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Nesco Holdings, Inc. Reports Third Quarter 2020 Financial Results

11/09/2020
THIRD QUARTER 2020 HIGHLIGHTS
All metrics compared to Third Quarter 2019 unless otherwise noted
- Total revenue increased 10.9% to $69.3 million
- Equipment Rental and Sales (ERS) segment revenue increased 5.0% to $54.2 million
- Parts, Tools and Accessories (PTA) segment revenue increased 39.2% to $15.1 million
- Adjusted EBITDA decreased 8.6% to $28.0 million
- Net income of $15.2 million
- Free cash flow increased to $0.5 million from negative $29.3 million
- Available liquidity of $69.1 million

FORT WAYNE, Ind., Nov. 9, 2020 /PRNewswire/ -- Nesco Holdings, Inc. (NYSE: NSCO, "Nesco" or the "Company"), a leading provider of specialty rental equipment to the electric utility, telecom and rail infrastructure end-markets, today reported financial results for its third quarter ended September 30, 2020.

Total revenue in the third quarter was $69.3 million, an increase of $6.8 million, or 10.9%, from the third quarter of 2019 as increased equipment sales and the acquisition of Truck Utilities more than offset the negative impact of COVID-19 related project delays that continued into July and August.

Adjusted EBITDA was $28.0 million, a decrease of 8.6% from $30.7 million in the third quarter of 2019. The decline in adjusted EBITDA was primarily due to lower fleet utilization resulting from project delays associated with COVID-19, which was partially offset by increases in equipment sales and the acquisition of Truck Utilities as well as cost-cutting measures in the second and third quarters.

The Company reported net income of $15.2 million, compared to a net loss of $18.0 million for the same period in 2019. The Company recognized a one-time income tax benefit of $23.7 million related to a reduction of deferred income tax valuation allowance.

MANAGEMENT COMMENTARY

"In the third quarter we saw sequentially improving demand and the beginning of a return to normal seasonality trends as new projects ramped up," said Lee Jacobson, Chief Executive Officer of Nesco. "The pandemic continued to impact our business through July and early August, but we saw substantial improvement in late August that continued into September and October. While our average original equipment cost on rent for the third quarter was down 4.1% year-over-year to $464 million, we exited the third quarter with $489 million of original equipment cost on rent, an increase of more than 10% from the start of the quarter, with momentum continuing into the fourth quarter. We have good visibility into planned project starts and are excited about the recovery that is now under way."

"We maintained a disciplined approach to costs and capital investments in the third quarter, which helped drive positive free cash flow for the second consecutive quarter and enabled us to reduce debt and maintain strong liquidity," said Josh Boone, Chief Financial Officer of Nesco. "Additionally, we continue to optimize our working capital balances and dispose of underperforming assets, putting the organization in a solid financial position. For the remainder of the year and beyond, we are focused on executing on our disciplined capital allocation strategy of investing in our fleet to maximize asset level returns, balanced with free cash flow generation and debt reduction. We are confident in our ability to maximize shareholder value and are committed to a long-term leverage target of 3.0x to 3.5x."

THIRD QUARTER REVENUE BY SEGMENT 
All metrics compared to Third Quarter 2019 unless otherwise noted

Equipment Rental and Sales Segment (78.2% of revenue)

  • Revenue increased 5.0% to $54.2 million, compared to $51.6 million
  • Equipment rental revenue decreased 9.2% to $42.6 million, compared to $46.9 million
    • Average equipment on rent decreased 4.1% to $464.3 million; the Company invested to grow the fleet in 2019 and in the first half of 2020, but lower utilization resulting from COVID-19 related project delays resulted in reduced equipment on rent year over year
    • Fleet utilization declined 7.0% to 72.1% due to project delays resulting from the COVID-19 pandemic
    • Rental rate per day declined 0.7% to $137.16
  • Equipment sales revenue increased 146.9% to $11.6 million, partially due to an increase in new equipment sales

Parts, Tools and Accessories Segment (21.8% of revenue)

  • Revenue increased 39.2% to $15.1 million, compared to $10.8 million
  • Parts rental revenue increased 10.3% to $3.5 million, mainly due to an expansion of PTA locations in 2019 to create a national footprint
  • Parts sales revenue increased 51.2% to $11.6 million, primarily due to the acquisition of Truck Utilities

COVID-19 BUSINESS UPDATE

Nesco continued to be impacted by the COVID-19 pandemic in the third quarter. The Company began to see a normal seasonal uptick starting in late August, which accelerated through September and into October. Original equipment cost (OEC) on rent improved significantly from the beginning to end of the quarter. While OEC on rent is not yet at the same levels as a year ago, Nesco is working to capitalize on the anticipated continuation of the recovery and growth in our end markets to drive this key metric.

