ALTA EQUIPMENT GROUP INC. The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report, and the audited consolidated financial statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . This discussion contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 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 Quarterly Report on Form 10-Q, 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.
Recent Developments
Strategic Acquisitions - 2020 and 2021
Our growth strategy is predicated on making strategic acquisitions that expand our geographic reach, broaden our capabilities and service offerings and diversify our customer and supplier bases. We believe these acquisitions, both immediately and over the long-term will be accretive to our financial performance. Post the Company's initial public offering, in 2020 and 2021 we successfully completed 11 strategic acquisitions which added over$300 million of revenue on an annualized basis. The acquisitions, both individually and in the aggregate, strengthened our business from a financial and operational perspective. We are adept at efficiently and effectively integrating acquisition targets on to our enterprise resource platform, which allows for management and operational synergies across business segments and our large branch network. To that end, in the second quarter, we successfully integrated the Vantage, Gibson, and Ambrose acquisitions onto our enterprise resource platform. See Note 17, Business Combinations, for information on our acquisitions in 2021.
E-Mobility
With our existing expertise in sales and service of electrified equipment in our existing business segments, in particular material handling, we have elected to pursue the strategic opportunity to leverage our knowledge to meet the growing demand for commercial electric vehicles and deliver world-class service to commercial electric vehicle customers within our existing territories. Accordingly, inAugust 2021 , the Company entered into a dealer agreement with Nikola Corporation to become the authorized dealer to sell and service Nikola medium and long-haul class 8 electric vehicle trucks in theNew York ,New Jersey , easternPennsylvania , andNew England markets. More recently, we were named the authorized dealer for Nikola inArizona as well. We view this opportunity as an accretive way to enter the class 8 truck market by leveraging our existing intellectual property, customer base and physical infrastructure.
COVID-19
While there were no material adverse impacts on the Company's results of operations for the three and six months endedJune 30, 2022 and 2021 from COVID-19, the potential future emergence of additional variant strains of COVID-19 remains and how those variant strains would impact the macroeconomic environment and our business is uncertain. Currently, our business is experiencing "recovery-related" supply-chain constraints that have affected some of our OEM equipment suppliers. Specifically, lead-times from OEMs for new equipment has been pushed beyond historic norms. While we believe our diversified cash flow streams, the breadth of our product portfolio, geographic reach and our ability to source used equipment will help mitigate the impact of the current supply-chain disruptions we are facing, an extended period or worsening of the supply chain issues our OEM equipment providers are experiencing could impact our financial results adversely.
Business Description
The Company owns and operates one of the largest integrated equipment dealership platforms in theU.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, paving and asphalt equipment, 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; 24
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(iv)
repair and maintenance services; and
(v)
equipment rentals.
We have operated as an equipment dealership for over 37 years and have developed a branch network that includes over 60 total locations inMichigan ,Illinois ,Indiana ,Ohio ,Massachusetts ,Maine ,Connecticut ,New Hampshire ,Vermont ,New York ,Virginia andFlorida . We offer our customers a one-stop-shop for their equipment needs by providing sales, parts, service, and rental functions under one roof. More recently, with the acquisitions ofPeakLogix inJune 2020 andScottTech inMarch 2021 , we have entered 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 e-commerce and logistics. 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. InAugust 2021 the Company entered into a dealer agreement with Nikola Corporation to become the authorized dealer to sell and service Nikola medium and long-haul class 8 electric vehicle trucks in theNew York ,New Jersey , easternPennsylvania , andNew England markets. More recently, the Company has addedArizona to its dealer agreement with Nikola. 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 inMichigan ,Illinois ,Indiana ,New York ,Virginia and throughout theNew England states. The Construction Equipment segment is principally engaged in operations related to the sale, service, and rental of construction equipment inMichigan ,Indiana ,Illinois ,Ohio ,New York ,Florida and throughout the New England States.Alta Equipment Group Inc. ,Alta Equipment Holdings, Inc. andAlta 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 segment. In addition to being holding companies, the Corporate entities also hold compensation (including share-based compensation) of our directors, corporate officers and certain members of our shared-services leadership team, consulting and legal fees related to acquisitions and capital raising activities, corporate governance and compliance related matters, certain corporate development related expenses, interest expense associated with original issue discounts and deferred financing cost related to previous capital raises, and the Company's income tax provision.
