custom Truck reclassified | |||||||||||||||||||||||||||
| Cash and cash equivalents | Cash and cash equivalents | $ | 59,130 | $ | — | $ | 59,130 | |||||||||||||||||||||||||
| Accounts receivable, net | Accounts receivable, net | 108,744 | — | 108,744 | ||||||||||||||||||||||||||||
| Financing receivables, net | 19,123 | — | 19,123 | |||||||||||||||||||||||||||||
| Inventory | Inventories, net | 444,402 | — | 444,402 | ||||||||||||||||||||||||||||
| Prepaid expenses and other | Prepaid expenses and other | 3,850 | — | 3,850 | ||||||||||||||||||||||||||||
| Property and equipment, net | Property and equipment, net | 87,178 | — | 87,178 | ||||||||||||||||||||||||||||
| Rental equipment, net | Rental equipment, net | 374,835 | — | 374,835 | ||||||||||||||||||||||||||||
| Goodwill and other intangibles, net | — | 340,615 | (i) | 340,615 | ||||||||||||||||||||||||||||
| Intangibles, net | 72,803 | (72,803) | (i) | — | ||||||||||||||||||||||||||||
| Goodwill | 267,812 | (267,812) | (i) | — | ||||||||||||||||||||||||||||
| Other assets | 17,564 | — | 17,564 | |||||||||||||||||||||||||||||
| Accounts payable | Trade accounts payable | 38,997 | — | 38,997 | ||||||||||||||||||||||||||||
| Accrued expenses | Accrued expenses | 29,902 | — | 29,902 | ||||||||||||||||||||||||||||
| Deferred income and deposits | Customer deposits | 19,765 | — | 19,765 | ||||||||||||||||||||||||||||
| Floor plan payables - trade | 121,747 | — | 121,747 | |||||||||||||||||||||||||||||
| Floor plan payables - non-trade | 238,956 | — | 238,956 | |||||||||||||||||||||||||||||
| Current maturities of long-term debt | Current maturities of long-term debt | 16,594 | (260) | (ii) | 16,334 | |||||||||||||||||||||||||||
| Current portion of capital lease obligations | — | 260 | (ii) | 260 | ||||||||||||||||||||||||||||
| Other liabilities | Other liabilities | 1,377 | — | 1,377 | ||||||||||||||||||||||||||||
| Long-term debt, net | Long-term debt, net of current maturities | 622,960 | (3,618) | (iii) | 619,342 | |||||||||||||||||||||||||||
| Capital leases | — | 3,618 | (iii) | 3,618 | ||||||||||||||||||||||||||||
| Other liabilities | Other long-term liabilities | 2,582 | — | 2,582 | ||||||||||||||||||||||||||||
i.Represents a combination of Intangibles, net and Goodwill to a single financial statement line item.
ii.Represents a reclassification of the current portion of capital lease obligations from current maturities of long-term debt.
iii.Represents a reclassification of capital leases from Long-term debt, net of current maturities.
9
Refer to the table below for a summary of adjustments made to present Custom Truck’s statement of operations for the year ended December 31, 2020 to conform with that of Nesco:
(in $000s) Nesco Presentation | Custom Truck Presentation | Historical Custom Truck for the year ended December 31, 2020 | Accounting policy and reclassification adjustments | Note | Historical Custom Truck reclassified | |||||||||||||||||||||||||||
| Rental revenue | Rental revenue | $ | 215,008 | $ | — | $ | 215,008 | |||||||||||||||||||||||||
| Sales of rental equipment | Used sales revenue | 161,694 | — | 161,694 | ||||||||||||||||||||||||||||
| Sales of new equipment | New sales revenue | 602,608 | — | 602,608 | ||||||||||||||||||||||||||||
| Parts sales and services | Parts and service revenue | 74,432 | — | 74,432 | ||||||||||||||||||||||||||||
| Cost of rental revenue | Cost of rental revenue | 50,641 | — | 50,641 | ||||||||||||||||||||||||||||
| Depreciation of rental equipment | Depreciation of rental equipment | 97,653 | — | 97,653 | ||||||||||||||||||||||||||||
| Cost of rental equipment sales | Cost of used sales | 122,732 | — | 122,732 | ||||||||||||||||||||||||||||
| Cost of new equipment sales | Cost of new sales | 533,889 | — | 533,889 | ||||||||||||||||||||||||||||
