Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
_______________________________
FORM 10-Q
_______________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-38186
_______________________________  
Nesco Holdings, Inc.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
84-2531628
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6714 Pointe Inverness Way, Suite 220
Fort Wayne, IN 46804
(Address of principal executive offices, including zip code)
(800) 252-0043
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
NSCO
New York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par value
NSCO.WS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES   x    NO   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
Emerging growth company
x
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES   o     NO  x
The number of ordinary shares outstanding of NESCO Holdings, Inc. as of May 1, 2020, was 49,033,903.



Nesco Holdings, Inc. and Subsidiaries
TABLE OF CONTENTS
PART I
 
FINANCIAL INFORMATION
 
Page Number
 
 
 
 
 
Item 1.
 
Unaudited Condensed Consolidated Financial Statements
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019
 
 
 
Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the Three Months Ended March 31, 2020 and 2019
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
Item 1A.
 
Risk Factors
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
 
Defaults Upon Senior Securities
 
Item 4.
 
Mine Safety Disclosures
 
Item 5.
 
Other Information
 
Item 6.
 
Exhibits
 
 
 
SIGNATURES
 


2


PART I - FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Nesco Holdings, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in $000s, except share data)
March 31, 2020

December 31, 2019
Assets



Current Assets



Cash
$
10,236


$
6,302

Accounts receivable, net of allowance of $4,685 and $4,654 respectively
70,282


71,323

Inventory
30,738


33,001

Prepaid expenses and other
5,251


5,217

Total current assets
116,507


115,843

Property and equipment, net
9,802


6,561

Rental equipment, net
380,053


383,420

Goodwill and other intangibles, net
308,014


308,747

Notes receivable
691


713

Total Assets
$
815,067


$
815,284

Liabilities and Stockholder's Deficit



Current Liabilities



Accounts payable
$
28,038


$
41,172

Accrued expenses
15,165


27,590

Deferred rent income
1,753


2,270

Current maturities of long-term debt
1,601


1,280

Current portion of capital lease obligations
7,430


5,451

Total current liabilities
53,987


77,763

Long-term debt, net
749,111


713,023

Capital leases
18,898


22,631

Deferred tax liabilities
12,940


12,288

Interest rate collar
7,671


1,709

Total long-term liabilities
788,620


749,651





Commitments and contingencies (see Note 9)







Stockholders' Deficit



Common stock - $0.0001 par value, 250,000,000 shares authorized, 49,033,903 shares issued and outstanding, at March 31, 2020 and December 31, 2019
5


5

Additional paid-in capital
433,136


432,577

Accumulated deficit
(460,681
)

(444,712
)
Total stockholders' deficit
(27,540
)

(12,130
)
Total Liabilities and Stockholders' Deficit
$
815,067


$
815,284

See accompanying notes to unaudited condensed consolidated financial statements.

3


Nesco Holdings, Inc.
Condensed Consolidated Statements of Operations (unaudited)
 
Three Months Ended March 31,
(in $000s, except share and per share data)
  2020
 
  2019
Revenue
 
 
 
Rental revenue
$
50,994

 
$
45,642

Sales of rental equipment
9,093

 
7,399

Sales of new equipment
7,577

 
2,350

Parts sales and services
14,079

 
6,101

Total Revenue
81,743

 
61,492

Cost of Revenue

 

Cost of rental revenue
13,786

 
11,057

Depreciation of rental equipment
20,112

 
16,731

Cost of rental equipment sales
7,728

 
5,934

Cost of new equipment sales
6,654

 
1,806

Cost of parts sales and services
11,360

 
4,850

Major repair disposals
700

 
762

Total cost of revenue
60,340

 
41,140

Gross Profit
21,403

 
20,352

Operating Expenses

 

Selling, general and administrative expenses
11,618

 
7,579

Licensing and titling expenses
821

 
653

Amortization and non-rental depreciation
716

 
770

Transaction expenses
736

 
2,510

Other operating expenses
716

 
150

Total Operating Expenses
14,607

 
11,662

Operating Income
6,796

 
8,690

Other Expense

 

Interest expense, net
16,014

 
14,993

Other (income) expense, net
6,021

 
(13
)
Total other expense
22,035

 
14,980

Loss Before Income Taxes
(15,239
)
 
(6,290
)
Income Tax Expense
730

 
434

Net Loss
$
(15,969
)
 
$
(6,724
)
Loss per Share:

 

Basic and diluted
$
(0.33
)
 
$
(0.31
)
Weighted-average-common shares outstanding:

 

Basic and diluted
49,033,903

 
21,660,638

See accompanying notes to unaudited condensed consolidated financial statements.

4


Nesco Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
 
Three Months Ended March 31,
(in $000s)
2020
 
2019
Net loss
$
(15,969
)
 
$
(6,724
)
Other comprehensive loss

 

Interest rate collar (net of taxes of $112 in 2019)

 
88

Other comprehensive loss

 
88

Comprehensive loss
$
(15,969
)
 
$
(6,636
)
There were no reclassifications from accumulated other comprehensive loss reflected in the Unaudited Condensed Consolidated Statements of Operations during the three months ended March 31, 2020 and 2019.

See accompanying notes to unaudited condensed consolidated financial statements.




5


Nesco Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31,
(in $000s)
2020

2019
Operating Activities



Net (loss) income
$
(15,969
)

$
(6,724
)
Adjustments to reconcile net (loss) income to net cash from operating activities:





Depreciation
20,377


16,996

Amortization - intangibles
691


724

Amortization - financing costs
711


677

Provision for losses on accounts receivable
777


692

Share-based payments
559


128

Gain on sale of rental equipment and parts
(2,213
)

(1,977
)
Gain on insurance proceeds - damaged equipment
(120
)

(452
)
Major repair disposal
700


762

Change in fair value of derivative
5,963



Deferred tax (benefit) expense
652


271

Changes in assets and liabilities:





Accounts receivable
1,207


1,823

Inventory
176


(4,299
)
Prepaid expenses and other
(34
)

(3,413
)
Accounts payable
(3,352
)

10,297

Accrued expenses and other liabilities
(12,427
)

(8,163
)
Unearned income
(517
)

(3,437
)
Net cash flow from operating activities
(2,819
)

3,905

Investing Activities



Purchase of equipment - rental fleet
(33,347
)

(13,704
)
Proceeds from sale of rental equipment and parts
9,960


7,628

Insurance proceeds from damaged equipment
365


797

Purchase of other property and equipment
(4,168
)

(1,656
)
Net cash flow from investing activities
(27,190
)

(6,935
)
Financing Activities





Borrowings under revolving credit facilities
35,680


15,000

Repayments under revolving credit facilities


(9,000
)
Repayments of notes payable


(183
)
Capital lease payments
(1,737
)

(1,166
)
Finance fees paid


20

Net cash flow from financing activities
33,943


4,671

Net Change in Cash
3,934


1,641

Cash at Beginning of Period
6,302


2,140

Cash at End of Period
$
10,236


$
3,781





Supplemental Cash Flow Information



Cash paid for interest
$
24,977


$
23,570

Cash paid for income taxes
76


136

Non-Cash Investing and Financing Activities



Transfer of parts inventory to leased equipment
2,087


1,470

Rental equipment and property and equipment purchases in accounts payable
11,861


20,868

Rental equipment sales in accounts receivable
5,627


3,050

Insurance recoveries accrued in accounts receivable


424

See accompanying notes to unaudited condensed consolidated financial statements.