The Company has been able to keep all business and service locations operational throughout the pandemic with little to no disruption. Our customers have also become more adept at working safely during the pandemic, resulting in the commencement of some previously delayed projects. 

LIQUIDITY AND CASH FLOW

The Company had cash of $1.6 million and availability of $67.4 million under its asset-based credit facility for total liquidity of $69.1 million as of September 30, 2020. Net debt outstanding, including capital leases, was $764.8 million at the end of the third quarter of 2020. The Company has no near-term debt maturities, as its $385.0 million credit facility and $475.0 million senior secured notes both mature in 2024.

Nesco reported negative cash flow from operating activities of $4.8 million, an increase of $0.3 million compared to third quarter of 2019. Net cash inflow from investing activities of $5.4 million improved from a $26.5 million cash outflow for the same period of 2019 as Nesco curtailed capital expenditures and increased sales of rental equipment. Free cash flow increased to $0.5 million from negative free cash flow of $29.3 million in the third quarter of 2019.

Average fleet count increased 7.6% to 4,542 units, compared to 4,221 units a year ago. Total net capital expenditures were negative $5.3 million, resulting in a net cash inflow. Gross capital expenditures, which include purchases of rental fleet and property and equipment, were $3.4 million. The Company received $8.7 million from sale of rental equipment and parts as well as insurance proceeds from damaged equipment. Nesco has invested $30.0 million in net capital expenditures to date in 2020.

2020 OUTLOOK

The Company has withdrawn its previous full year 2020 guidance as a result of the unpredictable nature of the COVID-19 pandemic. While a recovery from the COVID-19 pandemic appears to be under way and there is more visibility into future projects and demand, the Company plans to reinstate earnings guidance at a future date as it continues to assess the continuously changing economic and market conditions.

The Company is updating its outlook for net capital expenditures to be between $30 to $35 million for the full year 2020(1).

"As we look to the remainder of the year, we are well positioned to capitalize on new project starts and improving market demand. Momentum is building in our core markets and long-term tailwinds should continue to be a catalyst for our financial results in 2021 and beyond. Our focus on navigating through the pandemic and short-term execution continues in the fourth quarter. We remain focused on long-term strategic growth, generating free cash flow, reducing leverage and driving shareholder value," Jacobson said.

(1)   Net capital expenditures are a non-GAAP financial measure. Please see the historical non-GAAP reconciliation tables included at the end of this press release.

NON-GAAP FINANCIAL MEASURES

The Company uses a variety of operational and financial metrics, including financial measures that do not conform with Generally Accepted Accounting Principles (GAAP), to analyze its performance and financial condition. These include adjusted EBITDA, free cash flow, fleet utilization, original equipment cost (OEC) on rent, net capital expenditures, among other metrics. The Company utilizes these financial measures to manage its business on a day-to-day basis and believes they are the most relevant measures of performance.  Some of these measures are commonly used in the specialty rentals industry to evaluate performance. The Company believes these non-GAAP measures provide greater insights about its revenue and cost performance, in addition to standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they 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 to be superior to, the financial information prepared and presented in accordance with GAAP.  The definitions of non-GAAP financial measures along with a reconciliation of non-GAAP financial information to GAAP are included in the supplemental financial schedules.

CONFERENCE CALL INFORMATION

The Company has scheduled a conference call at 8:30 A.M. Eastern Time on November 10, 2020, to discuss its third quarter 2020 financial results. The conference call can be accessed by dialing 800-681-8614 (United States) or 303-223-4368 (International) using the conference ID 21970537. A replay of the call will be available on the Company's investor relations website at investors.nescospecialty.com.

ABOUT NESCO

Nesco is one of the largest providers of specialty equipment, parts, tools, accessories and services to the electric utility transmission and distribution, telecommunications and rail markets 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. Nesco's coast-to-coast rental fleet of more than 4,500 units includes aerial devices, boom trucks, cranes, digger derricks, pressure drills, stringing gear, hi-rail equipment, repair parts, tools and accessories. For more information, please visit investors.nescospecialty.com.