| Cost of parts sales and services | Cost of parts and service | 62,651 | — | 62,651 | ||||||||||||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative | 119,814 | (6,542) | (i) | 113,272 | |||||||||||||||||||||||||||
| Licensing and titling expenses | — | 3,423 | (i) | 3,423 | ||||||||||||||||||||||||||||
| Amortization and non-rental depreciation | — | 13,103 | (ii) | 13,103 | ||||||||||||||||||||||||||||
| Non-rental depreciation | 4,722 | (4,722) | (ii) | — | ||||||||||||||||||||||||||||
| Amortization | 8,381 | (8,381) | (ii) | — | ||||||||||||||||||||||||||||
| Transaction expenses | — | 3,119 | (i) | 3,119 | ||||||||||||||||||||||||||||
| Loss (gain) on extinguishment of debt | — | 2,261 | (iii) | 2,261 | ||||||||||||||||||||||||||||
| Interest expense, net | Interest expense | 56,505 | (2,261) | (iii) | 54,244 | |||||||||||||||||||||||||||
| Other (income) expense, net | — | (12,199) | (iv) | (12,199) | ||||||||||||||||||||||||||||
| Financing income | (4,180) | 4,180 | (iv) | — | ||||||||||||||||||||||||||||
| Other income, net | (8,019) | 8,019 | (iv) | — | ||||||||||||||||||||||||||||
i.Represents a reclassification of Selling, general and administrative expenses to Licensing and titling expenses ($3.4 million) and Transaction expenses ($3.1 million).
ii.Represents a combination of Non-rental depreciation and Amortization into a single financial statement line.
iii.Represents a reclassification of Custom Truck loss on debt extinguishment of debt recorded in Interest expense to Loss (gain) on extinguishment of debt.
iv.Represents a reclassification of Financing income and Other income, net to Other (income) expense.
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4. Transaction Accounting Adjustments - Financing
The following summarizes the pro forma adjustments related to the Financing. Proceeds from the Financing will be used to (1) repay borrowings outstanding under the 2019 Credit Facility, (2) repay the Existing Secured Notes, (3) purchase the partnership interests of Custom Truck in connection with the Acquisition, and (4) repay certain borrowings of Custom Truck's outstanding debt upon consummation of the Acquisition. The Transaction Accounting Adjustments related to the Acquisition, including repayment of Custom Truck’s existing borrowings, are presented in Note 5, Transaction Accounting Adjustments - Acquisition.
Nesco has assumed the repayment of the 2019 Credit Facility and the Existing Secured Notes will be accounted for as a debt extinguishment. This presentation is preliminary and subject to change as additional information becomes available to finalize the accounting treatment.
a.Financing Related Pro Forma Condensed Combined Balance Sheet Adjustments
i.Adjustment to cash consists of the following:
| (in $000s, except share and per share data) | As of December 31, 2020 | ||||
| Proceeds from Nesco Common Stock issued to Platinum | $ | 743,000 | |||
| Proceeds from Supplemental Equity Financing | 140,000 | ||||
| Proceeds from issuance of the New ABL Facility | 400,000 | ||||
| Proceeds from issuance of the Notes | 920,000 | ||||
| Debt issuance costs on the Debt Financing | (47,350) | ||||
| Repayment of the 2019 Credit Facility | (250,971) | ||||
| Redemption of the Existing Secured Notes | (475,000) | ||||
| Early redemption premium on the Existing Secured Notes | (39,000) | ||||
| Payment of accrued interest on the 2019 Credit Facility and Senior Secured Notes | (17,762) | ||||
| Net adjustment to cash and cash equivalents | $ | 1,372,917 | |||
ii.Adjustment to Other assets for the debt issuance costs related to the New ABL Facility.
iii.Adjustment to Accrued expenses for the payment of accrued interest on the 2019 Credit Facility and Senior Secured Notes.