6


Nesco Holdings, Inc.
Condensed Consolidated Statements of Stockholders' Deficit (unaudited)
 
 
 
 
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Deficit
 
Common Stock
 
 
 
 
(in $000s, except share data)
Shares
 
Amount
 
 
 
 
Balance, December 31, 2019
49,033,903

 
$
5

 
$
432,577

 
$
(444,712
)
 
$

 
$
(12,130
)
Net loss

 

 

 
(15,969
)
 

 
(15,969
)
Share-based payments

 

 
559

 

 

 
559

Balance, March 31, 2020
49,033,903

 
$
5

 
$
433,136

 
$
(460,681
)
 
$

 
$
(27,540
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Deficit
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
21,660,638

 
$
2

 
$
259,298

 
$
(417,660
)
 
$
(396
)
 
$
(158,756
)
Net loss

 

 

 
(6,724
)
 

 
(6,724
)
Share-based payments

 

 
128

 

 

 
128

Interest rate collar

 

 

 

 
88

 
88

Balance, March 31, 2019
21,660,638

 
$
2

 
$
259,426

 
$
(424,384
)
 
$
(308
)
 
$
(165,264
)

See accompanying notes to unaudited condensed consolidated financial statements.


7



 Nesco Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1: Business and Organization
Organization
Nesco Holdings, Inc. (“Holdings”), a Delaware corporation, serves as the parent for our primary operating company, NESCO, LLC. NESCO, LLC, an Indiana limited liability company, and its wholly owned subsidiaries (collectively, with Holdings, “we,” “our,” “us,” “Nesco,” or the "Company"), is engaged in the business of providing a range of services and products to customers through rentals of specialty equipment, sales of parts related to the specialty equipment, and repair and maintenance services related to that equipment.
Our wholly-owned subsidiaries include NESCO Holdings I, Inc. ("Holdings I"), NESCO Finance Corporation, a Delaware corporation, NESCO Investments, LLC, a Delaware limited liability company, NESCO International, LLC, a Delaware limited liability company, and NESCO El Alquiler S. de R.L. de C.V., an operating company in Mexico.
We are a specialty equipment rental provider to the electric utility transmission and distribution, telecommunications and rail industries in North America. Our core business relates to our fleet of specialty rental equipment that is utilized by service providers in infrastructure improvement work. Specifically, we offer our specialized equipment to a diverse customer base, including utilities and primarily contractors, for the maintenance, repair, upgrade and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as a small percentage for lighting and signage. We rent and sell a broad range of new and used equipment, including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, and underground equipment, which forms our Equipment Rental and Sales ("ERS") segment. To complement our fleet, we also provide a one-stop shop for existing and prospective Nesco customers in the same end markets of electric lines, telecommunications networks and rail systems; to purchase or rent parts, tools, and accessories needed to outfit their specialty truck fleet. These activities form our Parts, Tools, and Accessories (“PTA”) segment. We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories via our network of over 70 locations in the United States and Canada.

Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
We prepare our consolidated financial statements in conformity with GAAP, which requires us to use judgment to make estimates that directly affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates are used for items including, but not limited to, the useful lives and residual values of our rental equipment, and business combinations. In addition, estimates are used to test both long-lived assets, goodwill and indefinite-lived assets for impairment, and to determine the fair value of impaired assets, if any impairment exists. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances. We review our estimates on an ongoing basis using information currently available, and we revise our recorded estimates as updated information becomes available, facts and circumstances change, or actual amounts become determinable. Actual results could differ from our estimates. In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results.
Recently Issued Accounting Pronouncements
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. Accordingly, we have elected to comply with certain reduced public company reporting requirements related to effective dates for the adoption of newly issued standards

8


issued by the Financial Accounting Standards Board (the “FASB”). An emerging growth company is permitted to apply the effective dates applicable to non-public entities, which generally are delayed in comparison to public entities that are non-emerging growth entities.
Leases
The FASB’s new guidance to account for leases (“Topic 842”) by entities that are lessees, requires (1) recognition of lease assets and lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Topic 842 provides two classifications for leases: financing or operating.
Finance leases - The accounting and recognition for leases qualifying as finance leases is similar to the accounting and recognition required under ASC Topic 840, "Leases (“Topic 840”)," for capital leases. As of March 31, 2020, we have capital lease obligations of approximately $26.3 million. When we make our contractually required payments under the capital leases, we allocate a portion to reduce the capital lease obligation and a portion is recognized as interest expense. The assets leased under the capital leases are included in rental equipment, and depreciation thereon is recognized in cost of rental revenue.
Operating leases - Under Topic 842, operating leases result in the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and liabilities are recognized at the lease commencement date and measured based on the present value of lease payments over the lease term. The operating lease ROU assets will also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease that we are reasonably certain to exercise. Lease expense under Topic 842 will be recognized on a straight-line basis over the lease term. Upon adoption of Topic 842, we expect to recognize operating lease ROU assets and lease liabilities that reflect the present value of these future payments, which we currently estimate to be in the range of $8.0 million to $10.0 million.
In October 2019, the FASB approved its proposal to defer the effective date of Topic 842 by one year. Accordingly, we will adopt Topic 842 effective January 1, 2021, using the transition method that allows us to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We expect to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases.
Under Topic 842, lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASC Topic 606," Revenue from Contracts with Customers (“Topic 606”)," specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. On July 30, 2018, the FASB issued ASU 2018-11, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. We are currently in the process of evaluating whether our lease arrangements will meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which would alleviate the requirement upon adoption of Topic 842 that we reallocate or separately present lease and non-lease components.
Measurement of Current Expected Credit Losses
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. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings (deficit) in the period of adoption. For emerging growth companies electing the modified transition dates of non-public entities, this ASU is effective for fiscal years beginning after December 15, 2022.We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (Topic 350)," intended to simplify the subsequent accounting for goodwill acquired in a business combination. Prior guidance required utilizing a two-step process to review goodwill for impairment. A second step was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of a reporting unit’s goodwill (as if purchase accounting were performed on the testing date) to the carrying amount of the goodwill. The new guidance eliminates the second step from the goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill

9


impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (although the loss should not exceed the total amount of goodwill allocated to the reporting unit). The guidance requires prospective adoption and will be effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption of this guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the expected impact on our financial statements.
Revenue Recognition
Following the adoption of Topic 606, as of January 1, 2018, we recognized revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 840, which addresses lease accounting, for which we will adopt an update to this standard using the modified retrospective approach, as described herein. For the three months ended March 31, 2020 and 2019, we recognized rental revenue in accordance with Topic 840 Leases, which is the lease accounting standard.
Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A “performance obligation” is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. As reflected below, most of our revenue is accounted for under Topic 840. Our contracts with customers generally do not include multiple performance obligations. The inset below presents our revenue types based on the accounting standard used to determine the accounting.
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2020
 
2019
(in $000s)
Topic 840
 
Topic 606
 
Total
 
Topic 840
 
Topic 606
 
Total
Rental:
 
 
 
 
 
 
 
 
 
 
 
Rental revenue
$
48,913

 
$

 
$
48,913

 
$
43,641

 
$

 
$
43,641

Shipping and handling

 
2,081

 
2,081

 

 
2,001

 
2,001

Total rental revenue
48,913

 
2,081

 
50,994

 
43,641

 
2,001

 
45,642

Sales and services:
 
 
 
 
 
 
 
 
 
 
 
Sales of rental equipment

 
9,093

 
9,093

 

 
7,399

 
7,399

Sales of new equipment

 
7,577

 
7,577

 

 
2,350

 
2,350

Parts and services

 
14,079

 
14,079

 

 
6,101

 
6,101

Total sales and services

 
30,749

 
30,749

 

 
15,850

 
15,850

Total revenue
$
48,913

 
$
32,830

 
$
81,743

 
$
43,641

 
$
17,851

 
$
61,492

Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers as well as charges to customers for damaged equipment. Effective July 1, 2019, damage billings are classified in rental revenue, given that the amounts are directly related to the Company's rental arrangements with its customers. Amounts for damages in comparable prior periods have been reclassified to rental revenue from parts and services ($0.7 million for the three months ended March 31, 2019). Additionally, sales of equipment, which are presented separately between sales of rental equipment and new equipment, were previously presented on a combined basis as equipment sales. For the three months ended March 31, 2019, sales of rental equipment were $7.4 million and sales of new equipment were $2.4 million.
Inventory
Inventory consisted of the following:
(in $000s)
March 31, 2020

December 31, 2019
Parts, tools and accessories inventory
$
29,382


$
30,174

Equipment inventory
1,356


2,827

Inventory
$
30,738


$
33,001



10


Rental and Property and Equipment
Rental and property and equipment consisted of the following:
(in $000s)
March 31, 2020
 
December 31, 2019
Rental equipment
$
668,220

 
$
658,564

   Less: accumulated depreciation
(288,167
)
 
(275,144
)
Rental equipment, net
$
380,053

 
$
383,420

We recorded a major repair disposal expense of $0.7 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively, related to units needing major repairs.
(in $000s)
March 31, 2020

December 31, 2019
Property and equipment
$
10,411


$
10,082

   Less: accumulated depreciation
(7,389
)

(7,168
)
   Construction in progress
6,780


3,647

Property and equipment, net
$
9,802


$
6,561



Note 3: Segments
We operate and have two reportable business segments, Equipment Rental and Sales (“ERS”) and Parts, Tools, and Accessories (“PTA”). ERS provides rental solutions to utilities and contractors serving multiple infrastructure end-markets, including electric transmission and distribution, telecom, rail, lighting and signage. We rent and sell specialized equipment to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rental to the telecom, rail, lighting and signage end-markets. The majority of our existing equipment can be used across multiple end-markets and many of our customers operate in these multiple end-markets. We rent and sell a broad range of new and used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted equipment and underground equipment. Our PTA segment offers customers sale and rental solutions for parts, tools, and accessories to complement our specialty equipment line doing business servicing these same end-markets.
Our reportable segments align with the information our chief operating decision maker (“CODM”) receives on a regular basis to evaluate the performance of the business and to allocate resources. The accounting principles applied at the operating segment level in determining gross profit are generally the same as those applied at the consolidated financial statement level. There are no inter-segment revenues, and cost allocations to operating segment cost of revenue are minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to each of the operating segments. The following tables present our financial information by segment:

11


 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2020
 
2019
((in $000s)
ERS
 
PTA
 
Total
 
ERS
 
PTA
 
Total
Rental revenue(1)(2)
$
47,053

 
$
3,941

 
$
50,994

 
$
42,896

 
$
2,746

 
$
45,642

Sales of rental equipment
9,093

 

 
9,093

 
7,399

 

 
7,399

Sales of new equipment
7,577

 

 
7,577

 
2,350

 

 
2,350

Parts sales and services

 
14,079

 
14,079

 

 
6,101

 
6,101

Total revenues
63,723

 
18,020

 
81,743

 
52,645

 
8,847

 
61,492

Cost of revenue
27,320

 
12,908

 
40,228

 
18,654

 
5,755

 
24,409

Depreciation of rental equipment
18,976

 
1,136

 
20,112

 
15,661

 
1,070

 
16,731

Gross Profit
$
17,427

 
$
3,976

 
$
21,403

 
$
18,330

 
$
2,022

 
$
20,352

(1) As discussed in Note 2, Summary of Significant Accounting Policies, rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers as well as charges to customers for damaged equipment. Effective in 2019, billings to customers for damages are classified in rental revenue, given that the amounts are directly related to the Company’s rental arrangements with its customers. Amounts for damages in the comparable prior period have been reclassified to rental revenue from parts sales and services ($0.7 million for the three months ended March 31, 2019).
(2) Amounts for equipment rental revenue of $0.5 million for the three months ended March 31, 2019 previously reported in the PTA segment as rental revenue have been reclassified to the ERS segment to align the reportable segment information to the information our CODM began receiving on a regular basis in 2019.
Total assets by segment are not disclosed herein because asset by operating segment data is not reviewed by the CODM as the basis to assess performance and allocate resources.
Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of consolidated gross profit to consolidated loss before income taxes:
 
Three Months Ended March 31,
(in $000s)
2020
 
2019
Gross profit
$
21,403

 
$
20,352

Selling, general and administrative expenses
11,618

 
7,579

Licensing and titling expenses
821

 
653

Amortization and non-rental depreciation
716

 
770

Transaction expenses
736

 
2,510

Other operating expenses
716

 
150

Other (income) expense
6,021

 
(13
)
Interest expense, net
16,014

 
14,993

Loss before income taxes
$
(15,239
)
 
$
(6,290
)

We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories using our network of locations in North America. The following tables present revenue by country and total assets by country:
 
Three Months Ended March 31,
(in $000s)
2020
 
2019
Revenue:
 
 
 
United States
$
79,702

 
$
59,684

Canada
1,369

 
1,655

Mexico (1)
672

 
153

 
$
81,743

 
$
61,492


12


(1) On September 27, 2019, the Company began commencing activities for the closure of its Mexican operations, which is part of the ERS segment. For the three months ended March 31, 2020 and 2019, operations in Mexico generated a loss before income taxes of $0.5 million and $1.3 million, respectively.
(in $000s)
March 31, 2020
 
