Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this annual report. This discussion contains “forward-looking statements” reflecting Alta’s current expectations, estimates and assumptions concerning events and financial trends that may affect its future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this annual report, particularly in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. Alta assumes no obligation to update any of these forward-looking statements.
COVID-19
The COVID-19 pandemic has created significant volatility in the global economy and resulted in significant disruptions to our business in the year ended December 31, 2020. The extent and duration of the COVID-19 impact on our operations and financial position, and on the domestic and global economy, remain uncertain.
Prior to mid-March 2020, our performance was generally in accordance with our expectations. In mid-March 2020, the Company started to see a slowdown in its business activity, initially and primarily in the automotive industry and in the state of Michigan due to its customers being impacted by the COVID-19 pandemic. This slowdown reached its most acute level midway through the second quarter. In mid-May as state and local officials began easing quarantine and “stay at home” orders we saw an increase in business activity levels that continued to trend positively through the remainder of the second quarter. Generally, our business activity levels stabilized in the third quarter to near pre-COVID levels, and then held at or went beyond pre-COVID levels towards the end of the year, other than our rental fleet utilization, which continued to lag 2019 levels. Based on current business levels, we believe the worst of the pandemic’s effect on our business to be behind us.
Notably, the Company was classified as “essential businesses” and our branch infrastructure has remained operational, with minimal disruptions, since the beginning of the COVID-19 pandemic. Additionally, many of our customers in human sustenance, food and beverage, e-commerce, medical supplies and construction were also deemed “essential” early on in the pandemic.
Starting in mid-March 2020 we took several actions to address the pandemic and the directives of governmental authorities in the state and local geographic areas in which we have operations. These actions included those described below:
Remote Work Arrangements
In late March 2020, in compliance with the directives of government authorities in the state and local geographic areas in which we have operations, we adjusted our operations to permit virtually all of our sales and back office employees to work remotely. In late second quarter of 2020, we phased in a return to more normalize working conditions as state or local governments began lifting restrictions. Despite the lifting of certain restrictions, Alta continues to adhere to government issued guidelines and promote a clean and safe environment in all of its branch locations. Where and when applicable, certain non-revenue producing business functions have been able to operate via remote work arrangements which have been designed to allow for the continued operation of our business while allowing employees to work virtually.
Safety Protocols
We have established new safety protocols intended to help protect the health and safety of our workforce as many of them have continued to provide services to our customers in the field or within our branch infrastructure during the COVID-19 outbreak. The protocols comport with state and local guidelines and include, requiring face mask use in our facilities, providing additional personal protective equipment when job requirements do not permit following social distancing guidelines and rigorous facility cleaning protocols.
Liquidity
Although we, and certain segments of our customer base, were deemed an “essential” business in all of our geographies, many of our customers were drastically impacted by COVID-19, which led to an adverse effect on the Company’s financial performance throughout the last three quarters of 2020, with the second and third quarters of 2020 realizing the most significant impact.
In order to preserve our liquidity, during the second quarter of calendar year 2020, our senior executive officers volunteered to accept pay reductions, we implemented an employee furlough program and took various other cost savings measures to prioritize preserving our liquidity position. We believe the measures we took were prudent and successful in helping to preserve our liquidity
18
position. As business conditions and customer demand returned to more normalized levels, many of these cost savings measures and furlough programs were removed and eliminated in the third quarter. While our sales and services related operations are performing at pre-COVID levels, our rental fleet utilization has lagged pre-COVID performance which prevented the Company from generating an optimal level of cash flow commensurate with pre-COVID levels in the fourth quarter. The Company will continue to monitor utilization and, in-turn, rationalize rental fleet levels to match expected demand in 2021 and through the end of COVID-19 pandemic.
We believe that the acquisitions and investments made in the calendar year 2020 expanded our service capabilities, geographic reach, end market diversification and product offerings; each of which will ultimately strengthen our resiliency to economic shocks and will help to preserve liquidity over the long term.
We believe we have sufficient liquidity to fund our operations as we work through the COVID-19 recovery. Our Board of Directors and management team continues to monitor and evaluate the continuing impacts of the COVID-19 pandemic on our business and operations, to the extent business conditions regress from current levels we may take additional actions to further reduce costs and/or seek additional financing to bolster our liquidity position.
Business Description
The Company owns and operates one of the largest integrated equipment dealership platforms in the U.S. Through our branch network, we sell, rent, and provide parts and service support for several categories of specialized equipment, including lift trucks and aerial work platforms, cranes, earthmoving equipment and other material handling and construction equipment. We engage in five principal business activities in these equipment categories:
( i )
new equipment sales;
(ii)
used equipment sales;
(iii)
parts sales;
(iv)
repair and maintenance services; and
(v)
equipment rentals.
We have operated as an equipment dealership for over 35 years and have developed a branch network that includes 54 total locations in Michigan, Illinois, Indiana, Massachusetts, Maine, Connecticut, New Hampshire, Vermont, New York, Virginia, and Florida. We offer our customers a one-stop-shop for most of their equipment needs by providing sales, parts, service, and rental functions under one roof. More recently, with the acquisition of PeakLogix, we have entered the warehouse design, automated equipment installation and system integration sector, which we believe has natural synergies with our material handling business and positions us to take advantage of the macroeconomic trend in warehousing and logistics, and e-commerce.
Within our territories, we are the exclusive distributor of new equipment and replacement parts on behalf of our OEM partners. We enjoy long-standing relationships with leading material handling and construction equipment OEMs, including Hyster-Yale, Volvo, and JCB, among more than 30 others. We are consistently recognized by OEMs as a top dealership partner and have been identified as a nationally recognized Hyster-Yale dealer and multi-year recipient of the Volvo Dealer of the Year award.
Business Segments
We have two reportable segments: Material Handling and Construction Equipment. Our “Material Handling” segment has been previously reported as our “Industrial” segment. Our segments are determined based on management structure, which is organized based on types of products sold and customer end markets, as described in the following paragraph. The operating results for each segment are reported separately to our Chief Executive Officer (our chief operating decision maker) to make decisions regarding the allocation of resources, to assess our operating performance and to make strategic decisions.
