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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
_______________________________
FORM 10-K
_______________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
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)
_______________________________
Delaware84-2531628
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueNSCONew York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par valueNSCO.WSNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES   ☐     No   ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d). YES   ☐     No   ☒
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   ☒     NO   ☐
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  ☒    NO   ☐
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 Accelerated filer
Non-accelerated filer Smaller reporting company
   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.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES       NO  ☒
The aggregate market value of shares of common stock held by non-affiliates, computed by reference to the closing price for such common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $59.5 million.
The number of shares of Nesco Holdings, Inc.’s common stock outstanding as of March 1, 2021, was 49,156,753.
DOCUMENTS INCORPORATED BY REFERENCE:
None


Table of Contents
Nesco Holdings, Inc.
FORM 10-K REPORT INDEX
10K Part and Item No.Page No.
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
2


PART I
3


Item 1. Business
Nesco’s Business
For purposes of this “Business” section, unless otherwise indicated, references to “we,” “our,” “us,” “Nesco” or the “Company” are to Nesco Holdings, Inc., a Delaware corporation, and its subsidiaries. References to our “Sponsors” are to ECP and Capitol.

Nesco Overview
Nesco is one of the largest specialty equipment rental providers to the growing electric utility transmission and distribution (“T&D”), telecom and rail industries in North America. Nesco offers its specialized equipment to a diverse customer base for the maintenance, repair, upgrade and installation of critical infrastructure assets including electric lines, telecommunications networks and rail systems.
With a young, coast-to-coast rental fleet of more than 4,500 units as of December 31, 2020, Nesco has a diverse specialty fleet offering that includes insulated and non-insulated bucket trucks, digger derricks, line equipment, cranes, pressure diggers and underground equipment, with all-terrain options such as all-wheel drive, track mounting and rail mounting. Nesco’s rental fleet has an average unit age of approximately 4.0 years at December 31, 2020 compared to an average expected useful life of 15 to 25 years. The long useful life of Nesco’s equipment assets is a key driver of attractive asset economics. Nesco expects that a combination of highly attractive asset economics and long rental periods will continue to drive strong profit margins. In addition to renting its fleet, Nesco opportunistically sells both new and used specialty equipment, which fosters strong customer relationships, facilitates fleet management and strengthens supplier relationships.
Through its parts, tools and accessories, or PTA segment, Nesco provides its customers a total job-site solution, offering a range of parts, tools and accessories for rent or sale to fully equip their equipment and crews for activity in the field. Nesco’s large PTA inventory includes stringing blocks, augers, insulated hotline tools, hoist and rigging equipment and grounding clamps. Nesco’s comprehensive PTA offering expands opportunities to serve its equipment rental and sales customers through the convenience of a single vendor for all of their specialty equipment and PTA needs.
Nesco has an extensive geographic footprint which allows it to supply equipment and services to major electric utility T&D, telecom and rail customers throughout the U.S. and Canada. Nesco has over 60 locations, including third party facilities. This expansive footprint allows Nesco to opportunistically position its fleet in high-demand regions and across multiple end-markets, which drives high fleet utilization and results in superior customer connectivity. Nesco serves a diverse base of more than 2,000 customers as of December 31, 2020, including many of the top national and regional electric utilities, telecoms, railroads and related contractors.
Nesco’s three primary end-markets (electric utility T&D, telecom and rail) present large and compelling opportunities. Investment spend in these end-markets has exceeded the rate of GDP growth and shown resiliency through the economic cycle. Continued growth is supported by multiple important and transformative long-term trends. The electric utility market is in the early years of a secular upcycle, driven by utilities’ investment to replace or strengthen an aging electric grid, to integrate growing gas and renewable generation mandated by regulation and to meet the expanded demand from electric vehicles and electric heating with a growing focus on decarbonization. The 5G upgrade cycle is driving a new wave of telecom infrastructure spending. Urban congestion and increased freight transportation needs have driven a nationwide investment in improving rail infrastructure with many major projects approved and under development across the U.S. See “End-Market Overview” for additional detail.
Demand for Nesco’s equipment expanded from 2016 to 2019, as demonstrated by high levels of fleet utilization over this period. Prior to the Capitol Merger, Nesco’s ability to invest in its fleet to meet growing end-market demand was limited by the Company’s capital structure. As a result, Nesco turned away rental opportunities due to lack of fleet availability. With a strengthened capital structure following the consummation of the merger with Capitol Investment Corp. IV (“Capitol”), Nesco was able to make a significant investment into its fleet in 2019 to capture existing unmet demand as well as expected continued growth in demand from its end-markets.
Pending Acquisition of Custom Truck
On December 3, 2020, Nesco Holdings, Inc., Nesco Holdings II, Inc., certain affiliates of The Blackstone Group (“Blackstone”) and other direct and indirect equity holders of Custom Truck One Source, L.P. (“Custom Truck”), Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC (“PE One Source”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”), pursuant to which Nesco Holdings II, Inc. agreed to acquire 100% of the limited partnership interests of Custom Truck and 100% of the limited liability company interests of Custom Truck’s general partner (the “Acquisition”). Upon
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consummation of the Acquisition, the equity interest holders of Custom Truck will receive a base purchase price of $1,475.0 million, subject to customary working capital adjustments, indebtedness and transaction expenses of Custom Truck as of the closing date, as well as an adjustment on the basis of the target original equipment cost of the rental fleet inventory owned by Custom Truck as of the closing date, if any. As further described below, the purchase price for the Acquisition will be financed through borrowings under a new asset-based revolving credit facility (the “New ABL Facility”), proceeds from the Subscription and the Supplemental Equity Financing, the rollover of certain equity interests of Blackstone and certain members of the management of Custom Truck whereby the sellers will receive 20,000,000 shares of Nesco common stock at closing, cash on hand, and proceeds from the private placement of senior secured high-yield notes.
In connection with entering into the Purchase Agreement, Nesco entered into the Debt Commitment Letter pursuant to which certain lenders have agreed to provide a portion of the financing necessary to fund the consideration to be paid pursuant to the terms of the Purchase Agreement. The financing is anticipated to consist of the following: (i) an asset-based revolving credit facility in an aggregate principal amount of up to $750.0 million, $400.0 million of which shall be available on the closing date to finance the purchase price or, when determined, for working capital adjustments payable under the Purchase Agreement; and (ii) an issuance of senior secured notes (the “Notes,” the issuance of Notes, together with the incurrence of the new asset-based revolving credit facility, the “Debt Financing”) yielding approximately $1,000.0 million in gross cash proceeds and/or to the extent that the issuance of the Notes yields less than $1,000.0 million in gross cash proceeds or such cash proceeds are otherwise unavailable to consummate the Acquisition, loans under a senior secured bridge facility yielding up to approximately $1,000.0 million in gross cash proceeds (less the gross cash proceeds received from the Notes and available for use, if any).
The acquisition is expected to be accounted for using the acquisition method of accounting under the provisions of ASC 805, Business Combinations, with Nesco as the accounting acquirer of Custom Truck. In identifying Nesco 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 that will be issued to the selling equity holders of Custom Truck (consisting of cash from Nesco and Nesco common stock). Nesco also considered the relative outstanding share ownership and the composition of the combined company board 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.
Also on December 3, 2020, Nesco entered into the Common Stock Purchase Agreement (the “Investment Agreement”) with PE One Source, an entity controlled by Platinum Equity Advisors, LLC (“Platinum”), in respect of the subscription relating to the issuance and sale to Platinum of (i) Nesco common stock, for an aggregate purchase price in the range of $700.0 million to $763.0 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, and (ii) additional shares of common stock for an aggregate purchase price of not more than $100.0 million, if necessary, in connection with the “Supplemental Equity Financing.” The shares of common stock issued and sold to Platinum have a purchase price of $5.00 per share. Nesco has also entered into subscription agreements in respect of the sale of 28,000,000 shares of common stock in a private placement at a price per share of $5.00 for aggregate proceeds of $140.0 million (the “Supplemental Equity Financing”).
Company History
Nesco was founded in 1988 as a family-owned equipment sales and rental company in Bluffton, Indiana, focused on the electric utility market. Following its acquisition by Energy Capital Partners (“ECP”) in early 2014, Nesco expanded and diversified its operations with the launch of the PTA business in late 2015 and the entry into the telecom and rail markets in 2016. The PTA business allowed Nesco to cross-sell a complementary product offering to its existing customer base. The expansion into the telecom and rail industries represented a natural extension given that a significant portion of Nesco’s equipment has applications across the electric utility T&D, rail and telecom end-markets. Nesco’s telecom and rail expansion was facilitated by Nesco’s acquisition of V&H Leasing Services, a rail equipment rental business, in 2016. The acquisitions of Bethea Tool and Equipment Company (“Bethea”) in 2017 and N&L Line Equipment (“N&L”) in 2018 further enhanced the PTA segment and positioned it for nationwide expansion. Bethea added manufacturing capacity of stringing blocks, the most significant product within the PTA portfolio. N&L added certified expertise in dielectric testing and manufacturing of certified live-line tools. In November 2019, Nesco closed the acquisition of Truck Utilities, Inc. (“Truck Utilities”), expanding Nesco’s presence in the Upper Midwest and bringing with it a young, underutilized fleet as well as upfit and service capabilities.
Merger with Capitol
On April 7, 2019, NESCO Holdings I, Inc. (which was the ultimate parent holding company prior to the transaction described below) (“Holdings I”) entered into a definitive agreement with Capitol, whereby the parties agreed to merge (the “Capitol Merger”), resulting in Nesco becoming a publicly listed company.
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Capitol was originally incorporated under the laws of the Cayman Islands on May 1, 2017 as a blank check company under the name Capitol Investment Corp. IV to acquire, through a merger, share exchange, asset acquisition, stock purchase, plan of arrangement, recapitalization, reorganization or other similar business combination, one or more businesses or entities.
On July 31, 2019, we completed the Capitol Merger whereby Holdings I, became our wholly owned subsidiary and the entity (along with its subsidiaries) through which we operate our business. In connection with the Capitol Merger, Capitol domesticated as a Delaware corporation and changed its name to Nesco Holdings, Inc.
Segments
Nesco operates in two segments:
Equipment Rental and Sales. The Equipment Rental and Sales (“ERS”) segment principally provides specialty equipment rental solutions to customers including electric utilities, telecom operators, railroad operators and related contractors. These customers use Nesco’s equipment in performing maintenance, repair, upgrade and installation services on critical infrastructure assets. Nesco also sells new and used equipment through this segment.
Parts, Tools and Accessories. The PTA segment principally offers customers sale and rental solutions for parts, tools and accessories to complement Nesco’s specialty equipment fleet. Our PTA segment also includes maintenance, repair and upfit services of new and used heavy-duty trucks and cranes. Customers include equipment rental customers, industry contractors and select distributors.

End-Market Overview
Nesco’s core end-markets are electric utility T&D, telecom and rail.

General End-Market Trends
Nesco’s end-markets have demonstrated limited correlation with GDP growth and resiliency through the recent economic cycle, with 0.52 correlation to GDP from 2001 to 2019 compared to the construction end-market’s 0.70 correlation with GDP in the same period. For additional information regarding the impact of COVID-19 on our business see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Markets and Related Industry Performance.”
The North American market has experienced a secular shift from equipment ownership to rental. Rental penetration of the broader equipment fleet in North America increased from 42% in 2009 to 57% in 2019 and is expected to reach 65% by the mid-2020s.1 In comparison, other developed markets recorded higher rental penetration rates in 2017, including Europe at 65%, Japan at 80% and the U.K. at 80%, demonstrating the future potential of the North American market.2 Nesco believes that customers’ growing preference for equipment rental is driven by several factors including the avoidance of significant capital outlay, improved asset utilization, reduced storage and maintenance, access to a wider range of modern productive equipment, dedicated customer care and operational efficiencies.

Electric Utility T&D End-Market
Maintaining safe and effective transmission and distribution lines is critical to national infrastructure, as they carry the electricity that powers the nation. Transmission lines carry high voltage electricity long distances, while distribution lines carry electricity from local transformers to houses and businesses. Nesco’s specialty equipment is used in the maintenance and repair of live lines and installation of new lines. Capital expenditure spend in the electric utility transmission and distribution end-market is approximately $70 billion annually.3 This spend is driven by a number of attractive dynamics, demonstrating that the U.S. is likely in the very early stages of a multi-year electric utility T&D spending cycle.
Aging and Underinvested Electric Utility T&D Infrastructure. Electricity delivery in the U.S. depends on an aging and complex patchwork system of power generation facilities, transmission grids, local distribution lines and substations. Most electric utility T&D lines were constructed in the 1950s and 1960s with a 50-year life expectancy and were not originally engineered to meet today’s load demands. Today, approximately 40% to 50% of existing electric utility T&D infrastructure is at or beyond its
1 ARA/IHS Global Insight and Morgan Stanley research.
2 Jefferies research.
3 Evercore research.
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engineered life4. Due in part to this aging infrastructure, costly electric emergency incidents and disturbances have increased more than sevenfold since 2000.5 Multiple costly fires have also been caused by aging and undermaintained transmission and distribution lines. The prevention of additional incidents associated with the continued operations of aging electric utility T&D infrastructure is expected to continue to drive increasing levels of maintenance and repair and replacement spend by utilities.
Changing Generation Landscape. The ongoing transition from coal to gas and renewables continues to drive changes in the generation landscape and transmission project development. Twenty-nine states and Washington, D.C. have adopted renewable portfolio standards, which mandate that a certain percentage — most states target 10% to 45% — of electricity sold by a utility must come from renewable sources.6 Approximately 786 gigawatts of new renewables and natural gas-fired generating capacity is expected to be added through 2050.7 As a result, significant spend for new transmission lines will be required to interconnect these new sources of power with the electrical grid.
Increased Focus on Decarbonization. With an increased societal focus on decarbonization, major fossil fuel driven sectors are shifting towards electrification. The electrification of vehicles, heating technology and industrial processes is expected to drive a significant increase in electricity demand and require a transmission investment of up to $90 billion by 2030.8
Increased Outsourcing by Utilities. Utilities are increasingly turning to specialized third-party contractors to fulfill construction and maintenance needs. This outsourcing trend is driven by the challenge of an aging workforce and desire to shift the management and responsibilities of non-core activities to external service providers. Outsourcing is a favorable trend for Nesco, given its rental penetration among electric utility T&D contractors who prefer to rent due to lower initial capital outlay, increased flexibility, improved asset utilization and productivity and significantly reduced storage and maintenance costs.
Nesco’s longstanding relationships, national scale and diverse fleet of specialty rental equipment makes Nesco a key supplier to many companies in the electric utility T&D end-market. Approximately 75.8% and 76.4% of Nesco’s revenue was generated from the electric utility T&D end-market for the twelve months ended December 31, 2020 and year ended December 31, 2019, respectively.
Telecom End-Market
Telecommunications infrastructure, including telecom cells, towers and wirelines, are the backbone of telephonic interaction and the transportation of mobile data. Nesco provides the specialty equipment required to maintain and install telecom cells, towers and communication lines. Construction spend on telecommunications infrastructure is approximately $80 billion annually.9 This spend is expected to grow throughout the next decade due largely to the advent of 5G technology.
Rapid technological advancements, including advanced digital and video service offerings, continue to increase demand for greater wireline and wireless network capacity and reliability. Data traffic is at an all-time high and is expected to substantially increase in the future. United States data traffic is expected to grow at a 21% Compound Annual Growth Rate (“CAGR”) from 2017 to 2022.10 In response to this demand, Verizon Wireless, AT&T Inc., T-Mobile US and Sprint Corporation (the “Big 4 U.S. Telecom Operators”) are planning to increase speed and capacity through the deployment of 5G technology.
5G technology will require the installation of numerous higher bandwidth small cells to “densify” wireless networks and enhance performance. This is because small cells only deliver coverage within approximately a quarter mile of their location, compared to approximately five miles for the existing 4G and predecessor macro cells.11 As a result, approximately 20 times more small cells will need to be installed in order to provide the same level of coverage as the existing macro cells.12
The spend required by the Big 4 U.S. Telecom Operators to deploy 5G technology is expected to grow at a 40% CAGR from 2019 to 2023, continuing into 2030 with total 2019 to 2030 spend of approximately $240 billion.13
Emerging wireless technologies are also driving significant wireline deployments. A complementary wireline investment cycle is underway to facilitate the deployment of fully converged wireless and wireline networks. Continued recurring maintenance will be required on existing wireline infrastructure and new 5G infrastructure.
4 Harris Williams research.
5 U.S. Department of Energy.
6 National Conference of State Legislatures.
7 EIA’s 2020 Annual Energy Outlook.
8 The Brattle Group.
9 Deutsche Bank research.
10 Cisco VNI Complete Forecast Highlights.
11 Deutsche Bank research.
12 Deutsche Bank research.
13 Morgan Stanley research.
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Approximately 13.6% and 12.9% of Nesco’s revenue was generated from the telecom end-market in both the twelve months ended December 31, 2020 and year ended December 31, 2019, respectively.
Rail End-Market
Freight and commuter rail are responsible for transporting products and people across the nation. Nesco’s rail mounted equipment is used for a variety of tasks including the installation of new rail and maintenance of the existing rail lines. The hi-rail equipment is utilized in projects for both installation and repair of track, electric lines, signal crossings and signs. The equipment is also often used for working on older infrastructure such as repairing bridges and terminals with more antiquated track and systems that are in need of upgrades with more modern systems like Positive Train Control (“PTC”) and others. The six largest public railroads spend more than $10 billion annually in capital expenditures, which is expected to continue to grow as freight demands increase.14 In addition to freight rail, spend on active commuter rail projects is significant with a growing pipeline.
Freight Rail. Freight rail, one of the most cost-effective, energy-efficient modes of transport, carries about 40% of intercity freight as measured by ton-miles, more than any other mode of transportation.15 Total U.S. freight movements are expected to rise from around 18.0 billion tons in 2015 to around 25.3 billion tons in 2045 — a 41% increase.16 Nesco’s North American customers are principally Class I railroads and related contractors. Class I railroads operate in 44 states across the U.S. and account for 94% of freight rail revenues in North America.17
Commuter Rail. Trends such as population growth, increasing urbanization, a focus on sustainability, environmental awareness and increasing highway congestion are expected to drive continued investment in commuter rail. Furthermore, as a result of years of insufficient funding, transit systems across the U.S. are struggling to cope with aging infrastructure, creating a massive and increasing backlog. The most recent federal estimate quantifies the backlog of projects required to attain a “state of good repair”, meaning public transit is repaired to an age within its average service life, at $90 billion — projected to grow to $122 billion by 2032.18 In August 2018, the U.S. Senate approved a fiscal-year 2019 appropriations bill that provides $16.1 billion for public transit and intercity passenger rail. Also in 2018, the Los Angeles County Metropolitan Transportation Authority’s board adopted the Twenty-Eight by ’28 plan, which calls for completing 28 transportation projects at an estimated cost of $26 billion ahead of the 2028 Summer Olympics and Paralympics in Los Angeles.
Approximately 7.3% and 5.2% of Nesco’s revenue was generated from the rail end-market in the twelve months ended December 31, 2020 and year ended December 31, 2019, respectively.
Other End-Markets
Approximately 3.2% and 5.5% of Nesco’s revenue was generated from other end-markets in the twelve months ended December 31, 2020 and year ended December 31, 2019, respectively, primarily from lighting and signage.