December 31, 2019
Assets:
 
 
 
United States
$
804,649

 
$
802,516

Canada
7,159

 
8,152

Mexico
3,259

 
4,616

 
$
815,067

 
$
815,284


Note 4: Business Combination
On September 20, 2019, we entered into a stock purchase agreement with Truck Utilities, Inc. (“Truck Utilities”). Truck Utilities is a specialty rentals, parts, tools and accessories sales, service, equipment sales and truck upfitting company serving the electric transmission, distribution, telecom, and other regional end-markets. On November 4, 2019, we closed on the acquisition for a purchase price of approximately $44.7 million (net of cash acquired of $3.1 million), prior to certain capital expenditure adjustments of approximately $3.8 million. Truck Utilities’ rentals, equipment sales and truck upfitting operations were added to our ERS segment, while its parts, tools and accessories sales and service were added to our PTA segment. The transaction was financed by drawing on the 2019 Credit Facility.
As of the date of this report, we were in the preliminary phases of preparing the valuation of the assets acquired and liabilities assumed. Accordingly, the purchase price allocation for this acquisition presented below is preliminary. Completion of the purchase price allocation will encompass the finalization of valuations for acquisition-date working capital, intangible assets, property and equipment, as well as completion of acquisition-related income tax assessments. We have estimated the fair values of the assets acquired and liabilities assumed using the information that was available. Upon completion of the valuation process, amounts recognized could change resulting in additional expenses recognized for depreciation and amortization of long-lived assets in future periods.
We accounted for the acquisitions using the acquisition method of accounting. The purchase price has been allocated to the fair value of the tangible and identifiable intangible assets acquired as determined by management with the assistance of independent third parties. The results of operations of Truck Utilities has been included with the Company’s results since the date of the acquisition. Transaction costs associated with the acquisitions were expensed as incurred.
The fair value (which remains provisional) of the assets acquired and liabilities assumed as of the acquisition date is presented below.
(in $000s)
 
Current assets, net of current liabilities
$
403

Property and equipment
78

Rental equipment
38,780

Customer relationships
2,820

Total identifiable assets acquired
42,081

Goodwill
9,439

Total consideration
$
51,520


The preliminary values of intangible assets and goodwill related to the acquisition of Truck Utilities consists largely of the synergies and economies of scale provided by the acquired rental equipment portion of the business, as well as additional service center locations in the central Midwestern region of the United States. During the three months ended March 31, 2020 we recorded an adjustment to the preliminary fair value assigned to certain rental equipment, which reduced goodwill. This adjustment was not significant. Goodwill has been preliminarily allocated to the ERS and PTA reporting units in the amount of $5.9 million and $3.5 million, respectively.
The operating results of the acquisition has been reflected in the Company’s consolidated financial statements since the acquisition date. Truck Utilities reported revenue of $12.5 million and pretax income of $0.7 million in the three months ended March 31, 2020. The following pro forma information is presented for comparison purposes as if the Truck Utilities acquisition was completed as of January 1, 2019:

13


(in $000s)
Three Months Ended March 31, 2019
Total revenue
$
72,505

Net loss
(6,415
)
Basic and diluted net loss per share
(0.30
)


Note 5: Debt
Debt obligations and associated interest rates consisted of the following as of March 31, 2020 and December 31, 2019 :
 
March 31,
 
December 31,
 
March 31,
 
December 31,
(in $000s)
2020
 
2019
 
2020
 
2019
2019 Credit Facility
$
285,680

 
$
250,000

 
3.2
%
 
4.2
%
Senior Secured Notes due 2024
475,000

 
475,000

 
10.0
%
 
10.0
%
Notes Payable
3,543

 
3,525

 
 
 
 
Total debt outstanding
764,223

 
728,525

 
 
 
 
Deferred finance fees
(13,511
)
 
(14,222
)
 
 
 
 
  Net debt
750,712

 
714,303

 
 
 
 
Less current maturities
(1,601
)
 
(1,280
)
 
 
 
 
Long-term debt
$
749,111

 
$
713,023

 
 
 
 

On March 10, 2020, we entered into an agreement (the “Incremental Agreement”) amending the 2019 Credit Facility. The Incremental Agreement amends the syndicate of banks for a new participant that increased the maximum amount of the facility by $35.0 million to a total of $385.0 million.

Note 6: Goodwill and Intangible Assets
Goodwill and intangible assets consisted of the following:
(in $000s)
March 31, 2020
 
December 31, 2019
Goodwill
$
238,153

 
$
238,195

Nesco trade name
28,000

 
28,000

Other intangible assets:

 

 Trade names
1,030

 
1,030

 Non-compete agreements
380

 
380

 Customer relationships
52,880

 
52,880


82,290

 
82,290

 Less: accumulated amortization
(12,429
)
 
(11,738
)
Intangible assets, net
69,861

 
70,552

Goodwill and intangible assets
$
308,014

 
$
308,747


Goodwill related to our ERS segment and PTA segment was $229.4 million and $8.7 million, respectively, as of March 31, 2020, $229.5 million and $8.7 million, respectively, as of December 31, 2019.
We perform our annual goodwill impairment testing in the fourth quarter of each year. In addition to the annual impairment test, we regularly assess whether a triggering event has occurred which would require interim impairment testing. Despite the significant excess fair value identified in our 2019 impairment assessment, we determined that the decline in Nesco's market capitalization coupled with the uncertainties stemming from the broad economic impact as a result of the COVID-19 pandemic indicate that an impairment loss may have been incurred. Therefore, we qualitatively assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our current projections

14


that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business from the COVID-19 pandemic, and current discount rates.
Based on our interim impairment assessment as of March 31, 2020, we have determined that our goodwill and indefinite-lived intangible assets are not impaired. However, we are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on our business.

Note 7: Earnings per Share
The merger and other related transactions with Capitol Investment Corp. IV were accounted for as a reverse recapitalization. Earnings per share has been recast for all historical periods to reflect the Company's capital structure for all comparative periods.
Diluted net income (loss) per share includes the effects of potentially dilutive shares of common stock. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, and share-based compensation, all of which have been excluded from the calculation of diluted net income (loss) per share because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. The share amounts of our potentially dilutive shares excluded aggregated 27.3 million.
The following table sets forth the computation of basic and dilutive loss per share:
 
Three Months Ended March 31,
 
2020
 
2019
Net loss (in $000s)
$
(15,969
)
 
$
(6,724
)
Weighted-average basic and diluted shares outstanding
49,033,903

 
21,660,638

Basic and diluted net loss per share
$
(0.33
)
 
$
(0.31
)


Note 8: Fair Value Measurements
FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. Levels within the hierarchy are defined as follows:
Level 1 - Unadjusted quoted prices for identical assets and liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

15


The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:
 
Carrying Value
 
Fair Value
(in $000s)
 
 
Level 1
 
Level 2
 
Level 3
March 31, 2020
 
 
 