The Material Handling segment is principally engaged in operations related to the sale, service, and rental of lift trucks in Michigan, Illinois, Indiana, New York, Virginia and throughout the New England states. The Material Handling segment is made up of the legal entities Alta Industrial Equipment Michigan, LLC, Alta Industrial Equipment Company, LLC, NITCO, LLC, PeakLogix, LLC and Alta Industrial Equipment New York, LLC. The Construction Equipment segment is principally engaged in operations related to the sale, service, and rental of construction equipment in Michigan, Indiana, Illinois, New York, and Florida. The Construction Equipment segment is made up of the legal entities Alta Construction Equipment, LLC, Alta Construction Equipment Illinois, LLC, Alta Heavy Equipment Services, LLC, Alta Construction Equipment Florida, LLC and Alta Construction Equipment New York, LLC.
Alta Equipment Group Inc., Alta Equipment Holdings, Inc. and Alta Enterprises, LLC (individually or as sometimes collectively referred to as “Corporate”) are the holding companies for the legal operating entities noted above that make up each
19
segment. In addition to being a holding company, Alta Enterprises, LLC also holds corporate debt, debt extinguishment fees, deferred taxes, income tax provision, transaction costs associated with the reverse recapitalization and our preferred stock , and has minor operational activity all together.
Acquisitions
Vantage Equipment, LLC
On December 31, 2020, the Company acquired the assets of Vantage, a construction equipment dealer in Upstate New York, for a total purchase price of $24.2 million. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $22.5 million. This acquisition further diversifies our customer base and will complement our Liftech business which serves the Upstate New York material handling market.
Howell Tractor and Equipment, LLC
On October 30, 2020, the Company acquired the assets of Howell, a construction equipment and crane dealer in the greater Chicagoland area, for cash consideration of $22.4 million. Additionally, the Company issued 507,143 shares of its common stock in connection with the purchase agreement, valued at $4.0 million, yielding a total purchase price of approximately $26.4 million. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $23.1 million. This acquisition expands our presence in the Northern Illinois and Northwest Indiana markets adding a best-in-class product to our portfolio and additional service offerings.
Martin Implement Sales, Inc.
On September 1, 2020, the Company acquired the assets of Martin, a compact equipment dealer in the greater Chicagoland area, for a total purchase price of $16.1 million. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $10.6 million. This acquisition enhances our position in the Illinois construction market, broadens our product portfolio in the compact segment of the construction equipment market and adds valuable service capabilities in the region.
Hilo Equipment & Services
On July 1, 2020, the Company acquired the assets of Hilo, a material handling equipment dealer with three branches in the New York City metro area, for a total purchase price, net of cash, of $17.2 million, which includes potential earn-out payments of $1.0 million tied to post closing performance of the Hilo business. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $19.0 million. The acquisition aligns with our growth strategy by expanding our distribution footprint with a major OEM, giving us a strategic presence in yet another densely populated major market and strengthens our overall coverage of the Northeastern United States.
PeakLogix, Inc.
On June 12, 2020, the Company acquired the assets of PeakLogix, a warehouse design, automated equipment installation and systems integrator, for a total purchase price, net of cash, of $6.4 million, which includes $1.0 million in an unsecured one-year promissory note at 6% and earn-out payment of a minimum $2.0 million up to $3.7 million to be paid out to former owners based on meeting certain financial targets throughout the 5-year earn-out period. The acquisition represents the Company’s entrance into the automated equipment installation and system integration sector, which we believe has natural synergies with our material handling business and positions us to take advantage of the macroeconomic trend in warehousing and logistics, and e-commerce.
Liftech Equipment Companies, Inc.
On February 14, 2020, the Company acquired the assets of Liftech, a material handling equipment dealer in Upstate New York, for a total purchase price of $18.4 million, which was paid out of funds from closing of the reverse recapitalization. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $15.2 million. The acquisition primarily expands our materials handling segment into the Upstate New York market, scales our relationship with a major OEM and provides an opportunity for Alta to drive market share with allied products in the region.
20
FlaglerCE Holdings, LLC
On February 14, 2020, the Company acquired the assets of Flagler, a construction equipment dealer in Florida, for a total purchase price, net of cash, of $75.8 million, which was paid out of funds from the closing of the reverse recapitalization. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $79.0 million. The acquisition expands our heavy equipment segment into the Florida construction market, scales our relationship with a major OEM and provides an opportunity for us to deploy our aftermarket strategies in a robust and growing construction market in the southeastern United States.
Northland Industrial Truck Co., Inc.
On May 1, 2019, we purchased the assets of Northland Industrial Truck Company, Inc., a material handling equipment dealer in New England for a total purchase price of $65.6 million. Based on the purchase price and the amount of floorplan eligible new equipment inventory acquired in the transaction, the total enterprise value at close was $42.1 million. The acquisition expanded our business into the New England market, diversifies our end market exposure, and provided Alta a growth platform on the East Coast of the United States. The acquisition added a best-in-class full-service materials handling and construction equipment dealer with operations in Massachusetts, Connecticut, New Hampshire and Maine.
Financial Statement Components
Our revenues and related costs are primarily derived from sale or rental of equipment and related activities, and consist of:
New Equipment Sales. We sell new heavy construction and material handling equipment and are a leading regional distributor for over 30 nationally recognized equipment manufacturers, including Hyster, Yale, Volvo, and JCB. Our new equipment sales operation is a primary source of new customers for the rental, parts and services business. The majority of our new equipment sales is predicated on exclusive distribution agreements we have with best-in-class OEMs. The sale of new equipment to customers, while profitable, acts as a means of generating equipment field population and activity for our higher-margin aftermarket revenue streams, specifically service and parts. We also sell tangential products related to our material handling equipment offerings and, with the acquisition of PeakLogix, we provide warehouse design, automated equipment installation and system integration solutions.
Used Equipment Sales. We sell used equipment which is typically equipment that has been taken in on trade from a customer that is purchasing new equipment, equipment coming off a third-party or financing lease arrangement, or, as is primarily the case in our material handling segment, equipment that has been designated for disposal and has been transferred to our used inventory from our rental fleet. Used equipment sales made in our territories, like new equipment sales, generate parts and services business for the Company, as well.
Parts Sales. We sell replacement parts to customers and supply parts to our own rental fleet. Our in-house parts inventory is extensive such that we are able to provide timely service support to our customers. The majority of our parts inventory is made up of OEM replacement parts for those OEM’s with which we have exclusive dealership agreements to sell new equipment.