Product and Services
Equipment Rental and Sales
Nesco’s equipment rental fleet consists of more than 4,500 units, which management believes is among the largest specialty equipment rental fleets in North America. Nesco’s fleet consists of more than 250 product variations to serve the specialized needs of its customers including various terrain options such as truck mounted, rail mounted, track mounted and all-wheel drive. Nesco’s equipment can reach transmission lines and cell sites in excess of 200 feet in the air, dig to a depth of 60 feet to install telephone and power line poles, provide power line and fiber line pulling capacity of up to 40,000 pounds and reach remote and inaccessible areas for rail maintenance. A large percentage of Nesco’s fleet is insulated, which allows customers to safely work on live electric lines. Nesco’s equipment is regularly tested for safety, which includes regulation-mandated dielectric testing of all insulated units to ensure safe operations near electrical wiring. The majority of Nesco’s equipment can be used across a variety of end-markets and many of Nesco’s customers operate in multiple end-markets. Rental rates vary depending on product type, geography, demand and other factors.
Examples of Nesco’s equipment rental products include:
14 BMO research and Loop research.
15 Railroad of New York.
16 U.S. Department of Transportation.
17 Association of American Railroads.
18 U.S. Department of Transportation.
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Bucket Trucks
Trucks equipped with a bucket mounted on an insulated or non-insulated hydraulic lifting aerial device used to maintain and construct utility, rail or telecommunication lines.
Digger DerricksTrucks equipped with a boom and auger used to dig holes and set utility, rail and telephone poles.
Line EquipmentEquipment used to string new and re-conduct overhead utility, rail, telecom or cable lines including pole trailers, reel handling trailers and other material handling trailers.
CranesTrucks equipped with a boom crane used for large-scale transmission line repair and construction and in multiple rail applications for material handling and lifting.
Pressure DiggersTrucks equipped with a pressure drill used to dig holes for utility poles, structure bases and foundations through hard materials such as rock.
Underground EquipmentVariety of equipment used to place and remove underground utility and telecom lines without disruption to the surface.
Trucks/Miscellaneous EquipmentHi-rail equipment including hi-rail service trucks, grapples, roto-dumps, PTC trucks, etc.
In addition to equipment rentals, Nesco opportunistically sells used equipment from its own fleet and new equipment as a qualified dealer for 17 of its suppliers.
Parts, Tools and Accessories
Nesco’s parts, tools and accessories rental inventory consists of approximately 57,000 units, which management believes is the second largest PTA rental fleet in North America. Nesco also has a broad inventory of PTA available for purchase, including Nesco-manufactured stringing blocks and insulated tools as well as other Original Equipment Manufacturer (“OEM”) direct products. Nesco’s PTA products are a natural extension of Nesco’s core equipment rental offering and can be rented or purchased on an individual basis or in packaged specialty kits. A typical crew on assignment will require a collection of parts, tools and accessories of between $25,000 and $80,000 per crew.
The technical nature of certain PTA, such as insulated tools, requires periodic testing in a certified lab and expertise in specialized repairs, which Nesco provides at its test and repair facilities. Nesco is expanding its test and repair services nationwide and expects to increase its number of locations. These locations will serve as hubs for technical test and repair as well as PTA rental and sales.
Examples of Nesco’s PTA products and services include:
Stringing Blocks
Stringing dollies and accessories used to string powerline, telephone line (including fiber), or cable, above ground or underground in the new construction, rebuild or maintenance of the lines.
AugersTool used to dig holes for power, telephone or cable poles and also used to dig holes for structure bases, pilings and foundation supports.
Insulated Tools
Extension arms, temp arms, insulated ladders, etc., used to insulate and dielectrically protect workers and temporarily reposition powerlines for safe execution of tasks while working at height in live line circumstances.
Other PTACrimping tools and dies, pumps/motors, underground fiber laying tools and various other tools used in either utility, telecom or rail applications.
Test and Repair ServicesRegulatory requirements of not more than one year for specialized PTA including testing and inspections, design requirements, rubber testing, etc. and repair services for replacement parts.
Upfit and Repair ServicesCustomizing existing heavy-duty trucks by adding features, and repair services for replacement parts.

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Competitive Strengths
Nesco believes that the following competitive strengths have been instrumental in its success and position Nesco for continued growth:
Market Leader Across Compelling End-Markets. We believe Nesco is a leader in each of the electric utility T&D, telecom and rail end-markets that Nesco serves with a fleet of more than 4,500 units of specialty equipment. Nesco has established this position by leveraging its expansive fleet, national sales and service network, longstanding customer relationships and operational expertise. All three end-markets are in the early years of a secular upcycle that is expected to persist for years to come. Nesco is well positioned to benefit from this projected growth.
Comprehensive Product Offering. Nesco has a broad product offering, including both a wide array of specialized rental equipment and a diverse range of ancillary parts, tools and accessories. Nesco believes that its diverse and comprehensive offering make it a specialty equipment provider of choice for its customers. Nesco believes its “one stop shop” value proposition sets Nesco apart from its competitors and strengthens customer relationships.
Expansive Geographic Footprint. Nesco’s geographic presence spans the United States and Canada with a network of more than 60 locations, including third party facilities. Nesco’s strategically allocated fleet and wide-reaching service capabilities allow it to quickly respond to both equipment and service requests from customers. The Company’s broad reach also represents a competitive advantage in serving customers with nationwide operations who may prefer the convenience of interacting with a limited number of equipment providers.
Established Customer Relationships and Industry Expertise. Nesco has longstanding relationships with its large and diverse group of customers. The Company has built strong expertise of the equipment and product requirements in its end-markets and works closely with its customers to determine their needs by projects. Nesco’s top ten customers have an average of an 19.6-year tenure with the Company. These established relationships represent a competitive advantage for Nesco.
Strong Financial Profile. Robust growing demand for Nesco’s equipment and strong asset-level returns enabled the Company to achieve a 13% revenue CAGR and an 11% Adjusted EBITDA CAGR from 2016 to 2020. Following the consummation of the Capitol Merger, our financial flexibility was improved to pursue strategic growth opportunities through investments in the fleet, expansion of the PTA business and selective strategic activity, while still maintaining prudent capital management. Nesco will also benefit from the use of certain attractive tax attributes, including a federal net operating loss carryforwards of $363.0 million and a state net operating losses carryforward of nearly $223.2 million, as of December 31, 2020.

Growth Strategies
Nesco intends to maintain its leading market position and drive continued revenue and earnings growth by pursuing the following strategies:

Invest in Fleet to Meet Growing Excess Demand. As a result of increasing demand from customers and a lack of equipment availability in Nesco’s fleet, the Company had to turn away more than 6,000 rental opportunities from 2017 to 2019. Nesco had limited ability to invest in its fleet during this period due to capital structure constraints. The number of rental opportunities that Nesco was unable to service due to a lack of product availability grew from 810 rental opportunities in 2015 to 1,999 rental opportunities in 2019 indicating a growing need for increased capital investment. Nesco tracks information on rental opportunities, including the reasons for opportunities not serviced, in its customer relationship management system.
With a strengthened capital structure, Nesco made a significant investment in its fleet in 2019, growing the fleet size by approximately 700 additional units. Nesco expects to address the existing and growing end-market demand with a targeted investment in product lines that have demonstrated the greatest excess demand, highest utilization and shortest payback periods. Nesco’s investments in its fleet will allow the Company to leverage its highly attractive unit economics, with unlevered internal rates of return of approximately 30%.
Increase Customer Penetration in Parts, Tools and Accessories. Since its launch in 2015, the parts, tools and accessories business has demonstrated significant growth, indicating the strong appeal of the product offering to Nesco’s customer base. PTA revenue as a percentage of equipment rental revenue increased from 17% in 2018, when only two locations were opened with a limited product offering at each of those locations, to 22% in 2020, excluding Truck Utilities, after Nesco opened four full service locations and a warehouse facility and added certified test and repair services to all of is full service locations. Nesco believes
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PTA revenue as a percentage of equipment rental revenue demonstrates the level of cross-sell of the PTA segment into its existing customer base and believes there is ample opportunity to increase this percentage over time.
Following the acquisitions of Bethea and N&L in 2017 and 2018, Nesco became well positioned to expand the PTA segment. N&L and Bethea added manufacturing capabilities of key PTA products, including stringing blocks and hotline tools, both of which are long-lived assets that represent the largest share of PTA rentals. N&L also added certified test and repair capabilities. Management believes the integration of these two operations provides Nesco a cost and expertise advantage compared to competitors.
Nesco increased the number of PTA full-service locations and warehouses from two in 2018 to eight by the end of 2020. Each full-service location provides certified test and repair services and an expanded product offering of both insulated and non-insulated tools.
Selectively Pursue Strategic Acquisitions. Nesco has successfully sourced, executed and integrated seven strategic acquisitions since 2012. These seven accretive acquisitions have bolstered Nesco’s market leadership, fleet diversity, end market reach, product offerings and geographic footprint. The companies were acquired for weighted average EBITDA multiples ranging from 4.0x to 5.5x, including realized synergies and 100% or more of the expected synergies were realized in each acquisition, demonstrating management’s ability to effectively source, execute and integrate acquisitions. Management is actively evaluating additional acquisition opportunities to allow Nesco to leverage its national platform and act as a preferred consolidator in a fragmented industry with many regional and local players.
On December 3, 2020, Nesco announced entering into agreements to acquire Custom Truck. Nesco expects the combination with Custom Truck will create a leading, one-stop-shop provider of specialty rental equipment serving highly attractive and growing infrastructure end-markets, including transmission and distribution, the 5G revolution build-out and critical rail and other national infrastructure initiatives. With complementary business lines, customer bases and capabilities, the combination is expected to yield significant benefits from increased scale, breadth of product and service offerings and expanded geographic coverage. Following closing, we expect that the combined company will have a more attractive financial profile with significantly reduced leverage and enhanced liquidity providing flexibility to address anticipated demand in the large and growing addressable market in which it operates.
Customers Nesco serves a large base of more than 2,000 customers, including many of the top national and regional electric utilities, telecoms, railroads and related contractors.
Rental Contracts In excess of 95% of new rental orders use Nesco’s standard rental agreement, pre-negotiated master lease or national account agreements. The initial duration of Nesco’s rentals is 28 days or one month. Thereafter, the contract is automatically renewed in increments of 28 days or one month until the customer returns the equipment. Customers are billed on a monthly basis. The average rental duration of Nesco’s rental portfolio was approximately 13 months as of December 31, 2020 and December 31, 2019. In addition to the monthly rental rates, customers are responsible for the costs of delivery and return to Nesco’s service locations, preventative maintenance and consumables, and any loss or damage beyond normal wear and tear. Nesco’s rentals require customers to maintain liability and property insurance covering the units during the rental term and to indemnify Nesco from losses caused by the negligence of the customer, their employees or contractors. Nesco also provides rental customers the opportunity to enter into Rental Purchase Option (“RPO”) contracts, when requested, which allow the customer to earn credit towards the purchase of the equipment based on the rental payments made.
Fleet Management Nesco employs a disciplined and strategic approach to fleet management and optimization. The fleet management process includes the development of an annual plan for procurement, submission of purchase orders with key suppliers, monitoring and tracking maintenance and repair requirements and end of rental life decisions regarding remount or sale for each unit in the fleet. Nesco utilizes a third-party web-based fleet management information system for enhanced visibility into the transportation and service phases of the rental cycle, enabling it to effectively manage service cost, uptime and utilization. The system provides Nesco’s sales and operations teams with remote access to real-time information, enabling fleet optimization and improving responsiveness. Nesco actively tracks utilization for each unit in its fleet and type to forecast availability and inform fleet investment decisions, while sales representatives and management closely follow developing projects and remain in constant communication with customers to forecast their equipment needs.
Nesco’s dedication to maintaining its fleet in like-new condition provides customers with more reliable, readily available equipment. Nesco’s expansive geographic footprint enables it to quickly turn around newly off-rent equipment which supports high utilization levels. Fleet maintenance that occurs in a service facility is executed either at a Nesco operated service location, or a third-party outsourced location. Fleet maintenance that occurs in the field is executed either by a Nesco employed technician or third-party field service technician. Major overhaul and repair jobs are typically performed by Nesco’s highly skilled internal
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service team. Third-party service providers typically perform routine maintenance work, including standard checks as equipment comes off rent, but are equipped to handle larger overhaul and repair jobs as needed. This unique service network improves Nesco’s maintenance response time, equipment reliability and utilization levels while allowing it to minimize fixed costs.
As units approach the targeted end of rental lives, based upon expected increasing maintenance cost curves and customers’ preference for newer equipment, Nesco’s technical fleet management team will evaluate each individual unit for potential retention, remount on a new chassis or sale. Dynamic review of aged fleet to determine remount applicability on key product lines occurs as a first screen for each unit. Nesco will look to sell equipment if a unit is not suitable for remount. Nesco realizes attractive used equipment sale values, driven by Nesco’s significant purchasing power with suppliers, industry leading maintenance programs and lead times associated with new equipment orders. Generally, fleet sales are executed with long standing rental customers looking to satisfy permanent fleet needs.
Suppliers Nesco sources the specialty equipment and parts, tools and accessories it rents and sells from a limited number of middle market suppliers including Terex, S.D.P. Manufacturing and Versalift. Nesco is one of the largest customers for most of its key suppliers, making Nesco an important and highly strategic sales channel for OEMs. Management believes Nesco receives preferential pricing terms and production priority unavailable to smaller competitors. Nesco’s senior leadership maintains strong relationships with key suppliers. The Company maintains a resilient supply chain network by sourcing equipment product lines from multiple manufacturers, keeping the market competitive and eliminating risk of disruptions from a single supplier.
Competition Nesco’s competitors include local, regional and national companies within the electric utility T&D, telecom or rail end-markets. The national competitors within the specialty equipment rental segment include Altec Industries, Custom Truck One Source and Danella Companies. In most cases, these competitors focus on a primary activity other than rental such as manufacturing, truck upfitting or construction services. The only national competitor within the comparable parts, tools and accessories segment is Wagner-Smith Equipment Co. Outside of Nesco, Nesco believes that no national provider has a comprehensive offering of both specialty equipment and adjacent parts, tools and accessories. In addition to national competitors, there are numerous local or regional competitors that serve Nesco’s target end-markets. These smaller competitors lack the scope of fleet, sales coverage, service coverage and PTA offering that is a part of Nesco’s customer value proposition. On December 3, 2020, Nesco announced entering into agreements to acquire Custom Truck.