 
 
 
 
2019 Credit Facility
$
285,680

 
$

 
$
285,680

 
$

Senior Secured Notes due 2024
475,000

 

 
427,500

 

Notes Payable
3,543

 

 
3,543

 

Derivative
7,671

 

 
7,671

 


 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
2019 Credit Facility
$
250,000

 
$

 
$
250,000

 
$

Senior Secured Notes due 2024
475,000

 

 
494,000

 

Notes Payable
3,525

 

 
3,650

 

Derivative
1,709

 

 
1,709

 



Note 9: Financial Instruments
In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest rate exposure. These financial instruments are not used for trading or speculative purposes.
The fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets were as follows:
 
Liability Derivatives
(in $000s)
March 31, 2020
 
December 31, 2019
Derivative instruments:
 
 
 
Interest rate collar
$
7,671

 
$
1,709

Total derivative instruments
$
7,671

 
$
1,709


Derivatives Not Designated as Hedges
On July 17, 2019, we entered into an interest rate collar agreement to mitigate the risk of changes in the interest rate paid during the contract period for $170.0 million of the Company's variable rate loans under the 2019 Credit Facility. Under the terms of the interest rate collar, we are required to pay the counterparty to the agreement an amount equal to the difference between a monthly LIBOR-based interest rate and a defined interest rate floor; conversely, we are entitled to receive from the counterparty an amount equal to the excess of a LIBOR-based interest rate and a defined interest rate cap. The required payments due to or due from the counterparty are calculated by applying the interest rate differential to the notional amount ($170.0 million) and are determined monthly through July 31, 2024. The interest rate collar expires in July 2024 and has not been designated as a cash flow hedge. Consequently, the change in fair value of the interest rate collar ($6.0 million in the three months ended March 31, 2020) is recognized in our Unaudited Condensed Consolidated Statements of Operations within Other (income) expense, net.
Derivatives Instruments Designated as Hedges
When a derivative contract is entered into, the Company may designate the derivative instrument as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability or as an undesignated derivative. When a derivative is designated, the Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.
The fair market value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.

16


The Company assesses at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be an effective hedge, the fair market value changes of the instrument are recorded to accumulated other comprehensive loss and subsequently reclassified into net loss when the hedged transaction affects earnings. Changes in the fair market value of derivatives not deemed to be an effective hedge are recorded in net loss in the period of change. If the hedging relationship ceases to be effective subsequent to inception, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in net loss.
We entered into an interest rate collar on December 4, 2018, to hedge the interest rate risk associated with our previous revolving credit facility, which was repaid on the date of the merger with Capitol Investment Corp. IV. The interest rate collar was designated as a cash flow hedge and had a term extending to September 30, 2020. On July 17, 2019, we terminated the interest rate collar, which resulted in the hedge becoming undesignated. Accordingly, $0.8 million (net of income taxes of $0.3 million) was reclassified from accumulated other comprehensive loss to Other income (expense) net, in our Condensed Consolidated Statements of Operations during the year ended December 31, 2019.
Note 10: Commitments and Contingencies
We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Legal Matters
We are subject to various claims and legal actions that arise primarily in the ordinary course of business. These matters include, but are not limited to, general liability claims (including personal injury, product liability, property, and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, and contract and real estate matters. We maintain insurance coverage for our operations and employees. Our major policies include coverage for property, general liability, auto, directors and officers, health, and workers’ compensation insurances. The ultimate legal and financial liability with respect to such matters generally cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements against us. Estimates for losses from litigation are made after consultation with outside legal counsel. In our opinion, after consultation with legal counsel, the disposition or ultimate resolution of such claims and actions will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Purchase Commitments
We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. All of these agreements are cancelable within a specified notification period to the supplier.

Note 11: COVID-19
On March 11, 2020, the World Health Organization ("the WHO") declared the rapid spread of the Coronavirus Disease 2019 ("COVID-19") a global health pandemic. Beginning in March, governmental authorities began imposing restrictions on non-essential activities as part of social distancing measures. These measures have adversely affected the global and North American economies. The end markets Nesco operates in have been identified by the United States Cybersecurity and Infrastructure Security Agency ("CISA") as a critical markets that should continue operating throughout the pandemic, appropriately modified to adhere to the U.S. Centers for Disease Control workforce and customer protection guidance.
We have undertaken efforts intended to maintain the health and safety of our employees and their families and to ensure the Company's continued financial and operational viability, especially in relation to our position as a supplier to critical industries. Employees whose tasks can be done offsite have been instructed to work from home.  Our service locations remain operational, and we are maintaining social distancing and enhanced cleaning protocols and usage of personal protective equipment, where appropriate.
While Nesco’s business is considered critical, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. Some of our customers are delaying projects, deferring capital equipment purchases and eliminating in-person sales meetings.  As a result, our business has been and will continue to be adversely impacted by the pandemic.  Since the pandemic began, management has been very focused on mitigating the effects to the business. Specific actions we have taken include a reduction in planned capital expenditures and investments in inventory for the year in addition to reductions in headcount and other selling, general and administrative expenses. We are continually monitoring the situation and will take additional measures we believe are appropriate as the situation continues to develop.

17


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this section, unless otherwise noted “we,” “us,” “our,” “Company,” or "Nesco” refers to Nesco Holdings, Inc. and its consolidated subsidiaries.
The information provided below supplements, but does not form part of, our financial statements. This discussion contains forward-looking statements that are based on the views and beliefs of Nesco’s management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section entitled “Risk Factors” included herein and in our Annual Report on Form 10-K, filed with the SEC on March 16, 2020.