Service Support. We provide maintenance and repair services for customer-owned equipment and we maintain our own rental fleet. In addition to repair and maintenance on an as needed or scheduled basis, we provide ongoing preventative maintenance services and warranty repairs for our customers. We have committed substantial resources to training our technical service employees and have a full-scale service infrastructure that we believe differentiates us from our competitors. Approximately half of our employees are skilled service technicians. Training, paid time off, and other non-billable costs of maintaining our expert technicians flow through this department in addition to the direct customer-billable labor.
Equipment Rentals. We rent heavy construction, aerial, material handling, and compact equipment to our customers on a daily, weekly and monthly basis. Our rental fleet, which is well-maintained has an original acquisition cost (which we define as the cost originally paid to manufacturers plus any capitalized costs) of $405.5 million. The original acquisition cost of our rental fleet excludes the value of assets associated with our guaranteed purchase obligations, which are assets that are not in our day-to-day operational control. In addition to being a core business, our rental business also creates cross-selling opportunities for us in our sales and product support activities.
Rental Equipment Sales. We also sell rental equipment from our rental fleet. Customers often have options to purchase equipment after or before rental agreements have matured. Rental equipment sales, like new and used equipment sales, generate customer-based equipment field population within our territories and ultimately yield high-margin parts and services revenue for us.
General and Administrative Expenses. These costs are comprised of three main components: personnel costs, operational costs, and occupancy costs. Personnel costs are comprised of hourly and salaried wages for administrative employees, including incentive compensation, and employee benefits, including medical benefits. Operational costs include marketing activities, costs associated with
21
deploying and leasing our service vehicle fleet, personal property related insurance, information technology, office and shop supplies, general corporate costs, depreciation on non-sales and rental related assets, and intangible amortization. Occupancy costs are comprised of all expenses related to office and administrative working space, including rent, utilities, property taxes, and building insurance.
Other Income (Expense). This section of the financial statements is mostly comprised of interest expense and other miscellaneous items that result in income or expense. Interest expense is mostly driven by our OEM floorplan financing arrangements, a working capital line of credit, and a second lien term loan. Also included in this section of the financials are non-recurring costs, in particular expenses associated with the extinguishment of debt.
Results of Operations
Year ended December 31, 2020 compared to the year ended December 31, 2019
Consolidated Results
Years ended December 31,
Increase
(Decrease)
Percent of Revenue
Consolidated
2020
2019
2020 versus 2019
2020 versus 2019
Revenues:
New and used equipment sales
$
410.3
$
244.6
$
165.7
67.7
%
47.0
%
43.9
%
Parts sales
129.6
82.7
46.9
56.7
%
14.8
%
14.8
%
Service revenue
128.5
92.7
35.8
38.6
%
14.7
%
16.6
%
Rental revenue
118.8
95.2
23.6
24.8
%
13.6
%
17.1
%
Rental equipment sales
86.4
42.2
44.2
104.7
%
9.9
%
7.6
%
Net revenue
$
873.6
$
557.4
$
316.2
56.7
%
100.0
%
100.0
%
Cost of revenues:
New and used equipment sales
356.4
215.4
141.0
65.5
%
40.8
%
38.6
%
Parts sales
89.1
54.1
35.0
64.7
%
10.2
%
9.7
%
Service revenue
49.5
34.6
14.9
43.1
%
5.7
%
6.2
%
Rental revenue
20.2
17.5
2.7
15.4
%
2.3
%
3.1
%
Rental depreciation and amortization
68.4
47.3
21.1
44.6
%
7.8
%
8.5
%
Rental equipment sales
75.5
36.4
39.1
107.4
%
8.6
%
6.5
%
Cost of revenue
$
659.1
$
405.3
$
253.8
62.6
%
75.4
%
72.7
%
Gross profit
$
214.5
$
152.1
$
62.4
41.0
%
24.6
%
27.3
%
General and administrative expenses
216.0
137.6
78.4
57.0
%
24.7
%
24.7
%
Depreciation and amortization expense
6.6
2.8
3.8
135.7
%
0.8
%
0.5
%
Total general and administrative expenses
$
222.6
$
140.4
$
82.2
58.5
%
25.5
%
25.2
%
(Loss) income from operations
$
(8.1
)
$
11.7
$
(19.8
)
(169.2
)%
(0.9
)%
2.1
%
Other income (expense)
Interest expense, floor plan payable — new equipment
(2.3
)
(2.9
)
0.6
(20.7
)%
(0.3
)%
(0.5
)%
Interest expense — other
(21.5
)
(17.6
)
(3.9
)
22.2
%
(2.5
)%
(3.2
)%
Other income
8.9
1.3
7.6
584.6
%
1.0
%
0.2
%
Change in fair market of warrants
—
(27.9
)
27.9
(100.0
)%
—
(5.0
)%
Loss on extinguishment of debt
(7.6
)
—
(7.6
)
NA
(0.9
)%
—
Total other income (expense)
$
(22.5
)
$
(47.1
)
$
24.6
(52.2
)%
(2.6
)%
(8.4
)%
Loss before taxes
$
(30.6
)
$
(35.4
)
4.8
(13.6
)%
(3.5
)%
(6.4
)%
Income tax benefit
(6.6
)
—
(6.6
)
NA
(0.8
)%
—
Net loss
$
(24.0
)
$
(35.4
)
$
11.4
(32.2
)%
(2.7
)%
(6.4
)%
Revenues: Consolidated revenues increased by $316.2 million, or 56.7%, to $873.6 million for the year ended December 31, 2020 as compared to the previous year. The primary drivers of the year over year increase were the favorable impact from the acquisitions completed in 2020 of Flagler, Liftech, PeakLogix, Hilo, Martin, and Howell, along with the impact of full period results from the acquisition of NITCO in May 2019. The Vantage acquisition, although completed in 2020, has no impact to the 2020 revenues due to its closing date of December 31, 2020. Excluding the effects of acquisitions, new and used equipment sales increased on an organic
22
basis by approximately 7.0% within our existing markets. Service and parts revenue s similarly increased on an organic basis year over year by 2.6% mainly driven by demand for ongoing maintenance on equipment previously sold to our customers. On an organic basis, service and parts revenues increased 4.9 % and 0.1 %, respectively. While equipment sales and our aftermarket service and parts revenue s increased organically year over year , rental revenue decreased on an organic basis despite growing 24.8% overall when factoring in the impact of acquisitions. As the impact of COVID-19 became more widespread in March 2020, our equipment rental utilization and sales volumes began to decline as certain of our customers suspended operations or delayed project starts. T h e decline in rental performance, when compared to prior years, began in the second quarter of 2020, and continued to lag 2019 performance in the third and fourth quarters of 2020 . However, the rental performance lag versus prior years incrementally improved through the second half of 2020. Even with sequential improvements in the second half of 2020 , our organic rental revenues for the year ended December 31, 2020, were 7.5 % lower than those of the year ended December 31, 2019. In the fourth quarter of 2020, similar to prior years, we saw a notabl e increase in the sales of our rental equipment, which leads to more optimized fleet levels as we begin 2021.