Sales and Marketing
Sales
Nesco operates with a nationwide direct sales team to address the specialized needs of its customer base and cultivate strategic partnerships with key customers in the industry. The more than 35-member sales organization is led by members of the senior management team including Presidents and Regional Vice Presidents. The average years of experience in the industry of our sales personnel is more than 20 years. Nesco’s field sales organization has developed “first-call” relationships with several of its largest customers while providing significant expertise in the technical nature of the equipment and projects.
For key national or regional accounts, Nesco employs a top to bottom sales approach with a focus on building partnerships at all levels within these key accounts and securing commitments to use Nesco as a preferred supplier. Strategic Account Managers are responsible for establishing and managing these relationships along with direct involvement from senior leadership to create more contact and touch points between the key decision makers and Nesco.
Nesco divides the remainder of its sales organization into regional go-to market teams for the equipment rental and PTA segments consisting of Territory Managers supported by Inside Rental Representatives and Assistants. Territory Managers are responsible for developing new relationships and maintaining communication with key decision makers at customer organizations and working with employees at both the corporate office and on individual job sites to ensure customer satisfaction. After a rental opportunity is generated, Inside Rental Representatives and Assistants serve in a support role by working directly with customers to finalize orders, schedule delivery, coordinate payment and handle inbound requests. This direct communication helps expedite future orders with an industry leading turnaround time of 30 minutes on rental equipment availability and rate quotes.

Marketing
Nesco utilizes targeted advertising, tradeshows, focused email distributions, a comprehensive equipment catalog and a company website for marketing its products and services. The rental catalog contains detailed technical information and diagrams for all Nesco products, while the website offers easy access to equipment specifications and rental listings. Nesco supplements these
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materials with ten to twelve major marketing publications annually. In addition to print and online publications, Nesco participates in national and select regional trade shows, which represent important customer touch points for the sales team to both approach new customers and maintain strong relationships with existing customers.

Facilities
Nesco headquarters is based in Fort Wayne, Indiana where it houses executive management, accounting, finance, information technology, human resources, marketing and procurement professionals. Nesco maintains a diverse geographic footprint in the U.S. and Canada, with 28 leased facilities operated by Nesco. All Nesco operated facilities are leased which enhances operational flexibility. Nesco operates 13 facilities for the servicing of its core equipment rental fleet. Additionally, the Company partners with more than 50 third-party service locations geographically disbursed throughout the U.S. and Canada. Nesco currently operates 7 PTA facilities in New Haven, IN, Poulsbo, WA, El Monte, CA, Yuma, AZ, Bluffton, IN, Wilkes Barre, PA, Alvarado, TX and Tallahassee, FL.

Intellectual Property
Nesco does not own or license any patents, patent applications or registered copyrights. Nesco owns a number of trademarks and domain names important to the business. Its material trademarks are registered or pending applications for registrations in the U.S. Patent and Trademark Office and various non-U.S. jurisdictions. The Company uses “Nesco” and “Truck Utilities” as unregistered trademarks and “Nesco Specialty Rentals”, “Nesco Rentals” and “Bethea” as registered trademarks. Additionally, pursuant to an agreement with Terex, Nesco has a revocable, royalty-free, limited license to use certain Terex trademarks to promote the sale and servicing of Terex products, subject to certain conditions of use. Nesco believes it owns or licenses, or could obtain on reasonable terms, any intellectual property rights needed to conduct its business.

Governmental Regulation
Nesco is subject to various governmental, including environmental, laws and regulations. Regulations affecting our operations principally relate to the licensing, permitting and inspection requirements for vehicles in our rental fleet. Additionally, we are subject to environmental regulations governing the discharge of pollutants into the air or water, the management, storage and disposal of, or exposure to, hazardous substances and wastes, the responsibility to investigate and clean up contamination, and occupational health and safety. The Company is not aware of any material instances of non-compliance with respect to environmental regulations.
Nesco is also subject to federal, state and local environmental laws and regulations with respect to the ownership and operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor and waste oils. If leakage or a spill occurs, it is possible that the resulting costs of cleanup, investigation and remediation, as well as any resulting fines. The U.S. Congress and other federal and state legislative and regulatory authorities in the U.S. and internationally have considered, and will likely continue to consider, numerous measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for our services could be affected, our vehicle, and/or other, costs could increase, and our business could be adversely affected.

Human Capital
As of December 31, 2020, Nesco had approximately 380 employees across North America. Nesco has a non-union workforce and believes that relations with its employees are excellent. Nesco’s operations are generally organized into regions. These regions are managed by regional vice presidents or the executive management team in Fort Wayne. Geographic territories include assigned customer relationship managers, service center managers and warehouse managers. Employees are provided with operational and budgetary guidelines in order to make day-to-day decisions that are aligned with Nesco’s strategic objectives. Nesco’s management team monitors operational performance using various performance benchmarks, as well as conducts detailed monthly operating reviews. All employees receive training and development, including safety training, sales and leadership training, equipment-related training from Nesco’s suppliers and online courses covering a variety of relevant subjects.
Recruitment, training, and retention of employees is essential to the Nesco’s continued growth and fulfillment of customer needs. Nesco pays competitive wages and benefits, and other incentives intended to encourage safety, retention, and long-term
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employment. Employees are encouraged to participate in the Nesco’s 401(k) program, and Company-sponsored health, life, and dental plans. Nesco believes these factors aid in attracting, recruiting, and retaining employees in a competitive market.

Legal Proceedings and Insurance
From time to time, Nesco is subject to various lawsuits, claims and legal proceedings, the vast majority of which arise out of the ordinary course of business. The nature of Nesco’s business is such that disputes related to vehicles and accidents occasionally arise. Nesco assesses these matters on a case-by-case basis as they arise and it establishes reserves as and if required, based on its assessment of exposure. Nesco has insurance policies to cover general liability and workers’ compensation related claims. Management believes that none of the existing legal matters will have a material adverse effect on Nesco’s business or financial condition.

Available information
This Annual Report on Form 10-K, as well as future quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to all of the foregoing reports, are made available free of charge on our Internet website (https://www.nescospecialty.com) as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The contents of our website are not incorporated by reference in this Annual Report. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that are filed by us at www.sec.gov.