ORGANIZATION
On July 31, 2019, NESCO Holdings I, Inc. and NESCO Holdings, LP consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated as of April 7, 2019, which was amended on July 10, 2019 (as amended, the "Merger Agreement") by and among Capitol Investment Corp. IV ("Capitol"), Capitol Intermediate Holdings, LLC, a Delaware limited liability company and wholly-owned subsidiary of Capitol (“Intermediate Holdings”), Capitol Investment Merger Sub 1, LLC, a Delaware limited liability company and wholly-owned subsidiary of Capitol (“Merger Sub”), Capitol Investment Merger Sub 2, LLC, a Delaware limited liability company and wholly-owned subsidiary of Capitol Investment Corp. IV (“New HoldCo”). Pursuant to the Merger Agreement, (i) Capitol domesticated as a Delaware corporation and was renamed “Nesco Holdings, Inc.” (the “Domestication”), (ii) Merger Sub merged with and into Holdings I, with Holdings I surviving as a wholly-owned subsidiary of Capitol (the “Initial Merger”), and (iii) immediately after the Initial Merger, Holdings I merged with and into New HoldCo, with New HoldCo surviving as an indirect wholly-owned subsidiary of Capitol (the “Subsequent Merger,” and together with the Initial Merger, the “Mergers,” and together with the Domestication and the other transactions contemplated by the Merger Agreement, the “Transactions”). As a result of the Transactions, Holdings I became a limited liability company and a wholly-owned subsidiary of Capitol, with Nesco Owner becoming a securityholder of Capitol. Upon the closing, Capitol’s common stock, warrants and units ceased trading, and upon the opening of trading on August 1, 2019, common stock and warrants began trading on the NYSE, respectively, under the symbols “NSCO” and “NSCO WS,” respectively.
For information related to our business operations, see the description of our business set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 16, 2020.
COVID-19
On March 11, 2020, the World Health Organization ("the WHO") declared the rapid spread of the Coronavirus Disease 2019 ("COVID-19") a global health pandemic. Beginning in March, governmental authorities began imposing restrictions on non-essential activities as part of social distancing measures. These measures have adversely affected the global and North American economies. The end markets Nesco operates in have been identified by the United States Cybersecurity and Infrastructure Security Agency ("CISA") as a critical markets that should continue operating throughout the pandemic, appropriately modified to adhere to the U.S. Centers for Disease Control workforce and customer protection guidance.
There are many uncertainties regarding the pandemic, and we are closely monitoring the impact of the pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. While we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties, we have undertaken efforts intended to maintain the health and safety of our employees and their families and to ensure the Company's continued financial and operational viability, especially in relation to our position as a supplier to those critical industries identified in the Memorandum noted above.
While Nesco’s business is considered critical, we are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. Some of our customers are delaying projects, deferring capital equipment purchases and eliminating in-person sales meetings.  As a result, our business has been and will continue to be adversely impacted by the pandemic.  Since the pandemic began, management has been very focused on mitigating the effects to the business. Specific actions we have taken include a reduction in planned capital expenditures and investments in inventory for the year in addition to reductions in headcount and other selling, general and administrative expenses. We are continually monitoring the situation and will take additional measures we believe are appropriate as the situation continues to develop.

18


In our ERS segment, some of our end-user customers are delaying projects, deferring capital equipment purchases, and/or eliminating in-person sales meetings.  In additional, trade shows, industry conventions, and product demonstrations have been canceled and are continuing to be canceled.  As a result, our selling activities and our ability to convert those activities into actual sales have been and will continue to be adversely impacted by the pandemic.  In our PTA segment, distribution projects are often in population centers and several municipalities have elected to postpone non-emergency distribution repair projects to limit contact with the general public.  While several PTA projects have been postponed while current social distancing measures are in effect, we are not aware of any projects that have been canceled. In addition, management is focused on mitigating the effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time, energy, resources, and focus.

FINANCIAL OVERVIEW
We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, our non-GAAP financial measures may not be comparable to measures used by other companies within the industry.
The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our results of operations and financial condition together with the consolidated financial statements and the related notes thereto also included within.
Measures Related to our Fleet
We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions:
Equipment on rent - Equipment on rent is the original equipment cost (“OEC”) of units rented to customers at a given point in time. Average equipment on rent is calculated as the weighted-average equipment on rent during the stated period. OEC represents the original equipment cost by fleet type over a period of time, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations. This adjusted measure of OEC is used by our creditors pursuant to our credit agreements, wherein this is a component of the basis for determining compliance with our financial loan covenants. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. OEC is a widely used industry metric to compare fleet dollar value independent of depreciation.
Fleet count - Fleet count represents the average or period end (defined as either) equipment units held in our rental fleet over any period.
Fleet utilization - Fleet utilization, with respect to the average equipment units held in our rental fleet over any period, is defined as the total number of days the rental equipment was rented during the period divided by the total number of days such rental equipment could have been rented during the same period, assuming that each piece of equipment could have been rented every day in the period (i.e. no maintenance or planned downtime is included in the calculation).
Rental rate per day - Rental rate per day for the period is calculated as total rental revenue excluding freight and billings to customers for damaged equipment divided by the total billed rental days.
Fleet age - Fleet age represents the number of years from the manufacturer chassis year of the rental equipment unit through the current year end. We evaluate fleet age for each equipment type and our fleet as a whole. In order to calculate average fleet age by type and average total fleet age, we weight the fleet age by the number of units within the relevant group.
Gross Profit, Income from Operations and Cash Flow from Operations
Gross profit, income from operations and cash flow from operations are financial performance measures that we use to monitor our results from operations and to measure our performance against our debt covenants.
Adjusted EBITDA
Adjusted EBITDA is also a financial performance measure that we use to monitor our results from operations, to measure our performance against our debt covenants and in measuring our performance relative to that of our competitors.

19


We believe the presentation of Adjusted EBITDA enhances an investor’s understanding of our financial performance because it is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. Such items are excluded pursuant to the definition of Adjusted EBITDA in the 2019 Credit Facility and the Indenture, Adjusted EBITDA is the basis for several financial loan covenants contained in the 2019 Credit Facility. We believe that Adjusted EBITDA provides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, service debt and undertake capital expenditures. We use these financial measures for business planning purposes, for loan compliance purposes, and in measuring our performance relative to that of our competitors.
Nesco’s use of the terms EBITDA and Adjusted EBITDA may vary from that of others in its industry and therefore are limited in their usefulness as comparative measures. These financial measures should not be considered as alternatives to net income (loss), operating income (loss) or any other performance measures derived in accordance with GAAP as measures of operating performance, operating cash flows or as measures of liquidity. Non-GAAP financial measures should not be relied upon to the exclusion of U.S. GAAP financial measures. We encourage investors to review our non-GAAP financial measures together with our U.S. GAAP results and historical consolidated financial statements, and not in isolation. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies.
Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of used equipment sold. When equipment is purchased in connection with a business combination, the equipment is revalued to its then current fair value for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair value of equipment as of the acquisition date, with depreciation recorded thereafter following our accounting policies; however, this may not be indicative of our actual cost to acquire new equipment that we add to our fleet apart from a business acquisition. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. As indicated above, the agreements governing our indebtedness define this adjustment to EBITDA, as such, and we believe this metric is a better indication of our true cost of equipment sales due to the removal of the purchase accounting adjustments.