Gross profit (GP):
Years ended December 31,
2020
2019
Change
Consolidated
GP%
GP%
GP%
New and used equipment sales
13.1
%
11.9
%
1.2
%
Parts sales
31.3
%
34.6
%
(3.3
)%
Service revenue
61.5
%
62.7
%
(1.2
)%
Rental revenue
25.4
%
31.9
%
(6.5
)%
Rental equipment sales
12.6
%
13.7
%
(1.1
)%
Consolidated gross profit
24.6
%
27.3
%
(2.7
)%
Consolidated gross profit decreased by 2.7% from 27.3% in the year ended December 31, 2019 to 24.6% in the same period in 2020. The overall gross profit margin declined due to a combination of a sales mix change year over year toward lower-margin sales channels such as new and used equipment sales. A portion of the sales mix change can be attributed to our acquisitions, however, COVID-19 contributed to the mix change as well. As mentioned previously, reduced year-over-year utilization of our rental fleet, resulting from factors attributed to COVID-19 and the surrounding macroeconomic factors, combined with fixed depreciation expense contained within rental cost of revenues on certain product categories of our rental fleet, thereby compressing margins, also had an impact on gross profit margin in 2020. The reductions were partially offset by improved new and used equipment margins, mainly in our Material Handling segment. Additionally, and expectedly, parts and service gross margins regressed, in part due to the relative sales mix between the Construction and Material Handling segments.
General and Administrative expenses: Consolidated general and administrative (“G&A”) expenses increased by 58.5% to $222.6 million for the year ended December 31, 2020 as compared to the same year last year. This increase was mainly attributable to the seven acquisitions that were closed throughout 2020 along with consolidated full period results of NITCO in 2020. Additionally, the Company incurred $7.6 million of transaction costs associated with activities directly attributable to the reverse recapitalization, $3.6 million share-based compensation expense mainly due to the immediate vesting of restricted stock units in the third quarter related to the passing of our Construction Group President. Outside of the reverse recapitalization, share based compensation and acquisition activities, G&A expenses also increased in support of enterprise-wide growth as notable portion of our G&A expenses are variable in nature.
Other Income (expense): Consolidated other expense decreased by $24.6 million for the year ended December 31, 2020 compared to the same period last year. The favorable change was primarily attributable to $8.0 million in key man life insurance proceeds as a result of the passing away of our Construction Group President. This was offset by higher borrowings associated with the reverse recapitalization and acquisition related activities during year. Additionally, in 2019, the Company incurred $27.9 million expense as a result of the recognition of an increase in the fair value of warrants held by a former minority shareholder. The increase in fair value was triggered by the implied valuation of the company in the reverse recapitalization.
Provision for income taxes: Income tax benefit for the year ended December 31, 2020 was $6.6 million compared to $0 for the year ended December 31, 2019, which was prior to the reverse recapitalization. This benefit was the result of the level of pre-tax loss for the period from February 14, 2020 to December 31, 2020.
23
Material Handling Results
Years ended December 31,
Increase
(Decrease)
Percent of Revenue
Material Handling
2020
2019
2020 versus 2019
2020 versus 2019
Revenues:
New and used equipment sales
$
225.1
$
151.1
$
74.0
49.0
%
51.9
%
48.4
%
Parts sales
60.8
50.1
10.7
21.4
%
14.0
%
16.0
%
Service revenue
83.9
66.8
17.1
25.6
%
19.3
%
21.4
%
Rental revenue
46.9
38.3
8.6
22.5
%
10.8
%
12.3
%
Rental equipment sales
16.9
6.0
10.9
181.7
%
3.9
%
1.9
%
Net revenue
$
433.6
$
312.3
$
121.3
38.8
%
100.0
%
100.0
%
Cost of revenues:
New and used equipment sales
189.4
131.8
57.6
43.7
%
43.7
%
42.2
%
Parts sales
38.7
31.1
7.6
24.4
%
8.9
%
10.0
%
Service revenue
31.1
24.6
6.5
26.4
%
7.2
%
7.9
%
Rental revenue
7.6
6.1
1.5
24.6
%
1.8
%
2.0
%
Rental depreciation and amortization
20.4
14.8
5.6
37.8
%
4.7
%
4.7
%
Rental equipment sales
13.1
4.4
8.7
197.7
%
3.0
%
1.4
%
Cost of revenue
$
300.3
$
212.8
$
87.5
41.1
%
69.3
%
68.1
%
Gross profit
$
133.3
$
99.5
$
33.8
34.0
%
30.7
%
31.9
%
General and administrative expenses
114.3
81.5
32.8
40.2
%
26.4
%
26.1
%
Depreciation and amortization expense
3.6
2.2
1.4
63.6
%
0.8
%
0.7
%
Total general and administrative expenses
$
117.9
$
83.7
$
34.2
40.9
%
27.2
%
26.8
%
Income from operations
$
15.4
$
15.8
$
(0.4
)
(2.5
)%
3.6
%
5.1
%
Other income (expense)
Interest expense, floor plan payable — new equipment
(1.2
)
(1.6
)
0.4
(25.0
)%
(0.3
)%
(0.5
)%
Interest expense — other
(4.5
)
(3.0
)
(1.5
)
50.0
%
(1.0
)%
(1.0
)%
Other income
0.6
0.4
0.2
50.0
%
0.1
%
0.1
%
Total other income (expense)
$
(5.1
)
$
(4.2
)
$
(0.9
)
21.4
%
(1.2
)%
(1.3
)%
Net income
$
10.3
$
11.6
$
(1.3
)
(11.2
)%
2.4
%
3.7
%
Revenues: Material Handling segment revenues increased by 38.8% to $433.6 million for the year ended December 31, 2020 as compared to the same period last year. All revenue streams were increased primarily due to the numerous acquisitions in 2020 and consolidated full period results of NITCO in 2020 relative to 2019. In 2020, we experienced a reduction in customer demand, specifically in parts, service and rental, reflective of the impact of the COVID-19 pandemic on several of our end markets in the Material Handling segment. This was partially offset by the continuity of many of our customers in the medical, warehousing, and distribution industries, among other “essential business” customers that we serve, and the recovery of business operations for our most impacted customers in the second half of the year.