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Item 1A.    Risk Factors
Any of the risk factors described in this Annual Report could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Investors should carefully consider the following risk factors, together with all of the other information included in this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as well as our other SEC filings. Additional risks and uncertainties not presently known or that we currently deem to be immaterial may also have adverse impact to our business operations. Should any of these risks materialize, our business, results of operations, financial condition and future prospects could be negatively impacted, which could in turn affect the trading value of our securities.
Risk Factor Summary
For a summary of risk factors, see our “Disclosure Regarding Forward-Looking Statements and Risk Factor Summary.”
Risks Related to the COVID-19 Pandemic or Another Pandemic
The financial condition and results of operations of our business may be adversely affected by the COVID-19 pandemic or other pandemics.
Health concerns arising from the outbreak of a health epidemic or pandemic, including COVID-19, may have an adverse effect on our business. Our business could be materially and adversely affected by the outbreak of a widespread health epidemic or pandemic, including arising from various strains of coronavirus, such as COVID-19, or avian flu, or swine flu, such as H1N1, particularly if located in regions where inputs for our supply chain are manufactured. COVID-19 has spread to a significant number of countries and has had a global economic impact on the financial markets and economies of many countries. Our financial condition and results of operations could be adversely affected to the extent that the United States and Canada impose widespread quarantines that may limit our ability to offer our products and services to our customers. As a result of the COVID-19 pandemic, states in which we operate imposed restrictions on travel and other measures designed to control the spread of COVID-19. Although we were deemed an essential business during the pandemic, our first priority remains the health and safety of our employees and their families. 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. Nesco was negatively impacted by the COVID-19 pandemic during second quarter of 2020 and continuing into the third quarter of 2020, particularly during July and August; however, we began to see a normal seasonal uptick take hold starting in late August and continuing to the end of the year. While Nesco has not yet reached the same levels as a year ago, and remains cautious about the continuing impact of the COVID-19 pandemic, the pandemic could lead to an extended disruption of economic activity and the impact on our consolidated results of operations, financial position and cash flows could be material. Furthermore, another significant outbreak of COVID-19 or another contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect our operating results. Any of the foregoing could materially and adversely affect our business, financial condition and results of operations.
Risks Related to Our Business and Operations
Demand for our products and services is cyclical and vulnerable to industry downturns and regional and national downturns, which may result from the current economic conditions.
The demand for specialty equipment in the electric utility T&D, telecommunications, rail and private non-residential construction industries has been, and will likely continue to be, cyclical in nature and vulnerable to downturns specific to the industry, as well as to the United States economy in general. If the general level of economic activity were to decrease below historic norms, or the time frames for updating the electricity, telecommunications, and rail infrastructure, or compliance periods for government-regulated reliability levels were extended, financing conditions for our industry could be adversely affected and our customers may delay commencement of work on, or cancel, new projects or maintenance activity on existing projects. A number of other factors, including changes in government infrastructure spending programs, outside of our control could adversely affect electric utility T&D, telecommunications and rail project spending, which could result in lower demand from our customers for our products and services. As a result, demand for our products and services could decline for extended periods, which could have a material adverse effect on our business, financial condition or results of operations. Additionally, each of electric utility T&D, telecommunication, rail and private non-residential construction industries may be affected at different times from market fluctuations specific to those industries.
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A worsening of economic conditions, in particular with respect to industrial activities, could cause weakness in our end markets and adversely affect our revenues and operating results.
Our revenue and operating results have historically fluctuated and may continue to fluctuate, which could result in a decline in our profitability and make it more difficult for us to grow our business.
Our revenue and operating results have historically varied from quarter to quarter. Periods of decline could result in an overall decline in profitability and make it more difficult for us grow our business. We expect our quarterly results to continue to fluctuate in the future due to a number of factors, including:
general economic conditions in the markets where we operate;
the cyclical nature of the industries in which our customers operate (electric utility T&D, telecommunications, rail and non-residential construction);
severe weather and seismic conditions temporarily affecting the regions where we operate;
changes in governmental regulations specific to the industries in which we operate;
changes in government spending for infrastructure projects;
the effectiveness of integrating acquired businesses and new start-up businesses;
the cost and availability of capital to make acquisitions;
the cost and availability of equipment to replenish and grow our rental fleet;
changes in demand for, or utilization of, our equipment or in the prices we charge due to changes in economic conditions, competition or other factors;
increases in interest rates and related increases in our interest expense and our debt service obligations;
currency risks and other risks associated with international operations;
an overcapacity of fleet in the equipment rental industry;
changes in the size of our rental fleet and/or in the rate at which we sell our used equipment; and
the impact of changes in tax regulation on the economic benefits of leasing equipment compared to buying equipment.
We are subject to competition, which may have a material adverse effect on our business by reducing our ability to increase or maintain revenues or profitability.
The specialty equipment rental industry, especially as it relates to rental companies, is highly competitive and highly fragmented. Many of the markets in which we operate are served by numerous competitors, ranging from national and regional equipment rental companies to small, independent businesses with a limited number of locations. We generally compete on the basis of availability, quality, reliability, delivery, price and customer services. Some of our competitors have significantly greater financial, marketing and other resources than we do, and may be able to reduce rental rates or sales prices. In addition, we cannot be certain that our existing or prospective customers will continue to rent equipment in the future.
The cost of new equipment that we purchase for use in our rental fleet or for our sales inventory may increase and therefore we may spend more for such equipment, and in some cases, we may not be able to procure equipment on a timely basis due to supplier constraints.
The cost of new equipment from manufacturers that we purchase for use in our rental fleet may increase as a result of factors beyond our control, such as inflation, higher interest rates and increased raw material costs, including increases in the cost of steel, which is a primary material used in most of the equipment we use. Such increases could materially impact our financial condition or results of operations in future periods if we are not able to pass such cost increases through to our customers in the form of higher prices. In addition, based on changing demands of our customers, the types of equipment we rent to our customers may become obsolete resulting in a negative impact to our financial condition based on the increased capital expenditures required to replace the obsolete equipment, and our potential inability to sell the obsolete equipment in the used equipment market. In addition, we may incur losses upon dispositions of our rental fleet due to residual value risk.
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If the average age of our fleet of rental equipment were to increase, the cost of maintaining our equipment, if not replaced within a certain period of time, will likely increase. The costs of maintenance may materially increase in the future. Any significant increase in such costs could have a material adverse effect on our business, financial condition or results of operations.
In addition, the market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
the market price for new equipment of a like kind;
wear and tear on the equipment relative to its age;
the time of year that it is sold (prices are generally higher during the construction seasons);
worldwide and domestic demands for used equipment;
the supply of used equipment on the market; and
general economic conditions.
We include in operating income the difference between the sales price and the depreciated value of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gains or losses realized upon disposal of equipment. We cannot assure that used equipment selling prices will not decline. Any significant decline in the selling prices for used equipment could have a material adverse effect on our business, financial condition or results of operations.
We may be unsuccessful at acquiring companies or at integrating companies that we acquire and, as a result, may not achieve expected benefits, which could have a material adverse effect on our business, financial condition or results of operations.
One of our growth strategies is to selectively pursue, on an opportunistic basis, acquisitions of additional companies that will allow us to continue to expand our service offering and geographic footprint. We expect to face competition for acquisition candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition prices. We may not be able to identify, acquire or profitably manage additional businesses or integrate successfully any acquired businesses without substantial costs, delays or other operational or financial problems. Further, acquisitions involve certain risks, including failure of the acquired business to achieve expected results, diversion of management’s attention, failure to retain key personnel of the acquired business and risks associated with unanticipated events or liabilities, some or all of which could have a material adverse effect on our business, financial condition or results of operations. In addition, we may not be able to obtain the necessary acquisition financing or we may have to increase our indebtedness in order to finance an acquisition. Furthermore, general economic conditions or unfavorable global capital and credit markets could affect the timing and extent to which we implement our strategy and limit our ability to successfully acquire new businesses. Our future business, financial condition and results of operations could suffer if we fail to successfully implement our acquisition strategy.
We might not be able to recruit and retain the experienced personnel we need to compete in our industries.
Our future success depends on our ability to attract, retain and motivate highly skilled personnel. Competition for personnel in our industry is intense and we must have talented personnel to succeed. Our ability to meet our performance goals depends upon the personal efforts and abilities of the principal members of our senior management, who provide strategic direction, develop the business, manage our operations, and maintain a cohesive and stable work environment. We cannot provide assurance that we will retain or successfully recruit senior executives, or that their services will remain available to us. We will evaluate our senior management capabilities on an ongoing basis in consideration of, among other things, our business strategy, changes to our capital structure, developments in our industry and markets and our ongoing financial performance and consider, where appropriate, supplementing, changing or otherwise enhancing our senior management team and operational and financial management capabilities in order to maximize our performance. Accordingly, our organizational structure and senior management team may change in the future. Changes to our senior management team could result in a material business interruption resulting from the loss of their services.
Our work force could become unionized in the future, which could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages.
We currently operate with no collective bargaining agreements with our workforce. Our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union, and unions may conduct organizing activities in this regard. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different
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from our current compensation and job assignment arrangements with our employees, these arrangements could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages. In addition, even if our managed operations remain non-union, our business may still be adversely affected by work stoppages at any of our suppliers that are unionized.
Disruptions in our information technology systems or a compromise of security with respect to our systems could adversely affect our operating results by limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, implement strategic initiatives.
Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruption of these systems or the failure of any of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. In addition, because our systems may contain information about individuals and businesses, our failure to maintain the security of the data we hold, whether the result of our own error or the malfeasance or errors of others, could harm our reputation or give rise to legal liabilities leading to lower revenues, increased costs and other potential material adverse effects on our results of operations.
We may experience threats to our data and systems, including malware and computer virus attacks. We have implemented a multi-layered approach to protect our data and systems from software attacks and conduct annual security awareness training sessions for all Nesco employees. Additionally, we support web filters in place that prevent users from accessing suspect sites and deploy endpoint protection on user computers in addition to multiple mail filters that are in place to help manage spam and phishing attempts. We rely on our security software layer vendors to stay current with threats, and if any of these breaches of security occur or there are new threats that are not covered by our current software, we could be required to expend additional capital and other resources, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, because our systems sometimes contain information about individuals and businesses, our failure to appropriately maintain the security of the data we hold, whether as a result of our own error or the malfeasance or errors of others, could lead to unauthorized release of confidential or otherwise protected information or corruption of data. Our failure to appropriately maintain the security of the data we hold could also violate applicable privacy, data security and other laws and subject us to lawsuits, fines and other means of regulatory enforcement. Complying with any new regulatory requirements could force us to incur substantial expenses or require us to change our business practices in a manner that could harm our business. Further, any compromise or breach of our systems could result in adverse publicity, harm our reputation, lead to claims against us and affect our relationships with our customers and employees, any of which could have a material adverse effect on our business. Certain of our software applications are also utilized by third parties who provide outsourced administrative functions, which may increase the risk of a cybersecurity incident. Although we maintain insurance coverage for various cybersecurity risks, there can be no guarantee that all costs or losses incurred will be fully insured.
We have observed a global increase in information technology security threats and more sophisticated cyber-attacks. Our business could be impacted by such disruptions, which in turn could pose a risk to the security of our systems and networks and the confidentiality, accessibility and integrity of information stored and transmitted on those systems and networks. We have adopted measures to address cyber-attacks and mitigate potential risks to our systems from these information technology-related disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, our systems and networks remain potentially vulnerable to attacks. Depending on their nature and scope, such attacks could potentially lead to the compromising of confidential information, misuse of our systems and networks, manipulation and destruction of data, misappropriation of assets or production stoppages and supply shortages, which in turn could adversely affect our operating results by limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, implement strategic initiatives.
If we are unable to obtain additional capital as required, we may be unable to fund the capital outlays required for the success of our business.
If the cash that we generate from our business, together with cash that we may borrow under any debt facilities we have or may enter into in the future is not sufficient to fund our capital requirements, we will require additional debt and/or equity financing. However, we may not succeed in obtaining the requisite additional financing or such financing may include terms that are not satisfactory to us. We may not be able to obtain additional debt financing as a result of prevailing interest rates or other factors, including the presence of covenants or other restrictions under the agreements governing our current and future debt, including debt facilities entered into in connection with the Debt Financing. In the event we seek to obtain equity financing, our stockholders may experience dilution as a result of the issuance of additional equity securities. This dilution may be significant depending upon the number of equity securities that we issue and the prices at which we issue such securities. If we are unable to obtain sufficient additional capital in the future, we
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may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment, growth plans and refinancing existing indebtedness.
Our business may be adversely affected if we are unable to renew our leases upon their expiration.
We lease from third parties a substantial majority of the square footage of the facilities utilized in our operations, including with respect to certain of our sales, service, warehousing and office locations. If we are unable to renew the existing leases on terms acceptable to us, we may be forced to relocate the affected operations. Alternatively, we may decide to relocate operations. Relocation could result in material disruptions to our business (including potential changes to our workforce if the new location does not allow for our existing workforce to service it) and our incurrence of significant capital and other expenses, which in turn could have an adverse effect on our financial condition, results of operations or cash flow.
Failure to keep pace with technological developments may adversely affect our operations.
We are engaged in an industry that will be affected by future technological developments. The introduction of products or processes utilizing new technologies could render our existing products or processes obsolete or unmarketable. Our success will depend upon our ability to develop and introduce new products, applications and processes that keep pace with technological developments and address increasingly sophisticated customer requirements in a timely and cost-effective basis. We may not be successful in identifying, developing and marketing new products, applications and processes and product or process enhancements. We may experience difficulties that could delay or prevent the successful development, introduction and marketing of new products, applications, processes or enhancements. Our products, applications or processes may not adequately meet the requirements of the marketplace and achieve market acceptance. Our financial condition, results of operations or cash flow could be materially and adversely affected if we were to incur delays in developing new products, applications, processes or enhancements, or if our products do not gain market acceptance.
Unfavorable conditions or disruptions in the capital and credit markets may adversely impact industry conditions and the availability of credit to our customers and suppliers, which may have a material adverse effect on our organic growth strategies, financial condition or results of operations.
Disruptions in the global capital and credit markets as a result of economic downturns, economic uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our customers’ ability to access capital. Additionally, unfavorable market conditions could impede the rate of economic recovery, which may depress demand for our products and services or make it more difficult for our customers to obtain financing and credit on reasonable terms. Also, more of our customers may be unable to meet their payment obligations to us, increasing delinquencies and credit losses. Moreover, our suppliers may be adversely impacted, causing disruption or delay of product availability.
In addition, if the financial institutions that commit to lend us money under any debt facilities we have entered into or may enter into in the future are adversely affected by the conditions of the capital and credit markets, they may become unable to fund borrowings under those commitments, which could have an adverse impact on our financial condition and our ability to borrow funds, if needed, for working capital, acquisitions, capital expenditures and other corporate purposes. These events could negatively impact our business, financial condition or results of operations.
We purchase a significant amount of our equipment from a limited number of manufacturers and suppliers. An adverse change in or termination of our relationships with any of those manufacturers or suppliers could result in our inability to obtain equipment on an adequate or timely basis, negatively impacting our relationships with our customers and having a material adverse effect on our business, financial condition or results of operations.
We purchase most of our equipment from a limited group of original equipment manufacturers (OEMs). We rely on these suppliers and manufacturers to provide us with equipment that we will either rent or sell to customers. To the extent we are unable to rely on these suppliers and manufacturers, due to an adverse change in our relationships with them, if they fail to continue operating as a going concern, if they significantly raise their costs, if a large amount of our rental equipment is subject to simultaneous recalls that would prevent us from obtaining such equipment for a significant period of time, or such suppliers or manufacturers simply are unable to supply us with equipment or needed replacement parts in a timely manner, our business could be adversely affected through higher costs or the resulting potential inability to provide products or services to our customers. We may experience delays in receiving equipment from some manufacturers due to factors beyond our control, including parts and material shortages, and, to the extent that we experience any such delays, our customer relationships could be damaged by the resulting inability to meet our customers’ needs. In addition, the payment terms we have negotiated with the suppliers that provide us with the majority of our equipment may not be available to us at a later time. Although we believe that we have alternative sources of supply for the rental equipment we purchase in
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each of our core product categories, termination of one or more of our relationships with any of these major suppliers could have a material adverse effect on our business, financial condition or results of operations.
We have, and in the future may have, operations outside the United States which are subject to changes in political or economic conditions and regulations in that country. Additionally, we may incur losses from currency conversions and have higher costs than it otherwise would have due to the need to comply with foreign laws.
Our operations in Canada and former operations in Mexico, as well as any future international operations, are subject to the risks normally associated with international operations. These include the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates and the need to comply with foreign laws and regulations, as well as U.S. laws and regulations applicable to our operations in foreign jurisdictions. The effect of these factors cannot be accurately predicted and may adversely impact us and our operations.
Nesco has had operations in Mexico. Nesco began commencing activities for the closure of its Mexican operations in 2019, although the closure is not yet complete. As a result, Nesco is subject to risks of doing business internationally, including changes in the economic strength of Mexico, difficulties in enforcing contractual obligations and intellectual property rights, burdens of complying with a wide variety of international and U.S. laws, economic sanctions and social, political and economic instability. Nesco must also comply with applicable anti-corruption and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to government officials. Nesco cannot guarantee compliance with all applicable laws, and violations could result in substantial fines, sanctions, civil or criminal penalties, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations and our consolidated performance. Factors that substantially affect the operations of our business in Mexico may have a material adverse effect on our overall results of operations.
The risks with respect to Mexico or other developing countries include, but are not limited to: nationalization of properties, military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy and high rates of inflation. We may be affected in varying degrees by government regulation with respect to price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation and opposition from non-governmental organizations. The effect of these factors cannot be accurately predicted and may adversely impact our operations.
In recent years, incidents of security disruptions throughout many regions of Mexico have increased. Drug-related gang activity has grown in Mexico. Certain incidents of violence have occurred in regions in which we operate and have resulted in the interruption of our operations, and these interruptions could increase in the future.
Our business relies to some extent on third-party contractors to provide us with various services to assist us with conducting our business, which could adversely affect our business upon the termination or disruption of our third-party contractor relationships.
Our operations rely on third-party contractors to provide us with timely services to assist us with conducting our business. Any material disruption, termination, or substandard provision of these services could adversely affect our brand, customer relationships, operating results and financial condition. In addition, if a third-party contractor relationship is terminated, we may be adversely affected if we are unable to enter into a similar agreement with alternate providers in a timely manner or on terms that we consider favorable. Further, in the event a third-party relationship is terminated and we are unable to enter into a similar relationship, we may not have the internal capabilities to perform such services in a cost-effective manner.
We may need to recognize impairment charges related to goodwill, identified intangible assets and fixed assets, which would negatively impact our operating results.
We have substantial balances of goodwill and identified intangible assets as a result of prior acquisitions. Any future acquisitions and/or mergers are estimated to result in additional goodwill and intangible assets. We are required to test goodwill and other intangible assets with an indefinite life for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment.
There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and fixed assets. If, as a result of a general economic slowdown, deterioration in one or more of the markets in which we operate or in our financial performance and/or future outlook, the estimated fair value of our long-lived assets decreases. We may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have a material adverse effect on our financial position and results of operations.
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If we are unable to collect on contracts with customers, our operating results would be adversely affected.
One of the reasons some of our customers choose to rent equipment rather than own equipment is the need to deploy their capital elsewhere. Some of our customers may have liquidity issues and ultimately may not be able to fulfill the terms of their rental agreements with us. If we are unable to manage credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time, our credit losses could increase above historical levels and our operating results would be adversely affected. Further, delinquencies and credit losses generally can be expected to increase during economic slowdowns or recessions.
We are exposed to various risks related to legal proceedings or claims that could adversely affect our operating results. The nature of our business exposes us to various liability claims, which may exceed the level of our insurance coverage and thereby not fully protect us.
We are a party to lawsuits in the normal course of our business. Litigation in general can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits brought against us, or legal actions that we may initiate, can often be expensive and time-consuming. Unfavorable outcomes from these claims and/or lawsuits could adversely affect our business, financial condition or results of operations, and we could incur substantial monetary liability and/or be required to change our business practices.
Our business exposes us to claims for personal injury, death or property damage resulting from the use of the equipment we rent or sell and from injuries caused in motor vehicle accidents in which our delivery and service personnel are involved and other employee related matters. Additionally, we could be subject to potential litigation associated with compliance with various laws and governmental regulations at the federal, state or local levels, such as those relating to the protection of persons with disabilities, employment, health, safety, security and other regulations under which we operate.
We carry comprehensive insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims made during the respective policy periods. However, we may be exposed to multiple claims that do not exceed our deductibles and, as a result, we could incur significant out-of-pocket costs that could adversely affect our financial condition and results of operations. In addition, the cost of such insurance policies may increase significantly upon renewal of those policies as a result of general rate increases for the type of insurance we carry, as well as our historical experience and experience in our industry. Our existing or future claims may exceed the coverage level of our insurance, and such insurance may not continue to be available on economically reasonable terms. If we are required to pay significantly higher premiums for insurance, are not able to maintain insurance coverage at affordable rates, or if we must pay amounts in excess of claims covered by our insurance, or if we are exposed to multiple claims that do not exceed our deductibles, we could experience higher costs that could adversely affect our financial condition and results of operations.
Federal and state legislative and regulatory developments that we believe should encourage electric power transmission infrastructure spending may fail to result in increased demand for our equipment.
In recent years, federal and state legislation has been passed and resulting regulations have been adopted that could significantly increase spending on electric power transmission infrastructure, including the Energy Act of 2005 and the American Recovery and Reinvestment Act of 2009 (the “ARRA”). However, much fiscal, regulatory and other uncertainty remains as to the impact this legislation and related regulations will ultimately have on the demand for our rental equipment and, as such, the effect of these regulations is uncertain and may not result in increased spending on the electric power transmission infrastructure. Continued uncertainty regarding the implementation of the Energy Act of 2005 and ARRA may result in slower growth in demand for our rental equipment.
Renewable energy initiatives, including ARRA, may not lead to increased demand for our equipment. In addition, we cannot predict when programs under ARRA will be implemented or the timing and scope of any investments to be made under these programs, particularly in light of capital constraints on potential developers of these projects. In addition, some of these programs have expired, which may affect the economic feasibility of future projects. Investments for renewable energy and electric power infrastructure under ARRA may not occur, may be less than anticipated or may be delayed, or any resulting contracts may not be awarded to us, any of which could negatively impact demand for our equipment.