FORWARD-LOOKING STATEMENTS

This press release includes "forward-looking statements" within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995 and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  When used in this press release, the words "estimates," "projected," "expects," "anticipates," "forecasts," "plans," "intends," "believes," "seeks," "may," "will," "should," "future," "propose" and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside Nesco's management's control, that could cause actual results or outcomes to differ materially from those discussed in this press release. This press release is based on certain assumptions that Nesco's management has made in light of its experience in the industry as well as Nesco's perceptions of historical trends, current conditions, expected future developments and other factors Nesco believes are appropriate in these circumstances. As you read and consider this press release, you should understand that these statements are not guarantees of performance or results. Many factors could affect Nesco's actual performance and results and could cause actual results to differ materially from those expressed in this press release. All forward-looking statements attributable to Nesco or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. Important factors, among others, that may affect actual results or outcomes include: the impact of the COVID-19 pandemic on Nesco's business and operations as well as the overall economy; Nesco's ability to execute on its plans to develop and market new products and the timing of these development programs; Nesco's estimates of the size of the markets for its solutions; the rate and degree of market acceptance of Nesco's solutions; the success of other competing technologies that may become available; Nesco's ability to identify and integrate acquisitions, including Nesco's ability to integrate its acquisition of Truck Utilities and realize the anticipated benefits thereof; the performance and security of Nesco's services; potential litigation involving Nesco; and general economic and market conditions impacting demand for Nesco's services. For a more complete description of these and other possible risks and uncertainties, please refer to Nesco's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 16, 2020, and as updated by Nesco's quarterly reports on Form 10-Q.

INVESTOR CONTACT

Josh Boone, CFO
(800) 252-0043
investors@nescospecialty.com

 

Nesco Holdings, Inc.

Condensed Consolidated Statements of Operations (unaudited)



Three Months Ended September 30,



Nine Months Ended September 30,

(in $000s, except share and per share data)

2020


2019



2020


2019

Revenue









Rental revenue

$

46,125



$

50,103




$

144,103



$

143,871


Sales of rental equipment

5,510



3,436




19,585



15,167


Sales of new equipment

6,048



1,246




19,043



8,076


Parts sales and services

11,577



7,657




36,753



19,675


Total Revenue

69,260



62,442




219,484



186,789


Cost of Revenue









Cost of rental revenue

13,096



13,545




41,193



37,445


Depreciation of rental equipment

19,467



17,694




59,275



51,369


Cost of rental equipment sales

5,190



2,847




16,454



12,653


Cost of new equipment sales

5,410



1,116




16,841



6,618


Cost of parts sales and services

10,255



5,600




30,839



14,921


Major repair disposals

211



376




1,506



1,522


Total cost of revenue

53,629



41,178




166,108



124,528


Gross Profit

15,631



21,264




53,376



62,261


Operating Expenses









Selling, general and administrative expenses

8,633



9,824




31,269



24,708


Licensing and titling expenses

686



690




2,243



1,926


Amortization and non-rental depreciation

792



745




2,308



2,264


Transaction expenses

110



3,325




1,073



7,394


Asset impairment



657






657


Other operating expenses

451



434




2,209



1,213


Total Operating Expenses

10,672



15,675




39,102



38,162


Operating Income

4,959



5,589




14,274



24,099


Other Expense









Loss on extinguishment of debt



4,005






4,005


Interest expense, net

15,853



16,533




47,816



46,376


Other (income) expense, net

(559)



2,567




6,245



2,545


Total other expense

15,294



23,105




54,061



52,926


Loss Before Income Taxes

(10,335)



(17,516)




(39,787)



(28,827)


Income Tax Expense (Benefit)

(25,508)



494




(25,841)



1,330


Net Income (Loss)

$

15,173



$

(18,010)




$

(13,946)



$

(30,157)











Diluted Earnings (Loss) Per Share

$

0.31



$

(0.45)




$

(0.28)



$

(1.09)











 

 

Nesco Holdings, Inc.

Condensed Consolidated Balance Sheets (unaudited)


(in $000s, except share data)

September 30, 2020


December 31, 2019

Assets




Current Assets




Cash

$

1,640



$

6,302


Accounts receivable, net of allowance of $4,821 and $4,654 respectively

56,471



71,323


Inventory

30,623



33,001


Prepaid expenses and other

6,170



5,217


Total current assets

94,904



115,843


Property and equipment, net

6,373



6,561


Rental equipment, net

348,932



383,420


Goodwill and other intangibles, net

305,977



308,747


Deferred income taxes

12,708




Notes receivable

562



713


Total Assets

$

769,456



$

815,284


Liabilities and Stockholders' Deficit




Current Liabilities




Accounts payable

$

14,826



$

41,172


Accrued expenses

15,806



27,590


Deferred rent income

1,000



2,270


Current maturities of long-term debt

1,280



1,280


Current portion of capital lease obligations

7,975



5,451


Total current liabilities

40,887



77,763


Long-term debt, net

733,270



713,023


Capital leases

11,848



22,631


Deferred income taxes



12,288


Interest rate collar

7,858



1,709


Total long-term liabilities

752,976



749,651






Commitments and contingencies








Stockholders' Deficit








Common stock - $0.0001 par value, 250,000,000 shares authorized, 49,033,903 shares issued and outstanding, at September 30, 2020 and December 31, 2019