Gross profit (GP):
Years ended December 31,
2020
2019
Change
Material Handling
GP%
GP%
GP%
New and used equipment sales
15.9
%
12.8
%
3.1
%
Parts sales
36.3
%
37.9
%
(1.6
)%
Service revenue
62.9
%
63.2
%
(0.2
)%
Rental revenue
40.3
%
45.4
%
(5.1
)%
Rental equipment sales
22.5
%
26.7
%
(4.2
)%
Consolidated gross profit
30.7
%
31.9
%
(1.1
)%
Material Handling gross profit declined slightly to 30.7% in the year ended December 31, 2020 from 31.9% compared to the same period in 2019. New and used equipment margins benefited from the addition of PeakLogix to the sales mix and improved sales of higher margin allied and specialized product offerings. Further, used equipment sales margins showed an improvement over the previous year. Rental revenue margins declined comparably as a result of reduced utilization of our rental fleet and the fixed
24
depreciation on our Material Handling rental fleet. With the reduction in utilization, rental fleet expenses such as repairs and maintenance and subleasing costs increased as a percentage of revenue to drive the depressed margin in the department year over year . Parts and service gross profit experienced a modest decline year over year but are generally aligned with expectations despite lower sales volume in these departments .
General and administrative expenses: Material Handling general and administrative (“G&A”) expenses increased by 40.9% to $117.9 million for the year ended December 31, 2020 as compared to the same period last year. This increase was primarily attributable to the acquisitions of Liftech, PeakLogix and Hilo in 2020 along with consolidated full period results of NITCO in 2020 relative to 2019. At the onset of the COVID-19 pandemic, the Material Handling segment initiated immediate cost mitigation in the form of pay reductions, employee furlough programs and reductions in benefits. As state and local restrictions lifted and business activities resumed, employee pay and benefits were reestablished to previous levels, and employees were sequentially called back from furlough in the third quarter of the year.
Other Income (expense): Material Handling other expense increased by $0.9 million to ($5.1) million for the year ended December 31, 2020 as compared to the same period last year. This was primarily due to interest expense increasing by $1.1 million to ($5.7) million. This change was mainly the result of the addition of acquisition debt related to the purchase of Liftech, PeakLogix and Hilo during the year, as their assets were financed via our line of credit and floorplan facilities and interest expense was allocated to the segment accordingly.
Construction Equipment Results
Years ended December 31,
Increase
(Decrease)
Percent of Revenue
Construction
2020
2019
2020 versus 2019
2020 versus 2019
Revenues:
New and used equipment sales
$
185.2
$
93.5
$
91.7
98.1
%
42.1
%
38.1
%
Parts sales
68.8
32.6
36.2
111.0
%
15.6
%
13.3
%
Service revenue
44.6
25.9
18.7
72.2
%
10.1
%
10.6
%
Rental revenue
71.9
56.9
15.0
26.4
%
16.3
%
23.2
%
Rental equipment sales
69.5
36.2
33.3
92.0
%
15.8
%
14.8
%
Net revenue
$
440.0
$
245.1
$
194.9
79.5
%
100.0
%
100.0
%
Cost of revenues:
New and used equipment sales
167.0
83.6
83.4
99.8
%
38.0
%
34.1
%
Parts sales
50.4
23.0
27.4
119.1
%
11.5
%
9.4
%
Service revenue
18.4
10.0
8.4
84.0
%
4.2
%
4.1
%
Rental revenue
12.6
11.4
1.2
10.5
%
2.9
%
4.7
%
Rental depreciation and amortization
48.0
32.5
15.5
47.7
%
10.9
%
13.3
%
Rental equipment sales
62.4
32.0
30.4
95.0
%
14.2
%
13.1
%
Cost of revenue
$
358.8
$
192.5
$
166.3
86.4
%
81.5
%
78.5
%
Gross profit
$
81.2
$
52.6
$
28.6
54.4
%
18.5
%
21.5
%
General and administrative expenses
87.8
51.2
36.6
71.5
%
20.0
%
20.9
%
Depreciation and amortization expense
3.0
0.6
2.4
400.0
%
0.7
%
0.2
%
Total general and administrative expenses
90.8
51.8
$
39.0
75.3
%
20.6
%
21.1
%
(Loss) income from operations
$
(9.6
)
$
0.8
$
(10.4
)
(1300.0
)%
(2.2
)%
0.3
%
Other income (expense)
Interest expense, floor plan payable — new equipment
(1.1
)
(1.3
)
0.2
(15.4
)%
(0.3
)%
(0.5
)%
Interest expense — other
(9.5
)
(6.5
)
(3.0
)
46.2
%
(2.2
)%
(2.7
)%
Other income
0.3
0.9
(0.6
)
(66.7
)%
0.1
%
0.4
%
Total other income (expense)
$
(10.3
)
$
(6.9
)
$
(3.4
)
49.3
%
(2.3
)%
(2.8
)%
Net loss
$
(19.9
)
$
(6.1
)
$
(13.8
)
226.2
%
(4.5
)%
(2.5
)%
Revenues: Construction Equipment segment revenues increased by 79.5% to $440.0 million for the year ended December 31, 2020 as compared to the same period last year. This increase was primarily attributable to the Flagler, Martin and Howell acquisitions that occurred in the first, third and fourth quarters of 2020, respectively. Organically, all revenue streams improved over the prior year with the exception of rental revenues. New and used equipment sales increased organically year over year by 22.4%, and the aftermarket sales departments of parts and service increased by 13.6% organically. Our rental revenues were unfavorably impacted by weaker utilization metrics as a result of the macroeconomic factors surrounding and related to the COVID-19 pandemic. With rental
25
equipment being returned and utilization suffering, we focused on a fleet sales effort concentrated in the fourth quarter to increase rental equipment sales, achieving over $12 .0 million increase organically in rental equipment sales in the fourth quarter of 2020 over the same period in 2019.