To service our indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors, some of which are beyond our control. An inability to service our indebtedness could lead to a default under the indenture that governs
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the senior secured notes or the credit agreement that governs our asset-based revolving credit facility, which may result in an acceleration of our indebtedness.
To service our indebtedness, we require a significant amount of cash. Our ability to pay interest and principal in the future on our indebtedness and to fund our capital expenditures and acquisitions will depend upon our future operating performance and the availability of refinancing indebtedness, which will be affected by prevailing economic conditions, the availability of capital, as well as financial, business and other factors, some of which are beyond our control.
Our future cash flow may not be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. These actions may not be effected on a timely basis or on satisfactory terms or at all, and these actions may not enable us to continue to satisfy our capital requirements. In addition, our debt agreements, including the indenture that governs the senior secured notes and the credit agreement that governs our asset-based revolving credit facility, may contain restrictive covenants prohibiting us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.
The indenture and the credit agreement that governs our asset-based revolving credit facility impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities.
The indenture that governs the senior secured notes and the credit agreement that governs our asset-based revolving credit facility impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
incur additional indebtedness;
pay dividends or certain other distributions on our capital stock or repurchase our capital stock;
make certain investments or other restricted payments;
place restrictions on the ability of subsidiaries to pay dividends or make other payments to us;
engage in transactions with stockholders or affiliates;
sell certain assets or merge with or into other companies, reorganize our companies, or suspend or go out of a substantial portion of our business;
prepay or modify the terms of our other indebtedness;
guarantee indebtedness; and
create liens.
These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. A failure to comply with the restrictions in the indenture that governs the senior secured notes and the credit agreement that governs our asset-based revolving credit facility could result in an event of default under such instruments or credit agreement. Our future operating results may not be sufficient to enable compliance with the covenants in such indenture or credit agreement or to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any accelerated payments, including those under the notes and under our asset-based revolving credit facility. Also, we may not be able to obtain new financing. Even if we were able to obtain new financing, we cannot guarantee that the new financing will be on commercially reasonable terms or terms that are acceptable to us. If we default on our indebtedness, our business, financial condition or results of operations could be materially and adversely affected. If we fail to maintain compliance with these covenants in the future, we can provide no assurance that we will be able to obtain waivers from the lenders and/or amend the covenants. We anticipate that substantially similar restrictions will be imposed pursuant to the documentation governing the indebtedness incurred in connection with the Debt Financing.
Risks Related to Government Regulation
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Changes to international trade agreements, tariffs, import and excise duties, taxes or other governmental rules and regulations could adversely affect our business and results of operations.
The U.S. federal government or other governmental bodies may propose changes to international trade agreements, tariffs, taxes and other government rules and regulations. Any changes to the international trading system, or the emergence or escalation of an international trade dispute, could significantly impact our business and have a negative impact on our revenues. In addition, the U.S. and other countries from which materials used heavily in the industries that we serve may impose import and excise duties, tariffs and other taxes on products in varying amounts. Any significant increases in import and excise duties or other taxes on products that ultimately impact and are used in the industries in which we operate could have a material adverse effect on our business, liquidity, financial condition and/or results of operations.
In the United States and globally, international trade policy is undergoing review and revision, introducing significant uncertainty with respect to future trade regulations and existing international trade agreements. These major revisions include the negotiation of the United States-Mexico-Canada Agreement (“USMCA”) (in Canada, known as the Canada-United States-Mexico Agreement (“CUSMA”)), which is intended to supersede the North American Free Trade Agreement (“NAFTA”). USMCA/CUSMA has been signed but not ratified by the legislature of each of the United States, Canada and Mexico. NAFTA provides protection against tariffs, duties and other charges or fees and assures access by the signatories. The impact of USMCA/CUSMA, if ratified, on the industries in which we operate is uncertain but could have a material adverse effect on our business, financial condition or results of operations.
We are subject to, and could be adversely affected by, safety and environmental requirements, which could force us to increase significant capital and other operational costs and may subject us to unanticipated liabilities.
Our operations are subject to federal, state and local occupational health and safety and environmental laws and regulations. We are subject to potential civil or criminal fines or penalties if we fail to comply with any of these requirements. We have made and will continue to make capital and other expenditures in order to comply with these laws and regulations. However, the requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these requirements will change or that liabilities will arise in the future in a manner that could have a material adverse effect on our business, financial condition or results of operations.
We have made, and will continue to make, expenditures to comply with environmental, health and safety laws and regulations, including, among others, expenditures for the investigation and cleanup of contamination at or emanating from currently and formerly owned and leased properties, as well as contamination at other locations at which our wastes have reportedly been identified. Some of these laws impose strict, and in certain circumstances joint and several liability on current and former owners or operators of contaminated sites and other potentially responsible parties for investigation, remediation and other costs.
Environmental laws and regulations and the costs of complying with them, or any liability or obligation imposed under them, could materially adversely affect our results of operations, financial condition, liquidity and cash flows.
We are subject to federal, state and local environmental laws and regulations with respect to the ownership and operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor and waste oils. We can provide no assurance that our tanks will remain free from leaks at all times or that the use of these tanks will not result in significant spills or leakage. If leakage or a spill occurs, it is possible that the resulting costs of cleanup, investigation and remediation, as well as any resulting fines, could be significant. We can provide no assurance that compliance with existing or future environmental laws and regulations will not require material expenditures by us or otherwise have a material adverse effect on our consolidated financial condition, results of operations, liquidity or cash flows.
The U.S. Congress and other federal and state legislative and regulatory authorities in the U.S. and internationally have considered, and will likely continue to consider, numerous measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for our services could be affected, our vehicle, and/or other, costs could increase, and our business could be adversely affected.
We have operations, and rent equipment, throughout the United States, which exposes us to multiple state and local regulations, in addition to federal law and requirements as a government contractor. Changes in applicable law, tax regimes, regulations or requirements, or our material failure to comply with any of them, can increase our costs and have other negative impacts on our business.
We are geographically diverse and operate in multiple leased facilities and maintain access to a number of third-party service locations geographically dispersed across the U.S. and Canada, which exposes us to a host of different state and local regulations, in addition to
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federal law and regulatory requirements. These laws and requirements address multiple aspects of our operations, such as state and local taxes, worker safety, consumer rights, privacy, employee benefits and more, and there are often different requirements in different jurisdictions. Changes in these requirements, or any material failure by us or our branches to comply with them, can increase our costs, affect our reputation, limit our business, occupy management time and attention and otherwise impact our operations in adverse ways.
Risks Related to Our Securities
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of common stock.
We currently expect that securities research analysts will establish and publish their own periodic projections for our business. However, there is no assurance that they will in fact publish reports on our company. Any projections included in research analyst reports may vary widely and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline. We can provide no assurance that any research analysts will cover our securities and if no analysts commence coverage of us, the trading price and volume for our common stock could be adversely affected.
We do not intend to pay dividends on our common shares and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our common shares for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth and potentially reduce our indebtedness. Therefore, you are not likely to receive any dividends on your common shares for the foreseeable future and the success of an investment in our common shares will depend upon any future appreciation in their value. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders have purchased their shares. The payment of future dividends, however, will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. The credit agreement that governs our asset-based revolving credit facility and the indenture governing our existing senior secured notes (the “Indenture”) also effectively limit our ability to pay dividends. As a consequence of these limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common shares.
We are currently an emerging growth company within the meaning of the Securities Act. As an emerging growth company, our securities may be less attractive to investors and may make it more difficult to compare our performance with other public companies. To the extent we have taken advantage of certain exemptions from disclosure requirements available to emerging growth companies, including use of the extended the transition period for complying with new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. We anticipate losing our emerging growth company status in 2021 should the transactions described in this annual report, be consummated.
We are currently an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business Startups Act (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access to certain information they may deem important. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different
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application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time non-public companies adopt the new or revised standard. For a description of applicable new or revised financial accounting standards, refer to Note 2, Summary of Significant Accounting Polices, to our audited consolidated financial statements included in this annual report. This may make comparison of our financial statements with another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accountant standards used.
As a result of the pending acquisition of Custom Truck and the related transactions, we currently anticipate that we will lose our “emerging growth company” status. A company continues to be an emerging growth company until one of the following occurs: (i) annual revenue exceeds $1.07 billion; (ii) non-convertible debt of more than $1.0 billion is issued in the past three years; or, (iii) the company becomes a large accelerated filer, as defined in Exchange Act Rule 12b-2. As a result of losing such status, we will no longer be able to take advantage of certain exemptions from reporting, and we will also be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will incur additional expenses in connection with such compliance and our management will need to devote additional time and effort to implement and comply with such requirements.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act, increases costs and distracts management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we are subject to laws, regulations and requirements, certain corporate governance provisions, related regulations of the SEC and the requirements of the NYSE. We rely on a small number of key personnel to manage compliance with these regulations, and compliance with such regulations causes additional costs to our operations and diverts management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal control over financial reporting, accounting systems disclosure controls and procedures, auditing functions and other procedures related to public reporting in order to meet our reporting obligations as a public company.
Nesco may identify material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of their financial statements or cause a failure to meet their reporting obligations.
Effective internal controls are necessary for Nesco to provide reliable financial reports and prevent fraud. If we identify any material weaknesses that may exist, the accuracy and timing of its financial reporting may be adversely affected. Additionally, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports as well as applicable stock exchange listing requirements. We may be unable to prevent fraud, investors may lose confidence in its financial reporting, and the stock price may also decline. Nesco’s reporting obligations as a public company could place a significant strain on its management, operational and financial resources and systems for the foreseeable future and may cause it to fail to timely achieve and maintain the adequacy of its internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. As a result, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Nesco can provide no assurance that the measures they are currently undertaking or may take in the future will be sufficient to maintain effective internal controls or to avoid potential future deficiencies in internal control, including material weaknesses.
Neither management of Nesco, nor an independent accounting firm has ever performed an evaluation of Nesco’s internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had Nesco or its independent accounting firm performed an evaluation of internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, material weaknesses may have been identified. Nesco’s independent registered public accounting firm is not required to attest to and report on the effectiveness of internal control over financial reporting until after it is no longer an emerging growth company, which we expect will occur in 2021 as a result of the pending transactions described in this annual report. At that time, the independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which internal controls over financial reporting are documented, designed, or operating. Failing to maintain effective disclosure controls and internal controls over financial reporting could have a material and adverse effect on our business and operating results and could cause a decline in the price of their securities.
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We are controlled by affiliates of ECP, whose interests in our business may be different than yours.
As of December 31, 2020, ECP owned more than 50% of our common stock and is able to control our affairs in all cases. Pursuant to the Stockholders’ Agreement, four of the members of our board of directors have been designated by ECP. So long as ECP continues to own a majority of our common shares, they will have the ability to control the vote in any election of directors and will have the ability to prevent any transaction that requires shareholder approval regardless of whether other shareholders believe the transaction is in our best interests. Additionally, pursuant to our principal stockholders agreement, ECP will continue to have the ability to designate four of our directors until it owns less than 45% of the outstanding common shares. In any of these matters, the interests of ECP or other controlling shareholders may differ from or conflict with the interests of holders of our common stock or other securities. Moreover, this concentration of share ownership may also adversely affect the trading price for our common shares to the extent investors perceive disadvantages in owning shares of a company with a controlling shareholder. In addition, our Sponsors are in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are our significant existing or potential suppliers or customers. Our significant shareholders may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.
We may redeem unexpired Warrants prior to their exercise at a time that is disadvantageous to the holders of our Warrants, thereby making such Warrants worthless.
We have the ability to redeem outstanding warrants (other than the certain private Warrants issued to affiliates) at any time after they become exercisable and prior to their expiration, at $0.01 per Warrant, if the last reported sales price (or the closing bid price of our shares of common stock in the event the shares of common stock are not traded on any specific trading day) of the shares of common stock equals or exceeds $18 per share for each of 20 trading days within any 30-trading day period ending on the third business day prior to the date we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the warrants, we have an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a warrant holder: (i) to exercise Warrants and pay the exercise price therefore at a time when it may be disadvantageous for holders of our Warrants to do so, (ii) to sell Warrants at the then-current market price when holders might otherwise wish to hold their Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, will be substantially less than the market value of such Warrants.
We may issue additional shares of our common stock or other equity securities without shareholder approval, which would dilute shareholder ownership interests and may depress the market price of our common stock.
ECP has the right to receive: (1) up to an additional 1,800,000 shares of common stock for a period of five years following the closing of the Transactions (the “Closing”), in increments of 900,000 shares, if (x) the trading price of the common stock exceeds $13.00 per share or $16.00 per share for any 20 trading days during a 30 consecutive trading day period or (y) a sale transaction of Nesco occurs in which the consideration paid per share to holders of common stock of Nesco exceeds $13.00 per share or $16.00 per share, and (2) an additional 1,651,798 shares of common stock if during the seven-year period following the Closing, the trading price of common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of Nesco occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
Our issuance of additional shares of common stock or other equity securities of equal or senior rank would have the following effects:
our existing shareholders’ proportionate ownership interest will decrease;
the amount of cash available per share, including for payment of dividends in the future, may decrease;
the relative voting strength of each previously outstanding common share may be diminished; and
the market price of our shares of common stock may decline.
Risks Related to the Pending Acquisition
Any delay in completing the Acquisition may reduce or eliminate the benefits expected to be achieved thereunder.
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In addition to the required regulatory clearances, the Acquisition is subject to a number of other conditions beyond the control of the parties to the transaction that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the completion of the Acquisition for a significant period of time or prevent it from occurring. Any delay in completing the Acquisition could cause the combined company not to realize, or to be delayed in realizing, some or all of the synergies that we expect to achieve if the Acquisition is successfully completed within its expected time frame.
Uncertainties associated with the Acquisition may cause a loss of management personnel and other key employees which could adversely affect the future business and operations of the combined company.
Nesco and Custom Truck are dependent on the experience and industry knowledge of their respective officers and other key employees to execute their business plans. The combined company’s success after the Acquisition will depend in part upon the ability of Nesco and Custom Truck to retain key management and other key employees. Current and prospective employees of Nesco and Custom Truck may experience uncertainty about their roles within the combined company following the Acquisition, which may have an adverse effect on the ability of each of Nesco and Custom Truck to attract or retain key management and other key employees. Accordingly, no assurance can be given that the combined company will be able to attract or retain key management and other key employees of Nesco and Custom Truck to the same extent that Nesco and Custom Truck have previously been able to attract or retain their own employees. A failure by Nesco, Custom Truck or, following the completion of the Acquisition, the combined company to attract, retain and motivate key management and other key employees during the period prior to or after the completion of the Acquisition could have a negative impact on their respective businesses.
Failure to complete the Acquisition could negatively impact the stock price and the future business and financial results of Nesco.
Completion of the Acquisition is not assured and is subject to risks, including the risks that approval of the Acquisition by governmental entities will not be obtained or that certain other closing conditions will not be satisfied. If the Acquisition is not completed, the ongoing businesses and financial results of Nesco may be adversely affected and Nesco will be subject to several risks, including the following:
having to pay certain significant costs relating to the Acquisition without receiving the benefits of the Acquisition, including, in certain circumstances, a termination fee of $10 million;
having to pay certain significant costs relating to the issuance of common stock in connection with the Acquisition without receiving the benefits of such issuance, including, in certain circumstances, a termination fee of $15.25 million;
the potential loss of key personnel during the pendency of the Acquisition as employees may experience uncertainty about their future roles with the combined company;
Nesco will have been subject to certain restrictions on the conduct of its business which may have prevented them from making certain acquisitions or dispositions or pursuing certain business opportunities while the Acquisition was pending; and
having had the focus management on the Acquisition instead of on pursuing other opportunities that could have been beneficial to Nesco.
If the Acquisition is not completed, Nesco cannot provide assurance that these risks will not materialize and will not materially adversely affect the business, financial results and stock prices of Nesco.
The Investment Agreement contains provisions that could discourage a potential competing transaction involving Nesco.
The Investment Agreement contains a “no shop” provision that, subject to limited exceptions, restricts Nesco’s ability to solicit, initiate or encourage and induce, or take any other action designed to facilitate competing third-party proposals relating to a merger, reorganization or consolidation of the Company or an acquisition of a significant portion of the Company’s stock or assets. In addition, Platinum generally has an opportunity to offer to modify the terms of the issuance of common stock related to the Acquisition in response to any competing acquisition proposals before the Board may withdraw or qualify its recommendation with respect to the Acquisition.
These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of Nesco from considering or proposing that acquisition, including as a result of the added expense of the termination fees that may become payable in certain circumstances.
Nesco’s executive officers and directors have certain interests in the Acquisition that may be different from, or in addition to, the interests of Nesco stockholders generally.
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Nesco’s executive officers and directors have certain interests in the Acquisition that may be different from, or in addition to, the interests of Nesco stockholders generally. Nesco’s executive officers negotiated the terms of the Purchase Agreement and the Investment Agreement. The executive officers of Nesco have arrangements with Nesco that provide for severance benefits if their employment is terminated under certain circumstances following the completion of the Acquisition. There will be accelerated vesting of equity awards held by some or all of our non-employee directors who will not continue as directors of the combined company after the Acquisition. Nesco may act before completion of the Acquisition to amend certain terms of equity awards held by employees and to enter into certain compensatory arrangements related to the Acquisition. Executive officers and directors also have rights to indemnification and directors’ and officers’ liability insurance that will survive completion of the Acquisition.
At the closing of the Acquisition, the board of directors will be reconstituted to include up to eleven directors, with up to seven directors designated by Platinum, one director designated by each of ECP, Capitol and Blackstone and the chief executive officer of Nesco.
The Nesco board of directors was aware of these interests at the time it approved the Acquisition. These interests, including the continued employment of certain executive officers of Nesco by the combined company, the continued positions of certain directors of Nesco as directors of the combined company and the indemnification of former directors and officers by the combined company, may cause Nesco’s directors and executive officers to view the Acquisition proposal differently and more favorably than you may view it.
Subsequent to the completion of our Acquisition, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.
Although we have conducted due diligence in connection with the Acquisition, we can provide no assurance that this diligence will surface all material issues that may arise as a result of the consummation of the Acquisition. As a result of these factors, we may be forced to later write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the post-combination company or its securities.
Nesco will incur significant transaction and transition costs in connection with the Acquisition.
Nesco expects to incur significant, non-recurring costs in connection with consummating the Acquisition. Nesco may also incur additional costs to retain key employees. In general, all expenses incurred in connection with the Acquisition, including all legal, accounting, consulting, investment banking and other fees, expenses and costs, will be paid by the party incurring such expense.
Integration of the Nesco and Custom Truck businesses may be difficult, costly and time-consuming, and the anticipated benefits and cost savings of the Acquisition may not be realized or may be less than expected.
Even if the Acquisition is completed, our ability to realize the anticipated benefits of the Acquisition will depend, to a large extent, on our ability to integrate the two businesses. The combination of two independent businesses is a complex, costly and time-consuming process and we can provide no assurance that we will be able to successfully integrate Nesco and Custom Truck or, if the integration is successfully accomplished, that the integration will not be more costly or take longer than presently contemplated. If we cannot successfully integrate and manage the two businesses within a reasonable time following the Acquisition, we may not be able to realize the potential and anticipated benefits of the Acquisition, which could have a material adverse effect on our business, financial condition and operating results.
Our ability to realize the expected synergies and benefits of the Acquisition is subject to a number of risks and uncertainties, many of which are outside of our control. These risks and uncertainties could adversely impact our business, financial condition and operating results, and include, among other things:
our ability to complete the timely integration of operations and systems, organizations, standards, controls, procedures, policies and technologies, as well as the harmonization of differences in the business cultures of Nesco and Custom Truck;
our ability to minimize the diversion of management attention from ongoing business concerns during the integration process;
our ability to retain the service of key management and other key personnel;
our ability to preserve customer, supplier and other important relationships and resolve potential conflicts that may arise;
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the risk that certain customers and suppliers will opt to discontinue business with the combined business or exercise their right to terminate their agreements as a result of the Acquisition pursuant to change of control provisions in their agreements or otherwise;
the risk that Custom Truck may have liabilities that we failed to or were unable to discover in the course of performing due diligence;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the combination; and
difficulties in managing the expanded operations of a significantly larger and more complex combined business.
We may encounter additional integration-related costs, fail to realize all of the benefits anticipated in the Acquisition or be subject to other factors that adversely affect preliminary estimates. In addition, even if the operations of the two businesses are integrated successfully, the full benefits of the Acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that we expect. The occurrence of any of these events, individually or in combination, could have a material adverse effect on the combined business’ financial condition and operating results.
Our public stockholders will experience dilution as a consequence of the Acquisition. Having a minority share position may reduce the influence that our current stockholders have on the management of the post-combination company.
The issuance of common stock in connection with the Acquisition will dilute the equity interest of our existing stockholders and may adversely affect prevailing market prices for our public shares and/or public warrants.
It is anticipated that, upon completion of the Acquisition, the Company’s public stockholders (other than the Platinum, ECP, Capitol and Blackstone but including purchasers in the Supplemental Equity Offering) will retain an ownership interest of approximately 22% in the post-combination company. Additionally, following the completion of the Acquisition, and subject to the approval of the applicable award agreements by the post-Acquisition board of directors, Nesco may alter or supplement existing equity compensation plans. In connection with the Issuance, it is expected that (a) pursuant to the Investment Agreement (i) between 140,000,000 and 152,600,000 shares of common stock, at a purchase price of $5.00 per share will be issued, and (ii) up to an additional 20,000,000 shares of common stock, at a purchase price of $5.00 per share, will be issued in the event the backstop to the Supplemental Equity Financing is utilized, in each case, to Platinum; (b) pursuant to the Investment Agreement, purchase shares of common stock in (i) a private placement, (ii) a registered public offering and/or (iii) a rights offering to its stockholders, in each case, for the aggregate amount of up to $200.0 million (for the avoidance of doubt, including the Supplemental Equity Financing); and (c) pursuant to the rollover of certain equity interests of Blackstone and certain members of the management of Custom Truck whereby the sellers will receive an aggregate of 20,000,000 shares of common stock, at a purchase price of $5.00 per share.
Resales of the shares issued pursuant to the issuance of securities undertaken in connection with the Acquisition could depress the market price of Nesco’s common stock.
The shares issued pursuant to the transactions will be subject to registration rights. Following the effectiveness of the registration statement that we have agreed to file pursuant to such registration rights such shares will be freely tradable. We also expect that such shares will be subject to potential resale pursuant to Rule 144. Resales of such shares following the expiration of any applicable lock-up agreement could depress the market price of our common stock.