Consolidated Operating Results Three Months Ended March 31, 2020 and 2019
(in $000s)
Three Months Ended March 31, 2020
% of revenue
Three Months Ended March 31, 2019
% of revenue
Rental revenue
$
50,994

62.4%
$
45,642

74.2%
Sales of rental equipment
9,093

11.1%
7,399

12.0%
Sales of new equipment
7,577

9.3%
2,350

3.8%
Parts sales and services
14,079

17.2%
6,101

9.9%
Total Revenue
81,743

100.0%
61,492

100.0%
Cost of revenue
40,228

49.2%
24,409

39.7%
Depreciation of rental equipment
20,112

24.6%
16,731

27.2%
Gross Profit
21,403

26.2%
20,352

33.1%
Operating expenses
14,607


11,662


Operating Income
6,796


8,690


Other Expense
22,035


14,980


Loss Before Income Taxes
(15,239
)

(6,290
)

Income Tax Expense
730


434


Net Loss
$
(15,969
)

$
(6,724
)

Total Revenue
Total revenue for the three months ended March 31, 2020, increased by $20.3 million, or 32.9%, compared to the same period in 2019. Rental revenue increased $5.4 million, or 11.7%, compared to the same period in 2019. This increase is primarily a result of an increase in average equipment on rent, which grew 10.2% to $499.8 million in the first quarter 2020, compared to $453.6 million in the same quarter of 2019. Sales of rental equipment, which can vary from quarter to quarter, increased $1.7 million, or 22.9%, and sales of new

20


equipment increased $5.2 million, or 222.4%, compared to the same period in 2019. Parts sales and service revenue increased $8.0 million, or 130.8%, compared to the same period in 2019 as a result of investments to expand our Parts, Tools and Accessories segment. The Truck Utilities acquisition completed in November 2019 contributed $12.5 million to total revenue.
Total Cost of Revenue
Total cost of revenue, excluding depreciation of $20.1 million, for the three months ended March 31, 2020, increased by $15.8 million, or 64.8%, compared to the same period in 2019 ($19.2 million, or 46.7%, including depreciation). The increase is primarily due to a 71.0% increase in equipment sales, with $6.6 million of costs related to those sales. Additionally, the 130.8% increase in parts sales and service revenue resulted in a $6.5 million increase of costs related those sales.
Operating Expenses
Operating expenses for the three months ended March 31, 2020 increased $2.9 million, or 25.3%, compared to the same period in 2019. The increase is primarily due to an increase in selling, general and administrative expenses of $4.0 million. Selling, general and administrative expenses increased due to the combination of the acquisition of Truck Utilities; growth in personnel expenses necessary as a new public company in addition to other public company costs; and increased commissions as a result of higher revenue. Offsetting this increase is a reduction in transaction expenses of $1.8 million, which were directly related to the Transactions with Capitol in 2019.
Other Expense
Other expense for the three months ended March 31, 2020 increased $7.1 million, or 47.1%, compared to the same period in 2019. This is primarily a result of a change in fair value of an interest rate collar, which is an undesignated hedging instrument. The resulting expense in the current quarter related to the collar was approximately $6.0 million. In addition, net interest expense increased by $1.0 million due to the Senior Secured Notes that were issued in a private placement in the second half of 2019, as well as the amortization of associated deferred financing costs.
Income Tax Expense
Income tax expense was $0.7 million for the three months ended March 31, 2020. Due to our valuation allowance on our net operating loss and interest deduction limitation carryforwards, we have not recognized a deferred tax benefit when we report pretax losses because we have determined the realization of tax benefits for the carryforwards to be uncertain. Our income tax expense reflects an increase in our deferred tax liabilities associated with our non-tax deductible tradename intangible asset and goodwill as well as foreign taxes incurred in Canada and Mexico.
Financial Performance
We believe that our operating model, together with our highly variable cost structure, enables us to sustain high margins, strong cash flow generation and stable financial performance throughout various economic cycles. We are able to generate substantial free cash flow through our earnings, as well as sales of used equipment. Our highly variable cost structure adjusts with the utilization of our equipment, thereby reducing our costs to match our revenue. We principally evaluate financial performance based on five measurements: Adjusted EBITDA, fleet count, fleet utilization, equipment dollars ("OEC") on rent and rental rate per day. The following table summarizes these operating metrics.
The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

21


Financial performance for the three months ended March 31, 2019 and 2020:
 
Three Months Ended March 31,
(in $000s, except fleet count and rate per day)
2020
 
2019
 
change
 
(%)
 Adjusted EBITDA (a)
$
32,061

 
$
30,434

 
$
1,627

 
5.3
 %
Average equipment on rent (b)
$
499,756

 
$
452,146

 
$
47,610

 
10.5
 %
Average fleet count
4,627

 
3,913

 
714

 
18.2
 %
Average fleet utilization (c)
75.9
%
 
82.2
%
 
(6.3
)%
 
(7.7
)%
Average rental rate per day (d)
$
137.77

 
$
137.46

 
$
0.31

 
0.2
 %

(a) EBITDA represents net income (loss) before interest, provision for income taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA as further adjusted for (1) non-cash purchase accounting impact, (2) transaction and process improvement costs, including the effect of the cessation of operations in Mexico, (3) major repairs, (4) share-based payments, (5) other non-recurring items, and (6) the change in fair value of derivative instruments. These metrics are subject to certain limitations. See "Financial Overview—Adjusted EBITDA" and the reconciliation of Adjusted EBITDA to U.S. GAAP net income (loss) below.
(b) Average equipment on rent is the average original equipment cost of units on rent during the period. The measure provides a value dimension to the fleet utilization statistics. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.
(c) Average fleet utilization for the period is calculated as the total number of invoiced days divided by the total number of available equipment days. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.
(d) Average rental rate per day for the period is calculated as total rental revenue excluding freight and damaged billings divided by the total rental days, which represents the number of billable days in the period aggregated across all units in the fleet. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.
Adjusted EBITDA
Adjusted EBITDA increased $1.6 million, or 5.3%, from $30.4 million for the three months ended March 31, 2019 to $32.1 million for the three months ended March 31, 2020. This increase can be primarily attributed to a $4.4 million increase in gross profit, excluding depreciation of $20.1 million, for the three months ended March 31, 2020 as compared to the same period in 2019, driven by growth across all revenue streams. Core rental gross profit was the main driver of gross profit growth in the first quarter, contributing $37.2 million of gross profit excluding depreciation of $20.1 million, a $2.6 million or 7.6% year over year increase.
The following is a reconciliation from U.S. GAAP net loss to Adjusted EBITDA for the three months ended March 31, 2020 and 2019 and a reconciliation from Adjusted EBITDA to U.S. GAAP net cash from operating activities for the three months ended March 31, 2020 and 2019.
 
Three Months Ended March 31,
(in $000s)
2020
 
2019
Net loss
$
(15,969
)
 
$
(6,724
)
Interest expense
16,014

 
14,993

Income tax expense
730

 
434

Depreciation expense
20,377

 
16,996

Amortization expense
691

 
724

EBITDA
21,843

 
26,423

   Adjustments:

 

   Non-cash purchase accounting impact (1)
917

 
611

   Transaction and process improvement costs (2)
2,079

 
2,510

   Major repairs (3)
700

 
762

   Share-based payments (4)
559

 
128

Change in fair value of derivative (5)
5,963

 

Adjusted EBITDA
$
32,061

 
$
30,434


22


 
Three Months Ended March 31,
(in $000s)
2020
 
2019
Adjusted EBITDA
$
32,061

 
$
30,434

Adjustments:

 

Change in fair value of derivative (5)
(5,963
)
 

Share-based payments (4)
(559
)
 
(128
)
Major repairs (3)
(700
)
 
(762
)
Transaction and process improvement costs (2)
(2,079
)
 