Gross profit (GP):
Years ended December 31,
2020
2019
Change
Construction
GP%
GP%
GP%
New and used equipment sales
9.8
%
10.6
%
(0.8
)%
Parts sales
26.7
%
29.4
%
(2.7
)%
Service revenue
58.7
%
61.4
%
(2.6
)%
Rental revenue
15.7
%
22.8
%
(7.1
)%
Rental equipment sales
10.2
%
11.6
%
(1.4
)%
Consolidated gross profit
18.5
%
21.5
%
(3.0
)%
Construction Equipment gross profit decreased by 3.0% to 18.5% for the year ended December 31, 2020, from 21.5% compared to the same period in 2019. A decline in rental revenue gross margin was the main driver in the overall depressed margin. Rental margins decreased primarily due to the acquisition of Flagler in the first quarter of 2020. Flagler’s rental fleet, when compared to the rental fleet that existed prior, is more heavily weighted to larger capacity construction equipment which we depreciate at a higher rate than lower capacity construction equipment Secondarily, the combination of reduced utilization of our rental fleet, due to COVID-19 and the fixed depreciation expense on certain product categories of our rental fleet also contributed to this reduction in gross margin. Service and parts gross margins, decreased year-over-year, due to acquisition of Flagler in the first quarter of 2020, where the mix of service and parts revenue is more heavily weighted toward lower-margin warranty work and where best practices in the service department continue to be implemented.
General and Administrative expenses: Construction Equipment general and administrative (G&A) expenses increased by 75.3% to $90.8 million for the year ended December 31, 2020 as compared to the same period last year. The increase was primarily due to the impact from the acquisitions of Flagler, Martin, and Howell. In addition to the acquisitions, the Construction Equipment segment incurred $3.0 million stock compensation expense mainly due to the immediate vesting of the restricted stock units for the passing of its Construction Group President. Additionally, G&A expenses also increased in support of growth in certain departments and geographies, as notable portion of our G&A expenses are variable in nature.
Other Income (expense): Construction Equipment other expense increased to ($10.3) million for the year ended December 31, 2020 as compared to the same period last year. This was primarily due to interest expense increasing by $2.8 million to ($10.6) million respective to the Flagler, Martin, and Howell acquisitions, as these assets were financed via our availability on our line of credit and floorplan facilities.
Liquidity and Capital Resources
Year ended December 31, 2020 compared with year ended December 31, 2019 Cash Flows
Cash Flow from Operating Activities . Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital. For the year ended December 31, 2020, operating activities resulted in net cash used in operations of $38.4 million. Our reported net loss of $24.0 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, former debt extinguishment, provision for losses on accounts receivable , and the share-based payments, provided net cash inflows of $44.8 million. Changes in working capital included a $140.8 million increase in inventories, $38.0 million in net payments on manufacturer floor plans, and a $6.8 million increase in accounts receivable and prepaid expenses and other assets. Cash flows from operating activities were favorably impacted by $86.4 million due to proceeds from sale of rental equipment, and a $16.0 million favorable change in accounts payable, accrued expenses, customer deposits, leases and other liabilities.
For the year ended December 31, 2019, operating activities resulted in net cash used in operations of $5.5 million. Our reported net loss of $35.4 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, paid-in-kind interest, provision for losses on accounts receivable, and the change in the fair value of the warrants, provided positive cash flows of $46.8 million. These cash flows from operating activities were offset by cash outflows attributable to a $23.2 million increase in accounts receivable, a $72.2 million increase in inventories, and a $2.0 million increase in prepaid expenses and other assets. Cash flows from operating activities were positively impacted by a net $42.2 million due to proceeds from sale of rental equipment, $18.8 million increase in accounts payable, accrued expenses, customer deposits, and other current liabilities, and a $0.6 million
26
increase in liabilities associated with sale contracts containing guaranteed purchase obligations and other liabilities. Additionally, net payments on manufacturer floor plans decreased cash flows by $16.5 million.
Cash Flow from Investing Activities . For the year ended December 31, 2020, our cash used in investing activities was $224.5 million. This was mainly due to $180.0 million use of cash as a result of the recent acquisitions and $44.5 million purchases of rental equipment and non-rental property and equipment offset by proceeds from the sale of assets.
For the year ended December 31, 2019, our cash used in investing activities was $87.8 million. The acquisition of NITCO totaled $65.6 million and purchases of rental and non-rental equipment totaled approximately $22.3 million.
Cash Flow from Financing Activities. For the year ended December 31, 2020, cash provided by financing activities was $264.1 million. The favorable impact was mainly due to $175.7 million proceeds from the completion of the reverse recapitalization. Net proceeds under our lines of credits and floor plans with an unaffiliated source (i.e. a non-vendor) were $166.1 million and $6.8 million, respectively. Net proceeds under long-term debt amounted to $149.4 million. Additionally, we had cash inflows as a result of proceeds from issuance of common stock and preferred stock of $ 32.2 million and disgorgement of short swing profits of $1.6 million. This was partially offset by payments related to the extinguishment of former debt, a line of credit and redemption of former shareholders’ notes payable all of which totaled $221.6 million, an extinguishment of a warrant liability of $29.6 million, expenditures of debt issuance costs of $2.7 million, repurchases of common stock of $5.9 million and a $7.9 million payment on long term debt and capital lease obligations.
For the year ended December 31, 2019, cash provided by financing activities was $91.8 million. Net proceeds under our lines of credit and floor plans with an unaffiliated source (i.e. a non-vendor) for the year ended December 31, 2019 were $44.7 million and $40.1 million, respectively. Additionally, net proceeds under long-term debt amounted to $8.0 million, partially offset by payments on capital lease obligations of $0.9 million.
Sources of Liquidity
The Company reported $1.2 million in cash as of December 31, 2020.