Item 1B.    Unresolved Staff Comments
None.

Item 2.    Properties
Nesco headquarters is based in Fort Wayne, IN where it houses executive management, accounting, finance, information technology, human resources, marketing and procurement professionals. Nesco maintains a diverse geographic footprint in the U.S. and Canada, with 12 equipment rental and service locations. These facilities are service centers for the maintenance and support of our equipment, and depending on the location may include separate areas for displaying and storage of equipment and parts. All Nesco operated facilities are leased which enhances operational flexibility. Additionally, the Company partners with more than 50 third-party service locations geographically disbursed throughout the U.S. and Canada. Nesco currently operates PTA facilities in Bluffton, IN, Poulsbo, WA, Tallahassee, FL, Alvarado, TX, New Haven, IN, Yuma, AZ and El Monte, CA.
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The following table sets forth the location and use of our principal properties:
LocationUseType
6714 Inverness Way, Fort Wayne, INHeadquartersOffice
655 E. 20th St., Yuma, AZService CenterFull service
705 W. 62nd Avenue, Denver, COService CenterEquipment rental
300 Johnson St., Wilkes Barre, PAService CenterEquipment rental
4729 Capital Circle NW, Tallahassee, FLService CenterEquipment rental
3156 E. SR 24, Bluffton, INService CenterEquipment rental and warehouse
1400 E. HWY 67, Alvarado, TXService CenterEquipment rental and full service
1032 Black Gold Rd., Bakersfield, CAService CenterEquipment rental
10808 Weaver Avenue S., El Monte, CAService CenterWarehouse
5734 Minder Rd, Poulsbo, WAService CenterFull service
11139 W. Becher St., West Allis, WIService CenterEquipment rental
5901 NE Minder Rd., Poulsbo, WAService CenterFull service
7413 SR 930 E., Fort Wayne, INService CenterFull service
1523 E. 29th St., Marshfield, WIService CenterOffice
4755 D1 Capital Circle NW, Tallahassee, FLService CenterFull service
26109 & 26119 United Rd., Kingston, WAService CenterFull service
2331 S. Baker Avenue, Ontario, CAService CenterEquipment rental
99 Tanguay Avenue, Nashua, NHService CenterEquipment rental
2370 English St., St. Paul, MNService CenterEquipment rental
2770 5th Ave S., Fargo, NDService CenterEquipment rental
5320 Kansas Ave., Kansas City, KSService CenterEquipment rental
Total square footage under lease is approximately 300,000 with expiration dates through 2030. We believe that all of our properties are in good operating condition and are suitable to adequately meet our current needs.

Item 3.     Legal Proceedings
In the normal course of business, we are involved in a variety of lawsuits, claims and legal proceedings, including commercial and contract disputes, employment matters, product liability claims, environmental liabilities, intellectual property disputes and tax-related matters. In our opinion, pending legal matters are not expected to have a material adverse impact on our results of operations, financial condition, liquidity or cash flows.

Item 4.     Mine Safety Disclosures
Not applicable.

PART II
Item 5.    Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Nesco’s common stock and warrants trade on the New York Stock Exchange under the symbol “NSCO” and “NSCO WS.” respectively. As of March 1, 2021, there were 21 holders of record of our common stock and 14 holders of record of warrants.
Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities
30


None.
Equity Compensation Plans
For information regarding equity compensation plans see Item 11, Executive Compensation, of this Annual Report on Form 10-K and Note 13 to the consolidated financial statements included in this Annual Report.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our shares of common stock in the foreseeable future. It is presently intended that we will retain our earnings for use in business operations and, accordingly, it is not anticipated that our board of directors will declare dividends in the foreseeable future. In addition, the terms of our 2019 Credit Facility and the Indenture include restrictions on our ability to issue dividends.
Issuer Purchases of Equity Securities
None.

Item 6.    Selected Financial Data
Not required.
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Item 7. 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 following discussion contains forward-looking statements. 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 herein entitled “Cautionary Note Regarding Forward-Looking Statements” and the section entitled “Risk Factors”. This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons of 2020 to 2019. Discussions of 2018 items and year-to-year comparisons of 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2019.

Overview of Markets and Related Industry Performance
Nesco was negatively impacted by the COVID-19 pandemic during second quarter of 2020 and continuing into the third quarter of 2020, when we began to see an uneven recovery take hold. New project starts increased in August, September and October before additional pandemic related shutdowns in November and December led to additional temporary project delays, which impacted ERS rental revenue. While Nesco has not yet reached the same levels as a year ago, and remains cautious about the continuing impact of the COVID-19 pandemic, original equipment cost (or, “OEC”) on rent improved compared to the end of the second quarter to the end of the year.
Nesco serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to the U.S. Accordingly, we have continued to meet the needs of our customers during the pandemic. We continue to adhere to protocols designed to maintain the health and safety of our employees and their families, as well as our customers, vendors and communities. These protocols have allowed the Company to keep all business and service locations operational throughout the pandemic with little to no disruption.
Starting in March, we saw a decline in demand from customers as planned projects were delayed in response to the uncertainty caused by the onset of the pandemic. These delays were most pronounced in electric utility T&D customers close to population centers in efforts to promote social distancing. Electric transmission customers also delayed planned new project starts. This led to a decline in OEC on rent during the second quarter that began to impact business in the third and fourth quarters. As projects ended or were delayed, equipment was returned and there was little offsetting demand from new projects. This trend began to reverse starting in late August. Nesco started to service new electric distribution projects and then benefited from a normal seasonal uptick of new electric transmission projects in August, which continued through October. However, with additional COVID-19 shutdowns during November and December, additional projects were temporarily delayed. Electric utility T&D customers continue to have large backlogs of projects that must be undertaken to maintain an aged grid, to reduce fire hazards, to ensure the uninterrupted supply of electricity and to meet growing electricity demands of the future tied to increased household usages and vehicle electrification. We have experienced relative stability in the rail and telecom sectors. Telecom end-customers have announced intentions to continue to invest in 5G infrastructure and additional network enhancements designed to address deficiencies that became apparent with increased traffic during pandemic stay-at-home orders.
The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. However, our customers continue to reiterate record or near-record backlogs and capital investment plans. We are not aware of any significant project cancellations by our customers during the pandemic at this time. Customer projects that we are aware of were merely delayed. Many projects that were previously delayed have now been rescheduled. Following the project delays from March to August, we are now experiencing an increase in demand as customers work to fulfill backlogs. Like Nesco, our customers have become more adept at working safely within the pandemic environment.
At the onset of the pandemic, our focus was on delivering upon the needs of our customers, managing costs and cash flows, and preparing for a future recovery. We reduced our capital spending, our working capital balances and undertook cost reduction efforts including limited headcount reductions. As part of these efforts we reduced our service costs by limiting repairs on equipment coming off-rent to levels required to meet demand. We now believe the beginning of a pivot towards a recovery is underway. This led to temporary service cost increases during the fourth quarter as we sought to rapidly deploy equipment to meet customer demand. As we look ahead to 2021, leading up to the planned acquisition of Custom Truck, we are continuing to position ourselves for long-term growth while maintaining a financial position and liquidity level that provides flexibility in the face of ongoing uncertainty.


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Financial Overview
We use a variety of operational and financial metrics, including non-GAAP financial measures, such as EBITDA and 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:
OEC on rent — OEC on rent is the original equipment cost of units rented to customers at a given point in time. Average OEC on rent is calculated as the weighted-average OEC on rent during the stated period. OEC represents the original equipment cost, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations, and is the basis for calculating certain of the measures set forth below. 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 utilization — Fleet utilization is defined as the total numbers of days the rental equipment was rented during a specified period of time divided by the total number of days available during the same period and weighted based on OEC. Utilization is a measure of fleet efficiency expressed as a percentage of time the fleet is on rent and is considered to be an important indicator of the revenue generating capacity of the fleet.
OEC on rent yield — OEC on rent yield (“ORY”) is a measure of return realized by our rental fleet during a period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the average OEC on rent for the same period. For periods less than 12 months, ORY is adjusted to an annualized basis.
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. Additionally, from time to time we separately describe two components included in our measure of gross profit, depreciation of rental equipment and major repairs disposal expenses, each of which represents non-cash items. Refer to our discussion of Adjusted EBITDA for further information.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial performance measure that Nesco uses to monitor its results from operations, to measure performance against debt covenants and performance relative to competitors. Nesco believes Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of operating performance when compared to peers, without regard to financing methods or capital structures. Nesco excludes the items identified in the reconciliations of net income (loss) to Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Nesco’s presentation of Adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. Nesco’s computation of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.
Nesco defines Adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization, equity-based compensation, and other items that Nesco does not view as indicative of ongoing performance. Additionally, Nesco’s Adjusted
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EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used equipment sold. When inventory or equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. Additionally, the pricing of rental contracts and equipment sales prices for equipment is based upon original equipment cost (or, “OEC”), and Nesco measures a rate of return from rentals and sales using OEC. As indicated above, the agreements governing Nesco’s indebtedness define this adjustment to EBITDA, as such, and it is believed this metric is a better indication of its true cost of equipment sales due to the removal of the purchase accounting adjustments.
34


Operating Results
(in $000s)2020% of revenues2019% of revenues2018% of revenues
Rental revenue$195,490 64.6 %$197,996 75.0 %$184,563 74.9 %
Sales of rental equipment31,533 10.4 %23,767 9.0 %26,019 10.6 %
Sales of new equipment25,099 8.3 %10,308 3.9 %18,349 7.4 %
Parts sales and services50,617 16.7 %31,964 12.1 %17,366 7.1 %
Total Revenue302,739 100.0 %264,035 100.0 %246,297 100.0 %
Cost of revenue147,764 48.8 %106,919 40.5 %100,586 40.8 %
Depreciation of rental equipment78,532 25.9 %70,568 26.7 %64,093 26.0 %
Gross Profit76,443 25.3 %86,548 32.8 %81,618 33.1 %
Operating expenses59,195 50,530 38,454 
Operating Income17,248 36,018 43,164 
Other Expense68,599 69,056 56,985 
Loss Before Income Taxes(51,351)(33,038)(13,821)
Income Tax Expense (Benefit)(30,074)(5,986)1,705 
Net Income (Loss)$(21,277)$(27,052)$(15,526)

Total Revenue. Total revenue for the twelve months ended December 31, 2020 was $302.7 million, which represents an increase of $38.7 million, or 14.7%, when compared to 2019. Rental revenue decreased to $195.5 million, or 1.3%, in 2020 compared to 2019 driven by rental fleet investments made in 2019 and partially offset by delays in projects resulting from the COVID-19 pandemic beginning in the second quarter of 2020. Sales of rental equipment increased to $31.5 million, or 32.7%, and sales of new equipment increased to $25.1 million, or 143.5%, in 2020 compared to 2019. The increase in equipment sales is the result of the higher investment made in new equipment inventory in 2019 and early 2020 as well as the concerted effort made to market and sell aging units from the rental fleet during the year. Parts sales and service revenue increased to $50.6 million, or 58.4%, in 2020 when compared to 2019 due to the acquisition of Truck Utilities in the fourth quarter of 2019 and opening of new distribution center warehouses.
Cost of Revenue. Cost of revenue in 2020 increased by $40.8 million, or 38.2%, compared to 2019. The majority of the increase in cost of revenue for the twelve months ended December 31, 2020 can be attributed to incremental costs associated with the increases in equipment sales revenue and parts sales and service revenue.
Depreciation. Depreciation of rental equipment increased in 2020 and 2019 compared to the corresponding prior year periods as a direct result of the additional investments made in rental fleet. The acquisition of Truck Utilities in the fourth quarter of 2019 also contributed to the increase in 2020 as compared to 2019.
Operating Expenses. Operating expenses for the twelve months ended December 31, 2020 increased $8.7 million, or 17.1%, compared to 2019. The increase is partially due to increased selling, general and administrative expenses as a result of increased headcount with the expansion of the organization and additional expenses incurred as a result of being a public company. Offsetting the increase is a reduction in transaction expenses of $1.0 million for the twelve months ended December 31, 2020 compared to the same period in 2019, which were directly related to the merger with Capitol in 2019.
Other Expense. Other expense for the twelve months ended December 31, 2020 decreased $0.5 million, or 0.7%, compared to 2019. Other expense in 2019 included loss of extinguishment of debt of $4.0 million directly related to the transactions with Capitol, which closed on July 31, 2019. Additionally, the changes in fair value of an interest rate collar, which is an undesignated hedging instrument, resulted in $5.3 million of expense for the twelve months ended December 31, 2020 compared to $1.7 million in 2019.
Income Tax Expense. Income tax expense was a benefit of $30.1 million for twelve months ended December 31, 2020. We recorded a reduction of our deferred tax valuation allowance related to federal and state net operating loss carryforwards as well as disallowed interest expense deduction carryforwards. Final regulations issued by the US Treasury and Internal Revenue Service prompted a reassessment of how we had established valuation allowances in prior interim and annual periods, which were based on interpretations regarding the impacts of the interest limitation rules. In our revised assessment, we estimate that we are more likely than not, able to realize certain of our federal and state deferred tax assets within the period that the carryforwards expire.
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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 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 the following measurements: Adjusted EBITDA, OEC on rent, fleet utilization and OEC on rent yield. 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.
Financial performance for the year ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
(in $000s)20202019change(%)2018change(%)
Adjusted EBITDA (a)
$118,568$127,486$(8,918)(7.0)%$121,657$5,8294.8 %
Average OEC on rent (b)
$482,016$478,967$3,0490.6 %$450,195$28,7726.4 %
Fleet utilization (c)
74.6 %84.7 %(10.1)%(11.9)%86.9 %(2.2)%(2.5)%
OEC on rent yield (d)
36.0 %36.9 %(0.9)%(2.4)%37.1 %(0.2)%(0.5)%
(a) EBITDA represents net income (loss) before interest, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents 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, and (5) 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 OEC 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) Fleet utilization for the period is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the year. Time on rent is weighted by original equipment cost. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.
(d) OEC on rent yield (“ORY”) is a measure of return realized by our on rental fleet during the 12-month period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the Average OEC on Rent for the same period. For periods less than 12 months, the ORY is adjusted to an annualized basis.