iv.Adjustment to long-term debt consists of the following:
| (in $000s) | As of December 31, 2020 | ||||
| Proceeds from issuance of the New ABL Facility | $ | 400,000 | |||
| Proceeds from the issuance of the Notes | 920,000 | ||||
| Debt issuance costs on the Debt Financing | (21,100) | ||||
| Repayment of the 2019 Credit Facility | (250,971) | ||||
| Repayment of the Existing Secured Notes | (475,000) | ||||
| Elimination of deferred financing fees related to Nesco's existing long-term debt | 11,212 | ||||
| Net adjustment to long-term debt | $ | 584,141 | |||
v.Adjustment to Total stockholders' equity consists of the following:
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| (in $000s) | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | ||||||||||||||||||||||
| Proceeds from Nesco common stock issued to Platinum | $ | 15 | $ | 742,985 | $ | — | $ | 743,000 | ||||||||||||||||||
| Proceeds from Supplemental Equity Financing | 3 | 139,997 | — | 140,000 | ||||||||||||||||||||||
Senior secured bridge facility commitment fees(a) | — | — | (15,000) | (15,000) | ||||||||||||||||||||||
Early redemption premium on the Existing Secured Notes(b) | — | — | (39,000) | (39,000) | ||||||||||||||||||||||
Elimination of deferred financing fees related to Nesco's existing long-term debt(c) | — | — | (11,212) | (11,212) | ||||||||||||||||||||||
| Adjustments to Nesco stockholders' equity | $ | 18 | $ | 882,982 | $ | (65,212) | $ | 817,788 | ||||||||||||||||||
a.Adjustment of $15.0 million for commitment fees paid to secure the senior secured bridge facility.
b.Payment of the early redemption premium to redeem the Existing Secured Notes.
c.Elimination of unamortized deferred financing fees associated with the 2019 Credit Facility and the Existing Secured Notes.
b.Financing Related Pro Forma Condensed Combined Statements of Operations Adjustments
i.The net adjustment to interest expense is as follows:
| (in $000s) | Year Ended December 31, 2020 | |||||||
| Interest expense on the New ABL Facility | $ | 7,740 | ||||||
| Interest expense on the Notes | 50,600 | |||||||
| Amortization of deferred financing costs on the Debt Financing | 6,470 | |||||||
Senior secured bridge facility commitment fees(a) | 15,000 | |||||||
| Elimination of interest expense on the 2019 Credit Facility | (8,855) | |||||||
| Elimination of interest expense on the Existing Secured Notes | (47,500) | |||||||
| Elimination of amortization of deferred financing fees related to Nesco's existing long-term debt | (3,290) | |||||||
| Net adjustment to interest expense | $ | 20,165 | ||||||
a.Adjustment to recognize the commitment fees related to the senior secured bridge facility. The income tax effect of this adjustment is estimated to be $3.6 million. These costs will not affect the combined statements of operations beyond twelve months after the Acquisition date.
A 2.0% interest rate was used in calculating the pro forma adjustments under the New ABL Facility, which was derived from an assumed LIBOR rate as of March 31, 2021 of 0.2% plus a margin of 1.8%. A 5.5% interest rate was used in calculating the pro forma adjustments under the Notes. The following table presents a sensitivity analysis with a 12.5 basis point change on variable interest expense for the year ended December 31, 2020.
| (in $000s) | Year Ended December 31, 2020 | |||||||
| Increase of 0.125% | $ | 1,650 | ||||||
| Decrease of 0.125% | $ | (1,650) | ||||||
ii.Adjustment to recognize the loss on the extinguishment of debt aggregating $50.2 million, comprised of the early redemption premium of $39.0 million on the Existing Secured Notes and the write-off of $11.2 million of unamortized deferred financing fees related to Nesco's existing long-term debt. The income tax effect of this adjustment is estimated to be $12.1 million. These costs will not affect the combined statements of operations beyond twelve months after the Acquisition date.
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iii.Adjustment to record management fees pursuant to the Corporate Advisory Services Agreement that will be entered into with Platinum effective as of the Closing Date.
iv.Adjustment to recognize the income tax impacts of the pro forma adjustments for which a tax expense is recognized using a U.S. federal and state statutory rate of 24.0% for the year ended December 31, 2020. These rates may vary from the effective tax rates of the historical and combined businesses. Refer to Note 5.b(vi) for additional information related to income taxes.
5. Transaction Accounting Adjustments - Acquisition
a.Acquisition Related Pro Forma Condensed Combined Balance Sheet Adjustments
The following summarizes the Transaction Accounting Adjustments to give effect as if the Acquisition had been completed on December 31, 2020 for the purposes of the pro forma condensed combined balance sheet:
i.Adjustment to cash and cash equivalents consists of the following:
| (in $000s) | As of December 31, 2020 | ||||
Repayment of Custom Truck's Term Loan B and revolving credit facility(a) | $ | (601,487) | |||
| Cash paid for Custom Truck partnership interests | (769,198) | ||||
Transaction expenses(b) | (42,619) | ||||
| Net adjustment to cash | $ | (1,413,304) | |||
a.Comprised of Custom Truck's Term Loan B indebtedness (which balance was $594.0 million at December 31, 2020), borrowings on the Custom Truck Revolver (which balance was $7.3 million at December 31, 2020) and accrued interest thereon (which balance was $0.2 million at December 31, 2020).