In conjunction with the reverse recapitalization, effective February 14, 2020, the Company amended and restated its credit facility with its first lien lender by entering into the Fifth Amended and Restated ABL First Lien Credit Agreement (“Amended and Restated Credit Agreement” and the facility thereunder, the “ABL Facility”) by and among Alta Equipment Group Inc. and the other credit parties named therein, the lenders named therein, JP Morgan Chase Bank, N.A., as Administrative Agent, and the syndication agents and documentation agent named therein.
In connection with the Amended and Restated Credit Agreement, the Company amended and restated its floor plan facility with its first lien lender by entering into the Fifth Amended and Restated Floor Plan First Lien Credit Agreement (“Floor Plan Credit Agreement”) by and among Alta Equipment Group Inc. and the other credit parties named therein, the lender JP Morgan Chase Bank, N.A., as Administrative Agent, Sole Bookrunner and Sole Lead Arranger.
The Amended and Restated Credit Agreement, among other things, (i) moved the $85 million floor plan financing facility of the Fourth Amended and Restated First Lien Credit Agreement out of syndication and into the Floor Plan Credit Agreement, (ii) increased the total aggregate amount of allowed indebtedness of all floor plans from $220 million to $225 million, (iii) increased the revolving line of credit borrowing capacity from $110 million to $300 million, and (iv) modified financial covenants (as defined in the Amended and Restated Credit Agreement).
The Floor Plan Credit Agreement, among other things, (i) modified the floor plan financing facility with the Company’s first lien lender from $85 million to $40 million, and (ii) modified financial covenants (as defined in the Floor Plan Credit Agreement).
Line of Credit and Floor Plan First Lien Lender
The Company has a revolving line of credit with its first lien holder with advances on the line being supported by eligible accounts receivable, parts, and otherwise unencumbered new and used equipment inventory and rental equipment. The revolving line of credit has a maximum borrowing capacity of $300 million and interest cost is the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or the CB Floating Rate, depending on the borrowing. As of December 31, 2020, the Company had an outstanding revolving line of credit balance of $159.1 million, excluding unamortized debt issuance costs.
The Company has a floor plan financing facility with its first lien lender to finance new and used inventory and rental fleet equipment. This floor plan has a maximum borrowing capacity of $40 million. At December 31, 2020, the Company had an outstanding balance on their first lien lender floor plan facility of $35.3 million, excluding unamortized debt issuance costs.
27
Original Equipment Manufacturer (“OEM”) Captive Lenders and Suppliers’ Floor Plans
OEM captive lender and suppliers’ floor plans payable are financing arrangements for new and used inventory and rental equipment. We have such arrangements with several OEM captive lenders and suppliers each with borrowing capacities ranging from $2.0 million to $102.0 million. Certain floor plans provide for a five to twelve-month interest only or deferred payment period. In addition, these floor plan agreements provide for interest or principal free terms at the supplier’s discretion. The Company routinely sells equipment that is financed under OEM captive lender floor plans prior to the original maturity date of the financing agreement. The related OEM captive lender floor plans payable is then due and payable at the time the equipment being financed is sold.
Maximum borrowings under the floor plans and the revolving line of credit are limited to $525 million. The total amount outstanding as of December 31, 2020 was $316.6 million, exclusive of debt issuance and deferred financings costs of $1.5 million.
Term Loan
In connection with the reverse recapitalization, the Company entered into a new Note Purchase Agreement (the “Term Loan”) dated as of February 3, 2020, for the purposes of, among other things, (i) financing the reverse recapitalization, (ii) financing the acquisition of Flagler and Liftech, and (iii) providing for the repayment and refinance of a portion of the Company’s prior existing debt.
The Term Loan has an aggregate principal amount of $155.0 million and has second lien priority and the Company’s assets, with an initial maturity date of August 2025. In connection with the new Note Purchase Agreement, the Company retired its existing term loan facility. The term loan is payable in quarterly installments of $1.9 million plus interest at LIBOR plus 8%. As of December 31, 2020, the effective interest rate was 9.8%. The loan is collateralized by substantially all assets of the Company.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by our service-related operations and the sales of new, used and rental fleet equipment along with rentals of such equipment, proceeds from the issuance of debt, and borrowings available under our lines of credit and floor plans. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under lines of credit and flooring plans payable, fund acquisitions, and meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the uses described above encompass the principal demands on our cash and availability under our lines of credit in the future.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the year ended December 31, 2020 was approximately $159.4 million, including $117.9 million of transfers from new and used inventory to rental fleet. This gross rental fleet capital expenditure was offset by sales proceeds of rental equipment of approximately $86.4 million for the year ended December 31, 2020 as our business model is to sell lightly used inventory to customers from our rental fleet so as to increase field population in our geographies. In response to changing economic conditions, we have the flexibility to modify our capital expenditures, especially as it relates to rental fleet.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness, will depend upon our future operating performance and the availability of borrowings under the lines of credit and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash, and available borrowings under the lines of credit will be adequate to meet our future liquidity needs for the foreseeable future. As of December 31, 2020, we had $215.7 million of available borrowings under the revolving line of credit and floor plans.
We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities 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. Given current economic and market conditions, including the volatility in the global capital markets, we cannot assure investors that any of these actions could be affected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit 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 debt.
28
Critical A ccounting P olicies
In the preparation of consolidated financial statements prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures. Our management, on an ongoing basis, reviews these estimates and assumptions. While we believe the estimates and judgments, we use in preparing our consolidated financial statements are appropriate, they are subject to future events and uncertainties regarding their outcome and, therefore, actual results may materially differ from these estimates. We consider the following items in the consolidated financial statements to require significant estimation or judgment. See Note 2 to our consolidated financial statements for the year ended December 31, 2020 for a summary of our significant accounting policies.
Revenue Recognition
Revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the business expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain the benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. For agreements with multiple performance obligations, which are infrequent, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct performance obligation based on the observable selling price.
We enter into various equipment sale transactions with certain customers, whereby customers purchase equipment from us and then lease the equipment to a third party. In some cases, we provide a guarantee to repurchase the equipment back at the end of the lease term between the customer and third party lessee at a set residual amount set forth in the initial sales contract or pay the customer for the deficiency, if any, between the sale proceeds received for the equipment and the guaranteed minimum resale value. We are precluded from recognizing a sale of equipment if we guarantee to repurchase the sold equipment back or guarantee the resale value of the equipment to the customer for contracts determined to be operating leases. Rather, these transactions are accounted for in accordance with ASC 840, Lease Accounting (“Topic 840”).