Adjusted EBITDA. Adjusted EBITDA decreased $8.9 million, or 7.0%, to $118.6 million for the twelve months ended December 31, 2020 compared to 2019. This decrease is primarily due to the decrease in gross profit as a result of equipment sales and parts sales and services comprising a higher proportion of our total revenue mix in 2020 (35.4%) compared to 2019 (25.0%). The higher level of selling, general and administrative expenses from added headcount and full-year public company costs also contributed to the decline.
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The following is a reconciliation from U.S. GAAP net loss to Adjusted EBITDA for the years ended December 31, 2020, 2019 and 2018 and a reconciliation from Adjusted EBITDA to U.S. GAAP net cash from operating activities for the years ended December 31, 2020, 2019 and 2018.
Year Ended December 31,
(in $000s)202020192018
Net loss$(21,277)$(27,052)$(15,526)
Interest expense63,200 63,361 56,698 
Income tax expense (benefit)(30,074)(5,986)1,705 
Depreciation expense79,559 71,548 64,312 
Amortization expense3,153 3,008 2,826 
EBITDA94,561 104,879 110,015 
Adjustments:
   Non-cash purchase accounting impact (1)
2,510 1,802 3,631 
   Transaction and process improvement costs (2)
11,660 15,866 2,536 
   Major repairs (3)
2,177 2,216 1,436 
   Share-based payments (4)
2,357 1,014 1,130 
   Other non-recurring items (5)
— — 2,909 
Change in fair value of derivative (6)
5,303 1,709 — 
Adjusted EBITDA$118,568 $127,486 $121,657 
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Year Ended December 31,
(in $000s)202020192018
Adjusted EBITDA$118,568 $127,486 $121,657 
Adjustments:
Change in fair value of derivative (6)
(5,303)(1,709)— 
Other non-recurring items (5)
— — (2,909)
Share-based payments (4)
(2,357)(1,014)(1,130)
Major repairs (3)
(2,177)(2,216)(1,436)
Transaction and process improvement costs (2)
(11,660)(15,866)(2,536)
Non-cash purchase accounting impact (1)
(2,510)(1,802)(3,631)
EBITDA94,561 104,879 110,015 
Add:
Interest expense(63,200)(63,361)(56,698)
Income tax benefit (expense)30,074 5,986 (1,705)
Amortization - financing costs3,290 2,913 3,537 
Share-based payments2,357 1,014 1,130 
Loss (gain) on sale of rental equipment and parts(7,215)(5,542)(3,644)
Gain on insurance proceeds - damaged equipment(781)(538)— 
Major repair disposal2,177 2,216 1,436 
Loss on extinguishment of debt— 4,005 — 
Change in fair value of derivative5,303 1,709 — 
Asset impairment— 657 — 
Deferred tax (benefit) expense(28,810)(6,861)1,096 
Provision for losses on accounts receivable3,765 3,292 4,302 
Changes in assets and liabilities:
Accounts receivable7,061 (17,073)(5,185)
Inventory(9,642)(22,683)(8,023)
Prepaid expenses and other(2,313)(2,578)351 
Accounts payable3,113 7,547 (4,307)
Accrued expenses4,384 6,560 (1,203)
Deferred rental income(1,295)(3,350)(62)
Net cash flow from operating activities$42,829 $18,792 $41,040 
____________
Notes to EBITDA and Adjusted EBITDA reconciliations:
(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 Nesco’s acquisition of Truck Utilities (which includes post-acquisition integration expenses incurred during the twelve months ended December 31, 2020 and transaction expenses related to the pending acquisition of Custom Truck; 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 period. Finally, the expenses associated with the closure of operations in Mexico, which closure activities commenced in the third quarter of 2019, are included for the twelve month period periods ended December 31, 2020 and 2019. Pursuant to Nesco’s credit agreement, the cost of undertakings to affect 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 charges incurred in 2018 for the early termination of fleet equipment leases.
(6) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge).

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OEC on Rent. Average OEC on rent for the twelve months ended December 31, 2020 was $482.0 million, up from $479.0 million for 2019. The increase is due to fleet investments made in 2019 and continued demand from customers which increased in the third and fourth quarters of 2020 following first and second quarter headwinds from COVID-19 related project delays.
Fleet Utilization. Fleet utilization was 74.6% for the twelve months ended December 31, 2020, compared to 84.7% for 2019. The decrease is the result of project delay headwinds experienced in the second quarter and beginning of the third quarter stemming from the COVID-19 pandemic coupled with the significant level of fleet investment made in new rental equipment and acquired rental fleet in the second half of 2019.
OEC On Rent Yield. OEC on rent yield was 36.0% for the twelve months ended December 31, 2020, compared to 36.9% in 2019, and 37.1% in 2018. Relatively flat ORY was driven by the mix of equipment types on rent and holding rental rates steady in 2020, 2019 and 2018, including during the COVID-19 economic slowdown.
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Operating Results by Segment
The Company manages its operations through two business segments: ERS, and the rental and sale of PTA. See Note 3, Segments, to our consolidated financial statements for additional information.
Equipment Rental and Sales Segment (ERS)
Our ERS segment primarily provides equipment to contractors who install, repair and maintain infrastructure assets, including T&D electric cabling (above and below ground), telecommunications networks and rail systems in addition to installing lighting and signage.
Year Ended December 31,
(in $000s)20202019change(%)2018change(%)
Rental revenue $179,933 $182,720 $(2,787)(1.5)%$173,267 $9,453 5.5 %
Sales of rental equipment31,533 23,767 7,766 32.7 %26,019 (2,252)(8.7)%
Sales of new equipment25,099 10,308 14,791 143.5 %18,349 (8,041)(43.8)%
Total revenue236,565 216,795 19,770 9.1 %217,635 (840)(0.4)%
Cost of revenue103,547 76,573 26,974 35.2 %84,509 (7,936)(9.4)%
Depreciation of rental equipment74,376 66,228 8,148 12.3 %60,436 5,792 9.6 %
Gross profit$58,642 $73,994 $(15,352)(20.7)%$72,690 $1,304 1.8 %
ERS segment revenue increased by $19.8 million or 9.1%, for the twelve months ended December 31, 2020 compared to 2019. Rental revenue decreased by $2.8 million over the prior period primarily due to pandemic-related project delays starting in the second quarter and impacting each of the subsequent quarters. New equipment sales increased by $14.8 million, or 143.5%, compared to 2019. Used equipment sales increased by $7.8 million. The increase in equipment sales is the result of the segment’s higher investment in new equipment inventory in 2019 and early 2020 and the sale of aging fleet units from the rental fleet, including units from the shut-down operations in Mexico.
The $27.0 million increase in cost of revenue for the twelve months ended December 31, 2020 compared to the prior year is primarily due to costs related to increased sales of rental and new equipment.
Depreciation of our rental fleet increased by $8.1 million for the twelve months ended December 31, 2020, compared to 2019, primarily due to growth in fleet equipment.
Gross profit, excluding depreciation of $74.4 million, decreased by $7.2 million in 2020 compared to 2019. The decrease was primarily due to the higher mix of equipment sales to total revenue and reduced fleet utilization from pandemic related project delays.

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Parts, Tools, and Accessories Segment (PTA)
The PTA segment of our business complements products and services provided by our ERS operating segment. PTA is a natural adjunct to our specialty equipment rental offering. Our PTA segment offers customers sale and rental solutions for parts, tools and accessories to complement our specialty equipment line. Our PTA segment also includes maintenance, repair and upfit services of new and used heavy-duty trucks and cranes.
Year Ended December 31,
(in $000s)20202019change(%)2018change(%)
Rental revenue $15,557 $15,276 $281 1.8 %$11,296 $3,980 35.2 %
Sales of rental equipment50,617 31,964 18,653 58.4 %17,366 14,598 84.1 %
Total revenue66,174 47,240 18,934 40.1 %28,662 18,578 64.8 %
Cost of revenue44,217 30,346 13,871 45.7 %16,077 14,269 88.8 %
Depreciation of rental equipment4,156 4,340 (184)(4.2)%3,657 683 18.7 %
Gross profit$17,801 $12,554 $5,247 41.8 %$8,928 $3,626 40.6 %
For the twelve months ended December 31, 2020, PTA segment revenue increased by $18.9 million, or 40.1%. The increase in revenue is primarily due to the acquisition of Truck Utilities in the fourth quarter of 2019. The PTA segment experienced headwinds from COVID-19 social distancing measures in the second, third and fourth quarters of 2020 as a result of new project delays, which offset the revenue increase brought on by the Truck Utilities acquisition.
Cost of revenue in the PTA segment increased $13.9 million for the twelve months ended December 31, 2020 as a direct result of the increase in parts sales and service volume stemming from the Truck Utilities acquisition, as well as the expansion of operations from two PTA locations to seven over the course of 2019 with an eighth location partially opening during the second quarter of 2020. This expanded footprint, designed to service growth, has not yet eventuated due to COVID-19. Similar to ERS, as a recovery takes hold, we have significant capacity in place within the PTA segment to support growth with limited new investments.
PTA gross profit increased $5.2 million, or 41.8%, for the twelve months ended December 31, 2020, compared to 2019. The changes in gross profit were driven by higher revenue in the segment, but offset by higher costs as a result of expanded geographic footprint.

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Liquidity and Capital Resources
Cash Flows and Liquidity
Our primary cash needs have been to meet debt service requirements and to fund working capital and capital expenditures. We fund these requirements from cash generated by our rental operations and cash received from the sale of equipment, as well as funds available under our credit facilities. As of December 31, 2020, we had $3.4 million in cash compared to $6.3 million as of December 31, 2019. As of December 31, 2020, we had $251.0 million of outstanding borrowings under our 2019 Credit Facility (as defined below) with an additional $93.6 million in availability (subject to a borrowing base) compared to $209.0 million outstanding as of December 31, 2019. At December 31, 2020, the Company had $1.4 million of letters of credit outstanding.
Due to the condition and relatively young age of our fleet, we have the ability to significantly reduce or suspend capital expenditures during difficult economic times in order to generate additional cash flow during these periods. We believe that our cash generated by our rental operations and cash received from the sale of equipment, as well as funds available under our 2019 Credit Facility will be adequate to meet our operating, investing and financing needs for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described in PART I, Item 1A. Risk Factors. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be changes in governmental regulations for the T&D industry, weather, and our customers’ ability to secure materials. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. We expect to continually assess our performance, the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures.
2019 Credit Facility
On July 31, 2019, we entered into an agreement with JPMorgan Chase Bank, N.A., Fifth Third Bank, Morgan Stanley Senior Funding, Inc., Deutsche Bank AG New York Branch, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., and Citigroup Global Markets Inc., pursuant to which such parties provided us with $350.0 million in aggregate principal amount of commitments pursuant to a first lien senior secured asset based revolving credit facility (“2019 Credit Facility” or the “revolving credit facility”). The 2019 Credit Facility includes borrowing capacity available for letters of credit, borrowings on a same-day notice basis and a swingline sub-facility. On March 10, 2020, we entered into the Incremental Agreement amending the 2019 Revolving 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.
The revolving credit facility has a five-year term and a floating rate of interest based on either the federal funds rate plus a margin ranging between 50 and 100 basis points or LIBOR plus a margin ranging between 150 and 200 basis points, in each case, depending on excess availability under the facility. Our availability under the revolving credit facility is a percentage of the value of our accounts receivable, our parts inventory, our fleet inventory, and our cash, in each case, subject to certain eligibility criteria. A portion of the revolving credit facility may be used for the issuance of letters of credit. The revolving credit facility is guaranteed by our wholly owned domestic subsidiaries, subject to customary exceptions, and is secured by substantially all assets of Nesco and the guarantors. We can reduce the aggregate commitments under the revolving credit facility without premium or penalty. The revolving credit facility contains covenants which, among other things, limit the incurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens.
Senior Secured Notes due 2024
On July 31, 2019 we completed a private offering for Senior Secured Second Lien Notes due 2024 (the “Senior Secured Notes”) issued by Capitol Investment Merger Sub 2, LLC, our wholly owned and indirect subsidiary (the “Issuer”). The aggregate principal amount of the Senior Secured Notes was $475.0 million. The Senior Secured Notes bear interest at a rate of 10.0% per annum payable semi-annually, in cash in arrears, on February 1 and August 1 of each year, which commenced on February 1, 2020. The Senior Secured Notes do not have registration rights.
A summary of the key provisions are as follows:
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Guarantors The Senior Secured Notes are guaranteed (the “Guarantees”) by Intermediate Holdings, our wholly owned subsidiary and the wholly owned domestic subsidiaries of the Issuer (together, “Guarantors”) that guarantee obligations under the 2019 Credit Facility or any future debt of Nesco or any other Guarantors.
Security The Senior Secured Notes and the Guarantees are secured on a second-priority basis by all assets of Nesco and the Guarantors that secure our obligations under the 2019 Credit Facility.
Ranking The Senior Secured Notes and the Guarantees are general senior secured obligations. The Senior Secured Notes rank equally in right of payment with all of our existing and future senior debt and rank senior in right of payment to all of our future subordinated obligations. The Guarantees rank equally in right of payment with all of the Guarantors’ existing and future senior obligations and rank senior in right of payment to all of the Guarantors’ existing and future subordinated obligations. The Senior Secured Notes and the Guarantees rank effectively subordinated to all of the Guarantors’ and our first-priority secured debt, including borrowings under the 2019 Credit Facility.
Redemption and Repurchase The Senior Secured Notes are redeemable, in whole or in part, at any time at specified redemption prices. At any time prior to August 1, 2021, we may redeem all or part of the notes at a redemption price equal to 100.0% of the principal amount, plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. The applicable premium entitles holders of the Senior Secured Notes to receive a make-whole payment calculated as the greater of 1% of the principal amount and the excess of the present value of the redemption price.    We may also redeem some or all of the notes: from August 1, 2021, but before July 31, 2022, at a redemption price of 105.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; from August 1, 2022, but before July 31, 2023, at a redemption price of 102.5% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; and after August 1, 2023, at a redemption price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 40.0% of the Senior Secured Notes until August 1, 2021, at a redemption price of 110.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from one or more equity offerings. In addition, we may be required to make an offer to purchase the Senior Secured Notes upon the sale of certain assets and upon a change of control.
Covenants The Senior Secured Notes contain various restrictive covenants.
Cash Flows
The following table summarizes Nesco’s sources and uses of cash for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
(in $000s)202020192018
Net cash flow from operating activities$42,829 $18,792 41,040 
Net cash flow from investing activities(29,314)(129,679)(27,438)
Net cash flow from financing activities(16,405)115,049 (12,422)
Net change in cash$(2,890)$4,162 $1,180 
As of December 31, 2020, we had cash of $3.4 million, a decrease of 2.9 million from December 31, 2019. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, to pay down the outstanding balance of the 2019 Credit Facility.
Cash Flows from Operating Activities
Net cash provided by operating activities was $42.8 million for the year ended December 31, 2020, as compared to net cash provided by operating activities of $18.8 million in 2019. The increase is due to a $5.8 million improvement in net loss from 2019 to 2020 and a $32.9 million increase in cash flow provided from working capital changes from 2019 to 2020. Cash flow provided by working capital changes improved compared to 2019 as a result of the prior year’s investments in inventory for the new PTA locations. The increase in cash flows from operating activities from 2019 to 2020 can also be attributed to an increase in non-cash expenses, offset by the 2020 deferred tax benefit of $28.8 million from the release of a portion of the valuation allowance on deferred tax assets.
Cash Flows from Investing Activities
Net cash used in investing activities was $29.3 million for the year ended December 31, 2020, as compared to cash used in investing activities of $129.7 million in 2019. The reduction in net cash used in investing activities for 2020 is primarily due to the decrease in the Company’s cash outlay for purchases of rental equipment, $39.1 million, and acquisitions, $48.4 million.
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Cash Flows from Financing Activities
Net cash used by financing activities was $16.4 million for the year ended December 31, 2020, as compared to cash provided by financing activities of 115.0 million in 2019. The decrease is primarily due to the incremental proceeds received in 2019 from the issuance of long-term debt and the merger and recapitalization in connection with the transactions with Capitol. For the year ended December 31, 2020, the Company repaid certain capital lease obligation liabilities, reducing obligations by $16.0 million in 2020 as compared to $5.2 million in 2019.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020:
Payments due by period
(in $000s)TotalLess than 1 year
( 2021)
1 to less than 3 years
(2022 - 2023)
3 to less than 5 years
(2024 - 2025)
More than 5 years
(2026 and after)
  Debt:
2019 Credit Facility$250,971 $— $— $250,971 $— 
Senior Secured Notes due 2024475,000 — — 475,000 — 
     Notes payable 2,379 1,280 1,099 — 
     Interest on debt (1)201,136 56,167 112,274 32,695 — 
  Capital leases 11,677 5,885 5,792 — — 
  Operating leases 9,762 2,727 3,818 1,610 1,607 
Total contractual obligations$950,925 $66,059 $122,983 $760,276 $1,607 
(1)    Interest on debt is comprised of contractually required interest payments calculated using the interest rate in effect as of December 31, 2020, on our 2019 Credit Facility (3.4%) and semi-annual interest payments required under our Senior Secured Notes at 10.0%.
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Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In applying accounting principles it is often required to use estimates. These estimates consider the facts, circumstances, and information available, and may be based on subjective inputs, assumptions, and information known and unknown to us. Material changes in certain of the estimates that we use, could potentially affect, by a material amount, our consolidated financial position and results of operations. Although results may vary, we believe our estimates are reasonable and appropriate. See Note 2 to our consolidated financial statements for a summary of our significant accounting policies. The following describes certain of our significant accounting policies that involve more subjective and complex judgments where the effect on our consolidated financial position and operating performance could be material.
Revenue Recognition
Rental Revenue. Our rental contracts are for various equipment, parts, tools, and accessories under 28 day or monthly agreements which include automatic renewal provisions. The majority of our rental payments are due monthly. Revenue is recognized ratably over the rental agreement period and in accordance with Accounting Standards Codification 840, Leases (“Topic 840”). Unearned revenue is reported in our deferred rent income line of our Consolidated Balance Sheet. We had deferred revenue of $1.0 million as of December 31, 2020 and $2.3 million as of December 31, 2019.
Sales of Rental Equipment and New Equipment. We sell both new and used equipment. Our new equipment products are sold at list price. Discounts or other pricing incentives or concessions are not significant. The contractual sales price for each individual product represents the standalone selling price. Our used equipment is of a sufficiently unique nature - based on the specifics of its age, usage, etc. - in that it does not have an observable standalone selling price. Equipment sales revenue is recognized when equipment is delivered, which is when the transfer of title, risks and rewards of ownership, and control are considered passed to the customer. Payment is usually due and collected within 30 days subsequent to transfer of control. There are no rights of return or warranties offered on equipment sales.
Parts Sales and Services. We sell parts, tools and accessories. We derive our services revenue primarily from maintenance, repair and upfit services on heavy-duty trucks and cranes. Revenue from these services includes parts sales needed to complete the service work. We recognize services revenue when the service work is completed. We record revenue on a point in time basis as parts are delivered. The amount of consideration we receive for parts is based upon a list price net of discounts and incentives, and the impact of such variable consideration is factored into the amount of revenue we recognize at any point in time. The amount of consideration received for service is based upon labor hours expended and parts utilized to perform and complete the necessary services for our customers. There are no rights of return or warranties offered on parts sales. Payment is usually due and collected within 30 days subsequent to delivery of parts or performance of service.
Useful Lives and Residual Values of Rental Equipment and Property and Equipment
Our rentable equipment consists of parts, tools and accessories and specialized rental equipment. Purchases of our equipment are recorded at cost and we depreciate cost to an estimated residual value. We depreciate our parts, tools, and accessories over their estimated useful rentable life of five years. We depreciate our rental equipment over its estimated useful rentable life of 7 years with an estimated residual value of 15%, using the straight-line method. Useful life is estimated based upon the expected period the equipment will be in the fleet as a rentable unit. A residual value is estimated to approximate the value of the equipment at the end of its useful (i.e., rentable) life, allowing for a reasonable profit margin on the sale of the equipment when we remove the unit from the fleet. In establishing useful lives and residual values, we consider factors related to the estimated engineered life of the equipment, as well as customer demand of differing types of equipment in order for us to hold and maintain an optimal mix of equipment types in our fleet. We also continuously evaluate factors related to the condition and serviceability of the equipment in our fleet in order to make estimates of useful life and expected end-of-life value. Depreciation of our equipment is recognized as a component of our cost of revenue. For sold equipment, the carrying value of an item is recognized as cost of equipment sale within cost of revenue. Changes in estimated useful life and/or residual value would impact our gross profit in our consolidated financial statements. To the extent that the useful lives of our rental equipment were to increase and decrease by one year, we estimate that our annual depreciation expense would decrease and increase by approximately $9.7 million and $12.9 million, respectively. Similarly, to the extent the estimated residual values of our rental equipment were to increase or decrease by one percentage point, we estimate that our annual depreciation expense would change by approximately $0.9 million. Any change in depreciation expense as a result of a hypothetical change in either useful lives or residual values would generally result in a proportional increase or decrease in the gross profit we would recognize upon the ultimate sale of the asset.