5



5


Additional paid-in capital

434,246



432,577


Accumulated deficit

(458,658)



(444,712)


Total stockholders' deficit

(24,407)



(12,130)


Total Liabilities and Stockholders' Deficit

$

769,456



$

815,284


 

 

Nesco Holdings, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)



Nine Months Ended September 30,

(in $000s)

2020


2019

Operating Activities




Net loss

$

(13,946)



$

(30,157)


Adjustments to reconcile net loss to net cash flow from operating activities:




Depreciation

60,080



52,104


Amortization - intangibles

2,233



2,172


Amortization - financing costs

2,188



2,099


Provision for losses on accounts receivable

1,813



3,472


Share-based payments

1,669



463


Gain on sale of rental equipment and parts

(4,231)



(3,930)


Gain on insurance proceeds - damaged equipment

(714)



(570)


Major repair disposal

1,506



1,522


Loss on extinguishment of debt



4,005


Change in fair value of derivative

6,149



2,552


Asset impairment



657


Deferred tax (benefit) expense

(24,417)



816


Changes in assets and liabilities:




Accounts receivable

9,258



(13,728)


Inventory

(3,797)



(13,742)


Prepaid expenses and other

(953)



(2,211)


Accounts payable

(8,920)



4,792


Accrued expenses and other liabilities

(11,782)



(4,770)


Unearned income

(1,270)



(4,832)


Net cash flow from operating activities

14,866



714


Investing Activities




Purchase of equipment - rental fleet

(59,197)



(77,752)


Proceeds from sale of rental equipment and parts

26,108



22,608


Insurance proceeds from damaged equipment

3,747



1,721


Purchase of other property and equipment

(678)



(7,166)


Other

151



(1,671)


Net cash flow from investing activities

(29,869)



(62,260)


Financing Activities




Proceeds from debt



475,000


Borrowings under revolving credit facilities

74,042



243,000


Repayments under revolving credit facilities

(55,019)



(259,000)


Repayments of notes payable

(964)



(527,348)


Capital lease payments

(7,718)



(3,830)


Proceeds from merger and recapitalization



147,268


Finance fees paid



(15,483)


Net cash flow from financing activities

10,341



59,607


Net Change in Cash

(4,662)



(1,939)


Cash at Beginning of Period

6,302



2,140


Cash at End of Period

$

1,640



$

201






Supplemental Cash Flow Information




Cash paid for interest

$

56,815



$

47,861


Cash paid for income taxes

156



444


Non-Cash Investing and Financing Activities




Transfer of inventory to leased equipment

6,175



3,767


Rental equipment and property and equipment purchases in accounts payable

4,217



21,227


Rental equipment sales in accounts receivable

902



169


Settlement of note payable with common stock



25,000


Insurance recoveries accrued in accounts receivable



189


 

 

Nesco Holdings, Inc. 

Adjusted EBITDA Reconciliation (unaudited)



Three Months Ended September 30,


Nine Months Ended September 30,

(in $000s)

2020


2019


2020


2019









Net income (loss)

$

15,173



$

(18,010)



$

(13,946)



$

(30,157)


Interest expense

15,853



16,533



47,816



46,376


Income tax expense (benefit)

(25,508)



494



(25,841)



1,330


Depreciation expense

19,711



17,928



60,080



52,104


Amortization expense

771



724



2,233



2,172


EBITDA

26,000



17,669



70,342



71,825


   Adjustments:








   Non-cash purchase accounting impact (1)

390



126



1,485



862


   Transaction and process improvement costs (2)

1,380



9,648



5,098



14,676


   Major repairs (3)

211



376



1,506



1,522


   Share-based payments (4)

657



283



1,669



463


Change in fair value of derivative (5)

(618)



2,552



6,149



2,552


Adjusted EBITDA

$

28,020



$

30,654



$

86,249



$

91,900


 

Adjusted EBITDA is defined as net income (loss) plus interest expense, provision for income taxes, depreciation, and amortization, and further adjusted for (1) non-cash purchase accounting impact, (2) transaction and process improvement costs, including the effect of the cessation of operations in Mexico, (3) major repairs, (4) share-based payments, (5) other non-recurring items, if any, and (6) the change in fair value of derivative instruments.  This non-GAAP measure is subject to certain limitations.