b.Fees and expenses consist of $8.6 million of transaction costs accrued as of December 31, 2020 and $34.0 million of estimated transaction costs to be incurred in connection with the Acquisition that are not reflected in the historical consolidated financial statements of Nesco and Custom Truck. These costs will not affect the combined statements of operations beyond twelve months after the Acquisition.
ii.Adjustment to recognize the estimated step-up in fair value of inventory acquired. The fair value estimate was determined based on assumptions that market participants would use in pricing an asset. The calculated value is preliminary and subject to change could vary materially from the final purchase allocation.
iii.Adjustment to Rental equipment, net to recognize the estimated step-up in fair value of rental equipment acquired. The fair value estimate was determined based on assumptions that market participants would use in pricing an asset. The calculated value is preliminary and subject to change could vary materially from the final purchase allocation.
iv.Adjustment to Goodwill and intangible assets, net to recognize (a) the estimated fair value of intangible assets acquired consisting of customer relationships and trade names, and (b) the resulting goodwill that would have been recorded if the Acquisition occurred on December 31, 2020. The estimates and underlying assumptions for intangible assets will be revised as additional information becomes available and those changes could be significant. Accordingly, all fair value amounts should be treated only as a preliminary purchase price allocation.
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| (in $000s) | As of December 31, 2020 | ||||
| Customer relationships | $ | 190,000 | |||
| Trade names | 160,000 | ||||
| Software and product designs | 2,314 | ||||
| Fair value of intangible assets acquired | 352,314 | ||||
| Historical carrying value of intangible assets of Custom Truck | (72,803) | ||||
| Total adjustment to intangible assets, net | 279,511 | ||||
| Goodwill resulting from the acquisition | 341,633 | ||||
| Historical goodwill of Custom Truck | (267,812) | ||||
| Total adjustment to goodwill | 73,821 | ||||
| Total adjustment to goodwill and intangible assets, net | $ | 353,332 | |||
The fair value estimates for identifiable intangible assets are preliminary and are based upon assumptions that market participants would use in pricing an asset. The fair value of the customer relationships intangible asset was valued using a multi-period excess earnings method, a form of the income approach, which incorporates the estimated future cash flows to be generated from Custom Truck’s existing customer base. The Custom Truck trade name was valued using the relief from royalty method, which considers both the market approach and the income approach. The calculated value is preliminary and subject to change, and could vary materially from the final purchase allocation.
v.Adjustment to Other assets to reflect the elimination of Custom Truck’s unamortized debt issuance costs related to its revolving credit facility.
vi.Adjustment to Accrued expenses to reflect the repayment of accrued interest on Custom Truck’s Term Loan B and revolving credit facility and accrued liabilities related to the Acquisition.
vii.Adjustment to Long-term debt, net to reflect the repayment of Custom Truck’s Term Loan B and revolving credit facility.
viii.The adjustment to Total stockholders' equity consists of the following:
| (in $000s) | Common stock | Class A interest | Additional paid-in capital | Accumulated deficit | Total stockholders' equity | |||||||||||||||||||||||||||
| Shares of Nesco common stock to be issued in exchange for Custom Truck partnership interests | $ | 2 | $ | — | $ | 187,933 | $ | — | $ | 187,935 | ||||||||||||||||||||||
| Elimination of Custom Truck's historical equity | — | (569,964) | (12,154) | 219,557 | (362,561) | |||||||||||||||||||||||||||
Transaction expenses(a) | — | — | — | (34,000) | (34,000) | |||||||||||||||||||||||||||
| Net adjustment to equity | $ | 2 | $ | (569,964) | $ | 175,779 | $ | 185,557 | $ | (208,626) | ||||||||||||||||||||||
a.This adjustment represents transaction expenses incurred in connection with the Acquisition.