Lease liability, with respect to the aforementioned sale transactions, represents the net proceeds upon the equipment’s initial transfer. These amounts, excluding the guaranteed residual value, are recognized into rental revenue on a pro-rata basis over the leased contract period up to the first exercise date of the guarantee.
We also enter into various rental agreements whereby owned equipment is rented to customers. Revenue from the majority of rental agreements is recognized over the term of the agreement in accordance with Topic 840. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, the Company records unbilled rental revenues and deferred rental revenues at the end of each reporting period. Unbilled rental revenues are included as a component of “Accounts receivable” on the Consolidated Balance Sheets. Rental equipment is also purchased by customers outright (“rental conversions”). Rental revenue and revenue attributable to rental conversions, are recognized in “Rental revenue” and “Rental equipment sales” on the Consolidated Statements of Operations, respectively.
Periodic and ad-hoc maintenance service revenue is recognized upon completion of the service and the agreement of terms with the customer. Revenue from guaranteed maintenance contracts is recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract, typically three to five years.
We also enter into contracts with customers where we provide automated equipment installation and system integration services. Revenue from the installation services are recognized over time as the performance obligation is satisfied, determined using the cost-to-cost input method, based on contract costs incurred to date to total estimated contract costs.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized, and payment is due is not significant. We do not evaluate whether the selling price includes a financing interest component for contracts that are less than a year, or if payment is expected to be received less than a year after the good or service has been provided. Sales and other taxes collected from customers and remitted to government authorities are accounted for on a net basis and, therefore, excluded from revenue. Shipping and handling costs are treated as fulfillment costs and are included in cost of revenue.
Useful Lives of Rental Equipment and Property and Equipment
We depreciate rental equipment and property and equipment over their estimated useful lives. The useful life of rental equipment is determined based on our estimate of the period the asset will generate revenues. The principal methods of depreciation used are straight-line basis over the estimated useful lives or percentage of rental revenue based on the unit of activity method. We
29
periodically review the assumptions used in calculating rates of depreciation. We may be required to change these estimates based on changes in our industry or other changes in circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets. The amount of depreciation expense we record is highly dependent upon the estimated useful lives assigned to each category of equipment.
The useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate.
Generally, we assign the following useful lives to the below categories of Property and Equipment:
Estimated
Useful Life
Transportation equipment
2 – 5 years
Machinery and equipment
3 – 20 years
Office equipment
5 – 7 years
Computer equipment
2 – 5 years
Leasehold improvements
3 – 15 years
Evaluation of Goodwill Impairment
Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including: the identification of reporting units; assignment of assets and liabilities to reporting units; assignment of goodwill to reporting units; determination of the fair value of each reporting unit; and an assumption as to the form of the transaction in which the reporting unit would be acquired by a market participant (either a taxable or nontaxable transaction).
We estimate the fair value of our reporting units (which are our reportable segments) using a discounted cash flow methodology under an income approach, corroborating the results with a market approach based guideline-company methodology which analyzes the enterprise value (market capitalization plus interest-bearing liabilities) and operating metrics (e.g., EBITDA) of companies engaged in the same or similar line of business and compares those metrics to those of the Company. We believe the combination of these valuation approaches, yields the most appropriate evidence of fair value. A decrease in our EBITDA could materially affect the determination of the fair value and could result in an impairment charge to reduce the carrying value of goodwill, which could be material to our financial position and results of operations.
We review goodwill for impairment utilizing a one-step process in which we compare the fair value of each of our reporting units’ net assets to the respective carrying value of net assets. If the carrying value of a reporting unit’s net assets is less than its fair value, then we do not recognize an impairment. If the carrying amount of a reporting unit’s net assets is greater than its fair value, we recognize a goodwill impairment for the amount of the excess of the net assets over the fair value.
Financial Accounting Standards Board (“FASB”) guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.
In connection with our goodwill impairment tests that were conducted as of December 31, 2020 and 2019, we bypassed the qualitative assessment for each reporting unit and proceeded directly to the first step of the goodwill impairment test. We estimated the fair values of our reporting units based on financial information of companies that we deemed were comparable to our business. We made judgments the comparability of publicly traded companies engaged in similar businesses and based our judgments on factors such as size, growth rates, profitability, business model and risk.
Our annual goodwill impairment testing conducted as of September 30, 2020, indicated that all of our reporting units had estimated fair values which exceeded their respective carrying amounts. Our goodwill impairment testing as of December 31, 2019, indicated that all of our reporting units had estimated fair values which exceeded their respective carrying amounts.
Share Based Compensation
The board of directors approved the Company’s 2020 Omnibus Incentive Plan, which enables the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share based awards and cash awards to directors, employees and consultants to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company.
30
We measure the employee stock-based awards at their grant-date fair value using provisions of ASC 718 – Stock Compensation and record compensation expense over the vesting period of the award. The Company made an accounting election upon adoption of ASU 2016-09 and will recognize forfeitures when occurred rather than estimating expected forfeitures. The Company treated equity awards granted to non-employee directors similarly to the equity awards to employees upon adoption of ASU 2018-07.
Off Balance Sheet Transactions
The Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on the Company. As of December 31, 2020, there was $1.4 million in outstanding letters of credits issued in the normal course of business.
The Company was also party to certain contracts in which it guarantees the performance of lease agreements between various third-party leasing companies. The terms of the guarantees range from three to five years. In the event of a default by a third-party lessee, the Company would be required to pay all, or a portion of the remaining unpaid lease obligation as specified in the contract. The estimated exposure related to these guarantees was $2.4 million and $3.3 million at December 31, 2020 and 2019, respectively. It is anticipated that the third parties will have the ability to repay the debt without the Company having to honor the guarantee; therefore, no amount has been accrued on the Consolidated Balance Sheets at December 31, 2020 and 2019, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Rule 10(f)(1) of Regulation S-K, the Company is not required to provide this information.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.
Item 9. Changes in and Disagreements w ith Accountants on Accounting and Financial Disclosure.
None.