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Business Combinations
We have made acquisitions in the past and may continue to make acquisitions in the future. We allocate the cost of the acquired enterprise to the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. Rental equipment generally represents the largest component and was 62% of total assets acquired over the last three years followed by other intangible assets at 10% and goodwill at 22%. Goodwill is attributable to the synergies and economies of scale expected from the combination of the businesses.
In addition to long-lived fixed assets, we 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, deferred revenue and other working capital items. Because of their short-term nature, the fair values of these other assets and liabilities generally approximate the carrying values reflected on the acquired entities’ balance sheets. However, when appropriate, we adjust these carrying values for factors such as collectability and existence. The intangible assets that we have acquired are primarily goodwill, customer relationships, trade names, and non-compete agreements. Goodwill is calculated as the excess of the cost of the acquired entity over the fair value of the net assets acquired. Customer relationships, trade names, and non-compete agreements are valued based on an excess earnings or income approach with consideration to projected cash flows.
Our estimates of the values of tangible assets from our business combinations, principally rental equipment, utilize data that reflect quoted prices for similar assets available in active markets (such as the used equipment market). For this reason, estimates of the fair values of these items is not considered to be highly subjective or complex. However, to estimate the values of intangible assets we utilize income methods that involve forecasting future cash flow related to the acquired businesses. The estimates of future cash flow require us to establish expectations about customer demand, investments in maintaining or expanding infrastructure for the markets the businesses serve, and the supply and capacity of equipment in the rental market, among others. Additionally, we are required to establish expectations for the businesses’ cost of capital and ability to acquire and maintain equipment in the future. Changes in these assumptions would have an impact on the amount of intangible assets recorded and the resulting amortization expense.
Goodwill and the Evaluation of Goodwill Impairment
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including certain of the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset incorporating the key assumptions listed below into our calculation. Goodwill is tested for impairment at the reporting unit level, which we have determined to be ERS and PTA. We use a variety of methodologies in conducting impairment assessments, including qualitative analysis, income and market approaches. The market value approach compares current and projected financial results to entities of similar size and industry to determine market value. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends.
Factors that management must estimate when performing impairment tests include sales volume, prices, inflation, discount rates, tax rates and capital spending. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties. The estimates of future cash flow require us to establish expectations about customer demand, investments in maintaining or expanding infrastructure for the markets each reporting unit serves, and the supply and capacity of equipment in the rental market, among other factors. Additionally, we are required to establish expectations for the businesses’ cost of capital and ability to acquire and maintain equipment in the future. Measurement of the recoverability of these assets is dependent upon the accuracy of the assumptions used in making these estimates, as well as how the estimates compare to our eventual future operating performance. Changes in these estimates could change our conclusion regarding the impairment of goodwill assets and potentially result in a non-cash impairment in the future period.
Our consolidated goodwill balance was $238.1 million at December 31, 2020. Based on our quantitative assessment of all relevant factors, we determined that the fair value of goodwill significantly exceeded the carrying value and, therefore, there was no indication that goodwill was impaired.
Our consolidated indefinite-lived intangible asset balance was $28.0 million at December 31, 2020, and is comprised of the Nesco tradename. Based on our quantitative assessment of all relevant factors, we determined that the fair value of our indefinite-lived
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intangible asset significantly exceeded the carrying value and, therefore, there was no indication that the indefinite-lived intangible asset was impaired.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA made broad and complex changes to the U.S. tax code. The principal change impacting our tax provision includes the limitation on deductible interest expense, the resulting federal limitation from which creates an indefinite lived deferred tax asset for which a valuation allowance assessment is required. This limitation is affected by the determination of the meaning of depreciation, which was clarified by the final regulations issued on July 27, 2020 described below. In March 2020, the United States Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) reduced the amount of disallowed interest expense which resulted in a greater amount of interest deduction. On July 27, 2020, the United States Department of Treasury and Internal Revenue Service issued final regulations that provided guidance on the determination of disallowed interest expense (the “Final Regulations”).
The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law. On a quarterly basis, we evaluate the realizability of our deferred tax assets.
The evaluation includes the consideration of all available evidence, both positive and negative, regarding the estimated future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimated future taxable income exclusive of temporary differences and tax planning strategies. Our income tax carryforwards are comprised of federal and state net operating loss carryforwards (“NOLs”), some of which are subject to annual usage limitations. Certain of our state NOLs are subject to expiration, while other state NOLs and all of our federal NOLs do not have expirations. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized.
Our results have reflected a three year cumulative loss from operations. As a result, at December 31, 2019, we established $34.4 million in deferred tax asset valuation allowances. During the twelve months ended December 31, 2020, we recorded a reduction of our deferred tax valuation allowance of approximately $5.0 million as a correction of the valuation allowance at December 31, 2019; and, we recorded an additional income tax benefit of approximately $8.7 million to correct the deferred tax valuation allowance recorded in prior 2020 interim periods. These releases of valuation allowance were based on our reassessment concerning sources of future taxable income, principally from interpretations related to the future interest deduction limitation under the TCJA, as well as the subsequent changes effective with the CARES Act and the Final Regulations.
While we remain in a cumulative loss condition, our ability to evaluate the realizability of deferred tax assets is generally limited to the ability to offset timing differences on taxable income associated with deferred tax liabilities. Therefore, a change in estimate of deferred tax asset valuation allowances for federal or state jurisdictions during this cumulative loss condition period will primarily be affected by changes in estimates of the time periods that deferred tax assets and liabilities will be realized, or on a limited basis to tax planning strategies that may result in a change in the amount of taxable income realized. At December 31, 2020, our deferred tax asset valuation allowance was $16.5 million.
Recent Accounting Standards
Leases.    The FASB’s guidance issued under ASU No. 2016-02, "Leases (Topic 842)" will require all leases with durations greater than twelve months to be recognized on the balance sheet. Currently, we are required to apply Topic 842 in interim and annual reporting periods beginning after December 15, 2021; however, adoption of the new standard may be required during the interim period in the year ending December 31, 2021 in the event we lose our current status as an “emerging growth company.”
While we have not completed our assessment, we believe adoption of this standard will have a significant impact on our consolidated balance sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expenses within the consolidated statements of operations or the consolidated statements of cash flows. Information about our undiscounted future lease payments and the timing of those payments is in Note 9 to the Notes to consolidated financial statements.
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-
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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.
Information about the expected effect of adopting this new standard can be found in Note 2 to the Notes to consolidated financial statements.

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Off-Balance Sheet Financing Arrangements
We have no obligations, assets, or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any nonfinancial assets.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
Any statements made in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies. These statements often include words such as “anticipate,” “expect,” “suggests,” “plan,” “believe,” “intend,” “estimates,” “targets,” “projects,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections:
•     The financial condition and results of operations of our business may be adversely affected by the COVID-19 pandemic or other pandemics;
•     Demand for our products and services is cyclical and vulnerable to industry downturns and regional and national downturns, which may result from the current economic conditions;
•    Our revenue and operating results have historically fluctuated and may continue to fluctuate, which could result in a decline in our profitability and make it more difficult for us to grow our business;
•     We are subject to competition, which may have a material adverse effect on our business by reducing our ability to increase or maintain revenues or profitability;
•     The cost of new equipment that we purchase for use in our rental fleet or for our sales inventory may increase and therefore we may spend more for such equipment, and in some cases, we may not be able to procure equipment on a timely basis due to supplier constraints;
•    We may be unsuccessful at acquiring companies or at integrating companies that we acquire and, as a result, may not achieve expected benefits, which could have a material adverse effect on our business, financial condition or results of operations;
•    We might not be able to recruit and retain the experienced personnel we need to compete in our industries;
•     Disruptions in our information technology systems or a compromise of security with respect to our systems could adversely affect our operating results by limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, implement strategic initiatives;
•     If we are unable to obtain additional capital as required, we may be unable to fund the capital outlays required for the success of our business;
•    We are exposed to various risks related to legal proceedings or claims that could adversely affect our operating results. The nature of our business exposes us to various liability claims, which may exceed the level of our insurance coverage and thereby not fully protect us;
•     To service our indebtedness, we require a significant amount of cash. Our ability to generate cash depends on many factors, some of which are beyond our control. An inability to service our indebtedness could lead to a default under the indenture that governs the senior secured notes or the credit agreement that governs our asset-based revolving credit facility, which may result in an acceleration of our indebtedness;
•     Changes to international trade agreements, tariffs, import and excise duties, taxes or other governmental rules and regulations could adversely affect our business and results of operations;
•     The risk that a condition to closing of the Acquisition and related transactions may not be satisfied or that one of more of the agreements may be terminated in accordance with its terms and the transactions may not be completed, including the risk that we may be unable to obtain governmental and regulatory approvals required for the Acquisition, or that required
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governmental and regulatory approvals may delay the Transaction or result in the imposition of conditions that could reduce the anticipated benefits from the pending Acquisition or cause the parties to abandon the transactions; and
•     Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of common stock.
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. See “Risk Factors” in this Annual Report for additional risks.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under the 2019 Credit Facility, which provides for variable rate borrowings of up to $385.0 million, subject to a borrowing base. Interest rate changes generally impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. Assuming the 2019 Credit Facility is fully drawn, each 12.5 basis point increase or decrease in the applicable interest rates would correspondingly change our interest expense on the 2019 Credit Facility by approximately $0.5 million per year. As of December 31, 2020, we had $251.0 million of outstanding borrowings under the 2019 Credit Facility.
We manage a portion of our risks from exposures to fluctuations in interest rates as part of our risk management program through the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings and cash flows caused by fluctuations, our primary exposure is from our variable-rate debt. We currently have an interest rate collar agreement in place as a hedge against fluctuations in the required interest payments due on our 2019 Credit Facility. All of our derivative activities are for purposes other than trading.
Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis.
Our interest rate collar contract (currently our only derivative contract) was executed under a standard master agreement that contains a cross-default provision to our borrowing agreement with the counterparty, which provides the ability of the counterparty to terminate the interest rate collar agreement upon an event of default under the borrowing agreement.
Exchange rate risk
During the year ended December 31, 2020, we generated $5.8 million and $1.8 million of U.S. dollar denominated revenues in Canadian dollars and Mexican pesos, respectively. Each 100 basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate or Mexican peso to U.S. dollar exchange rate for the year would have correspondingly changed our revenues by approximately $0.1 million. We do not currently hedge our exchange rate exposure.
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Nesco Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Nesco Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Indianapolis, Indiana
March 8, 2021

We have served as the Company’s auditor since 2016.
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Nesco Holdings, Inc.
Consolidated Balance Sheets
(in $000s, except share data)December 31, 2020December 31, 2019
Assets
Current Assets
Cash$3,412 $6,302 
Accounts receivable, net of allowance of $6,372 and $4,654, respectively
60,933 71,323 
Inventory31,367 33,001 
Prepaid expenses and other7,530 5,217 
Total current assets103,242 115,843 
Property and equipment, net6,269 6,561 
Rental equipment, net335,812 383,420 
Goodwill and other intangible assets, net305,631 308,747 
Deferred income taxes16,952  
Notes receivable498 713 
Total assets$768,404 $815,284 
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable$31,829 $41,172 
Accrued expenses31,991 27,590 
Deferred rent income975 2,270 
Current maturities of long-term debt1,280 1,280 
Current portion of capital lease obligations5,276 5,451 
Total current liabilities71,351 77,763 
Long term debt, net715,858 713,023 
Capital leases5,250 22,631 
Deferred income taxes 12,288 
Interest rate collar7,012 1,709 
Total long-term liabilities728,120 749,651 
Commitments and contingencies (see Note 9)
Stockholders' Deficit
Common stock - $0.0001 par value, 250,000,000 shares authorized, 49,156,753 and 49,033,903 issued and outstanding, at December 31, 2020 and 2019, respectively
5 5 
Additional paid-in capital434,917 432,577 
Accumulated deficit(465,989)(444,712)
Total stockholders' deficit(31,067)(12,130)
Total Liabilities and Stockholders' Deficit$768,404 $815,284 
See accompanying notes to consolidated financial statements.
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Nesco Holdings, Inc.
Consolidated Statements of Operations
Year Ended December 31,
(in $000s, except share and per share data)202020192018
Revenue
Rental revenue$195,490 $197,996 $184,563 
Sales of rental equipment31,533 23,767 26,019 
Sales of new equipment25,099 10,308 18,349 
Parts sales and services50,617 31,964 17,366 
Total revenues302,739 264,035 246,297 
Cost of revenue
Cost of rental revenue59,030 50,829 49,023 
Depreciation of rental equipment78,532 70,568 64,093 
Cost of rental equipment sales25,615 20,302 21,689 
Cost of new equipment sales21,792 8,520 16,099 
Cost of parts sales and services39,150 25,052 12,339 
Major repair disposals2,177 2,216 1,436 
Total cost of revenue226,296 177,487 164,679 
Gross profit76,443 86,548 81,618 
Operating expenses
Selling, general, and administrative43,464 34,667 32,718 
Licensing and titling2,945 2,617 2,241 
Amortization and non-rental depreciation3,248 3,122 3,045 
Transaction expenses6,627 7,641 440 
Asset impairment 657  
Other operating expenses2,911 1,826 10 
Total operating expenses59,195 50,530 38,454 
Operating income17,248 36,018 43,164 
Other expense
Loss on extinguishment of debt 4,005  
Interest expense, net63,200 63,361 56,698 
Other expense, net5,399 1,690 287 
Total other expense68,599 69,056 56,985 
Loss before income taxes(51,351)(33,038)(13,821)
Income tax expense (benefit)(30,074)(5,986)1,705 
Net Loss$(21,277)$(27,052)$(15,526)
Loss per share:
    Basic and diluted$(0.43)$(0.82)$(0.72)
Weighted-average common shares outstanding:
    Basic and diluted49,064,615 33,066,165 21,660,638 
See accompanying notes to consolidated financial statements.
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Nesco Holdings, Inc.
Consolidated Statements of Comprehensive Loss
Year Ended December 31,
(in $000s)202020192018
Net loss$(21,277)$(27,052)$(15,526)
Other comprehensive loss:
Interest rate collar (net of taxes of $285 in 2019)
 396 (