b.Acquisition Related Pro Forma Condensed Combined Statements of Operations Adjustments
The following summarizes the Transaction Accounting Adjustments to give effect as if the Acquisition had been completed on January 1, 2020 for the purposes of the pro forma condensed combined statements of operations:
i.Adjustment to Depreciation of rental equipment associated with the estimated fair value of rental equipment acquired. The estimated weighted average remaining useful life of rental equipment acquired is five years. The table below presents the adjustments to Depreciation of rental equipment:
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| (in $000s) | Estimated weighted average useful life (in years) | Estimated fair value | Year ended December 31, 2020 | ||||||||||||||
| Rental equipment | 5 | $ | 586,525 | $ | 117,305 | ||||||||||||
| Historical depreciation of rental equipment of Custom Truck | (97,653) | ||||||||||||||||
| Pro forma adjustment for depreciation of rental equipment | $ | 19,652 | |||||||||||||||
ii.Adjustment to cost of revenue accounts for the run-off of the estimated step-up in fair value of inventory acquired. The adjustment has been allocated to Cost of rental revenue, Cost of rental equipment sales, Cost of new equipment sales and Cost of parts sales and services based on estimates. The run-off for the portion of the estimated step-up in fair value relating to work-in-process inventory that, when completed, is estimated to be added to the rental equipment fleet is not reflected as an adjustment to cost of revenue. These estimates are preliminary and are based upon assumptions that incorporate the estimated future revenue to be generated from the sale of the acquired inventory to Custom Truck’s existing customer base. The calculated step-up amount is preliminary and subject to change, and could vary materially from the final purchase allocation. These adjustments will not affect the combined statement of operations beyond twelve months after the acquisition date.
iii.Adjustment to Amortization based on the estimated fair values of intangible assets acquired, amortized over the respective useful lives. The table below presents the adjustments to Amortization:
| (in $000s) | Estimated useful life (in years) | Estimated fair value | Year ended December 31, 2020 | ||||||||||||||
| Customer relationships | 10.5 | $ | 190,000 | $ | 18,000 | ||||||||||||
| Trade names | Indefinite | 160,000 | — | ||||||||||||||
| Software and product designs | 7 | 2,314 | 350 | ||||||||||||||
| Historical amortization of Custom Truck | (8,381) | ||||||||||||||||
| Pro forma adjustment for amortization | $ | 9,969 | |||||||||||||||
Amortization expense related to customer relationships has been calculated on a preliminary basis using a straight-line method over the midpoint of a nine to twelve year estimated useful life. Trade names are an indefinite life intangible asset and are not amortized. Amortization expense relating to software and product designs has been calculated on a preliminary basis using a straight-line method over a weighted average useful life of seven years.
iv.Adjustment to Transaction expenses for estimated transaction costs and fees incurred in connection with the Acquisition. The income tax effect of this adjustment is estimated to be $8.2 million. These costs will not affect the combined statements of operations beyond twelve months after the acquisition date.
v.Adjustment to Interest expense, net to eliminate historical Custom Truck interest expense associated with its historical long-term debt repaid in connection with the Acquisition.
vi.Adjustment to record the income tax impacts of the pro forma adjustments using a statutory tax rate of 24.0% for the year ended December 31, 2020. This rate does not reflect the combined company’s effective tax rate, which may differ from the rates assumed for purposes of preparing these statements. Because the tax rates used for these unaudited pro forma condensed combined financial statements are an estimate, the blended rate will likely vary from the actual effective rate in periods subsequent to completion of the Acquisition. Further, the combined company’s ability to use net operating loss (“NOL”) carryforwards to offset future taxable income for U.S. federal and state income tax purposes is subject to limitations. In general, under Section 382 of the U.S. Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. As of the date hereof, Nesco has not made a determination of the ability to utilize all tax attributes, which determination will be subject to a formal Section 382 analysis upon consummation of the Acquisition.
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6. Pro Forma Earnings (Loss) Per Share
Pro forma earnings (loss) per common share for the year ended December 31, 2020, has been calculated based on the estimated weighted average number of common shares outstanding on a pro forma basis, as described below. The pro forma weighted average number of common shares outstanding has been calculated as if the shares issued in the transactions had been issued and outstanding on January 1, 2020.
The following table sets forth the computation of pro forma weighted average common and diluted shares outstanding for the year ended December 31, 2020:
| December 31, 2020 | ||||||||
| Historical Nesco weighted average shares | 49,064,615 | |||||||
| Shares of Nesco common stock issued to Platinum | 148,600,000 | |||||||
| Shares of Nesco common stock issued in Supplemental Equity Financing | 28,000,000 | |||||||
| Shares of common stock issued as Acquisition consideration | 20,100,000 | |||||||
| Pro forma weighted average shares used in computing net loss per share - basic and diluted | 245,764,615 | |||||||
Nesco’s historical consolidated statement of operations for the year ended December 31, 2020 was in a net loss position, thus Nesco’s stock options, stock awards and outstanding warrants were excluded from the computation of diluted earnings (loss) per share because their effect would have been anti-dilutive. There is no adjustment for the dilutive impact of stock options, stock awards and outstanding warrants in the pro forma condensed combined financial statements due to the combined results being in a net loss position.
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