(2,510
)
Non-cash purchase accounting impact (1)
(917
)
 
(611
)
EBITDA
21,843

 
26,423

Add:

 

Interest expense
(16,014
)
 
(14,993
)
Income tax benefit (expense)
(730
)
 
(434
)
Amortization - financing costs
711

 
677

Share-based payments
559

 
128

Loss (gain) on sale of rental equipment and parts
(2,213
)
 
(1,977
)
Gain on insurance proceeds - damaged equipment
(120
)
 
(452
)
Major repair disposal
700

 
762

Change in fair value of derivative
5,963

 

Deferred tax (benefit) expense
652

 
271

Bad debt expense, net of recoveries
777

 
692

Changes in assets and liabilities:

 

Accounts receivable
1,207

 
1,823

Inventory
176

 
(4,299
)
Prepaid expenses and other
(34
)
 
(3,413
)
Accounts payable
(3,352
)
 
10,297

Accrued expenses
(12,427
)
 
(8,163
)
Deferred rental income
(517
)
 
(3,437
)
Net cash from operating activities
$
(2,819
)
 
$
3,905


(1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment sold. The equipment acquired received a purchase step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement.
(2) 2020: Represents transaction costs related to our acquisition of Truck Utilities (which include post-acquisition integration expenses incurred during the current quarterly period); 2019: Represents transaction expenses related to merger activities associated with the Transaction with Capitol that was consummated on July 31, 2019. These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are costs of startup activities (which include training, travel, and process setup costs) associated with the rollout of new PTA locations that occurred throughout the prior year into the current quarterly period. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are also included. Pursuant to our credit agreement, the cost of undertakings to effect such cost savings, operating expense reductions and other synergies, as well as any expenses incurred in connection with acquisitions, are amounts to be included in the calculation of Adjusted EBITDA.
(3) Represents the undepreciated cost of replaced vehicle chassis and components from heavy maintenance, repair and overhaul activities associated with our fleet, which is an adjustment pursuant to our credit agreement.
(4) Represents non-cash stock compensation expense associated with the issuance of stock options and restricted stock units.
(5) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge) in the three months ended March 31, 2020.




23


Equipment on rent
Average equipment on rent was $499.8 million for the three months ended March 31, 2020, an increase of $46.1 million or 10.2% over the same period in 2019. The increase is due to increased fleet size, including the equipment acquired in connection with our acquisition of Truck Utilities, and continued demand from our equipment rental customers.
Fleet count
Average fleet count was 4,627 for the three months ended March 31, 2020, an increase of 714 units from an average fleet count of 3,913 over the same period in 2019. Bucket trucks represented the largest category of our capital expenditures for the three months ended March 31, 2020, driven by demand in transmission and distribution, telecom and rail end-markets.
Fleet utilization
Fleet utilization was 75.9% for the three months ended March 31, 2020, compared to 82.2% in the same period of 2019. Every product category saw an increase in rented days year over year. First quarter utilization is typically lower than other quarters due to seasonality, absent any unusual activity such as the California fire recovery work in the first quarter of 2019. This quarter followed typical patterns, however, was further impacted by COVID-19 and equipment recently added to the fleet that has not yet gone on rent.
Rental rate per day
Average rental rate per day was $137.8 for the three months ended March 31, 2020, a 0.2% increase from $137.5 for the same period in 2019. Consolidated rate remained steady year over year.
Fleet age
We use fleet age by type to assist in our decision to sell and purchase a particular fleet category to ensure our fleet age remains competitive. Our overall average fleet age was 3.4 years as of March 31, 2020, compared to 3.7 years at March 31, 2019. We believe the current age of our fleet is young and gives us flexibility from a capital allocation and sales perspective.
Fleet composition
We own a diverse selection of equipment in order to meet the needs of our customers. Bucket trucks, digger derricks, line equipment and rail-mounted equipment make up a significant percentage of our fleet portfolio. We also carry cranes, pressure diggers, underground equipment, and other miscellaneous fleet items, making us a full service specialty equipment provider. All of our equipment is available for rent and our used equipment sales and new equipment purchases are partially driven by our desire to keep an optimal product mix and maintain a competitive fleet age.
The OEC of our ERS fleet was $644.6 million as of March 31, 2020, a $7.3 million, or 1.1%, increase from $637.3 million at December 31, 2019. The bucket trucks category represented the largest increase for the three months ended March 31, 2020.

Operating Results by Segment - Three Months Ended March 31, 2020 and 2019
The Company manages its operations through two business segments: rental and sale of fleet and equipment along with repair and maintenance related to those assets (ERS), and the rental and sale of parts, tools, and accessories (PTA). See Note 3, Segments, to our unaudited condensed consolidated financial statements for additional information.

24


Equipment Rental and Sales Segment
 
Three Months Ended March 31,
 
 
 
 
(in $000s)
2020
 
2019
 
$ change
 
% change
Rental revenue
$
47,053

 
$
42,896

 
$
4,157

 
9.7
 %
Sales of rental equipment
9,093

 
7,399

 
1,694

 
22.9
 %
Sales of new equipment
7,577

 
2,350

 
5,227

 
222.4
 %
Total revenues
63,723

 
52,645

 
11,078

 
21.0
 %
Cost of revenue
27,320

 
18,654

 
8,666

 
46.5
 %
Depreciation of rental equipment
18,976

 
15,661

 
3,315

 
21.2
 %
Gross Profit
$
17,427

 
$
18,330

 
$
(903
)
 
(4.9
)%

Revenue in our ERS segment represented 78.0% and 85.6% of Nesco’s consolidated revenues for the three months ended March 31, 2020 and 2019, respectively. Total revenue increased by $11.1 million for the three months ended March 31, 2020 compared to the same period in 2019. Truck Utilities generated $4.5 million of revenue within the ERS segment.
Rental revenue increased $4.2 million as a result of increased demand in the end-markets we serve coupled with increased fleet investment over the past year to meet that demand. Sales of rental equipment, which can vary from quarter to quarter, increased $6.9 million with a focus on disposing of certain older fleet units in the first quarter of 2020, helping result in a decline in the average age of our fleet from 3.6 years at December 31, 2019 to 3.4 years at March 31, 2020.
The $8.7 million increase in cost of revenue (excluding the increase in depreciation expense of $3.3 million) for the three months ended March 31, 2020 compared to the prior year is primarily due to a $6.6 million increase in cost of sales of rental and new equipment.
Depreciation of our rental fleet increased by $3.3 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to the 13.5% growth in fleet count.
Gross profit for the three months ended March 31, 2020, excluding depreciation of $19.0 million, increased by $2.4 million compared to the same period in 2019. Margins on equipment sales declined in the first quarter relative to the same period in 2019 due to a combination of an increase in the disposal of older rental units, which typically generate lower margins and a significant supplier rebate offered on the sale of new equipment in 2019 but not repeating in 2020.
Parts, Tools, and Accessories Segment