(1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment sold.  The equipment acquired received a purchase step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement.
(2) 2020: Represents transaction costs related to our acquisition of Truck Utilities (which include post-acquisition integration expenses incurred during the current quarterly and nine month period); 2019: Represents transaction expenses related to merger activities associated with the transaction with Capitol that was consummated on July 31, 2019. These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are costs of startup activities (which include training, travel, and process setup costs) associated with the rollout of new PTA locations that occurred throughout the prior year into the first half of the current year. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are also included for the periods presented. Pursuant to our credit agreement, the cost of undertakings to effect such cost savings, operating expense reductions and other synergies, as well as any expenses incurred in connection with acquisitions, are amounts to be included in the calculation of Adjusted EBITDA.
(3) Represents the undepreciated cost of replaced vehicle chassis and components from heavy maintenance, repair and overhaul activities associated with our fleet, which is an adjustment pursuant to our credit agreement.
(4) Represents non-cash stock compensation expense associated with the issuance of stock options and restricted stock units.
(5) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge) in the three and nine months ended September 30, 2020.

 

 

Fleet Metrics (unaudited)



Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(in $000s, except fleet count and rate per day)








Average equipment on rent

$

464,302



$

484,305



$

475,038



$

467,178


Average fleet count

4,542



4,221



4,595



4,075


Average fleet utilization 

72.1

%


79.1

%


73.1

%


80.4

%

Average rental rate per day 

$

137.16



$

138.11



$

137.23



$

137.42


 

OPERATIONAL AND FINANCIAL METRICS

Average equipment on rent is the average original equipment cost of units on rent during the period. The measure provides a value dimension to the fleet utilization statistics. 

Average fleet count is the average number of units in the fleet during the period.

Average fleet utilization for the period is calculated as the total number of invoiced days divided by the total number of available equipment days. 

Average rental rate per day for the period is calculated as total rental revenue excluding freight and damaged billings divided by the total rental days, which represents the number of billable days in the period aggregated across all units in the fleet.

These metrics have been adjusted to exclude Mexico, for which the Company commenced exit activities in the third quarter of 2019.

 

Segment Performance (unaudited)



Three Months Ended September 30,


Three Months Ended September 30,


2020


2019


ERS

PTA

Total


ERS

PTA

Total

(in $000s)








Rental revenue

$

42,615


$

3,510


$

46,125



$

46,922


$

3,181


$

50,103


Sales of rental equipment

5,510



5,510



3,436



3,436


Sales of new equipment

6,048



6,048



1,246



1,246


Parts sales and services


11,577


11,577




7,657


7,657


Total revenues

54,173


15,087


69,260



51,604


10,838


62,442



Cost of revenue

23,342


10,820


34,162



17,091


6,393


23,484


Depreciation of rental equipment

18,530


937


19,467



16,636


1,058


17,694


Gross Profit

$

12,301


$

3,330


$

15,631



$

17,877


$

3,387


$

21,264






Nine Months Ended September 30,


Nine Months Ended September 30,


2020


2019


ERS

PTA

Total


ERS

PTA

Total

(in $000s)








Rental revenue

$

132,693


$

11,410


$

144,103



$

134,684


$

9,187


$

143,871


Sales of rental equipment

19,585



19,585



15,167



15,167


Sales of new equipment

19,043



19,043



8,076



8,076


Parts sales and services


36,753


36,753




19,675


19,675


Total revenues

171,321


48,163


219,484



157,927


28,862


186,789



Cost of revenue

72,211


34,622


106,833



55,306


17,853


73,159


Depreciation of rental equipment

56,065


3,210


59,275



48,186


3,183


51,369


Gross Profit

$

43,045


$

10,331


$

53,376



$

54,435


$

7,826


$

62,261


 

 

Net Capital Expenditures (unaudited)



Nine Months Ended September 30,

(in $000s)

2020


2019

Purchase of equipment - rental fleet

$

59,197



$

77,752


Purchase of other property and equipment

678



7,166


Total Capital Expenditures

59,875



84,918


Less: Proceeds from sale of rental equipment and parts

(26,108)



(22,608)


Less: Insurance proceeds from damaged equipment

(3,747)



(1,721)


Net Capital Expenditures

$

30,020



$

60,589





Free Cash Flow (unaudited)



Nine Months Ended September 30,

(in $000s)

2020


2019

Net cash flow from operating activities

$

14,866



$

714


Less: Net capital expenditures

(30,020)



(60,589)


  Free Cash Flow

$

(15,154)



$

(59,875)






 

 

 

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SOURCE Nesco Holdings, Inc.

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