Financial Statement Overview
Our revenues are primarily derived from sale or rental of equipment and product support (e.g. parts and service) 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 ofPeakLogix andScottTech , we provide warehouse design, automated equipment installation, system integration and warehouse controls software. 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 lease arrangement where we purchase the equipment from the finance company, or used equipment that is sourced for our customers in the open market by our used equipment specialists. 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. 25 -------------------------------------------------------------------------------- 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$464.2 million as ofJune 30, 2022 . The original acquisition cost of our rental fleet excludes the$9.9 million 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.
Principal Costs and Expenses
Our cost of revenues are primarily related to the cost associated with the sale
or rental of equipment and product support activities, which includes direct
labor costs for our skilled technicians. Our operating expenses consist
principally of general and administrative ("G&A") expenses, which primarily
includes personnel costs associated with our sales and administrative staff and
expenses associated with the deployment of our service vehicle fleet and
occupancy expenses. In addition, we have interest expense related to our
floorplan payables, finance leases, line of credit and secured second lien
notes. These principal costs and expenses are described further below:
New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net of any amount of credit given to the customer from trade-ins of used equipment.
Used Equipment Sales. Cost of used equipment sold consists of the net book value, or cost, of used equipment we purchase from third parties or the trade-in value of used equipment that we obtain from customers in new equipment sales transactions. Parts Sales. Cost of parts sales represents consists of the net book value, or cost, of parts used in the maintenance and repair of customer-owned equipment we service or parts sold directly to customers for their owned equipment (e.g. over-the-counter parts).
Services Revenue. Cost of services revenues represents, primarily, the labor costs attributable to services provided for the maintenance and repair of customer-owned equipment.
Rental Revenue. Rental expense represents the costs associated with rental
equipment, including, among other things, the cost of repairing and maintaining
our rental equipment and other miscellaneous costs of owning rental equipment.
Other rental expenses consist primarily of equipment support activities that we
provide our customers in connection with renting equipment, such as freight
services, damage waiver policies, environmental fees and other recovery fees.
Rental Depreciation. Depreciation of rental equipment represents the
depreciation costs attributable to rental equipment. Estimated useful lives vary
based upon type of equipment. See Note 2 to the audited consolidated financial
statements contained in the Company's 2021 Annual Report on Form 10-K, for
information on our rental equipment depreciation methods.
Rental Equipment Sales. Cost of previously rented equipment sold consists of the
net book value (i.e. net of accumulated depreciation) of rental equipment sold
from our rental fleet.
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
deploying and leasing our service vehicle fleet, 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 our facility infrastructure,
including rent, utilities, property taxes, and building insurance.
Other Income (Expense). This section of the income statement 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, our second lien secured notes,
and our finance lease arrangements. Also included in this section of the
financials are non-recurring costs, in particular expenses associated with the
extinguishment of debt in 2021.
26
--------------------------------------------------------------------------------Results of Operations (amounts in millions unless otherwise noted)
Three and six months ended
Consolidated Results
Three Months Ended Six Months Ended
June 30, Increase (Decrease) June 30, Increase (Decrease)
2022 2021 2022 versus 2021 2022 2021 2022 versus 2021
Revenues:
New and used
equipment sales $ 217.3 $ 132.0 $ 85.3 64.6 % $ 368.9 $ 255.8 $ 113.1 44.2 %
Parts sales 58.3 44.1 14.2 32.2 % 111.7 85.5 26.2 30.6 %
Service revenue 51.7 42.4 9.3 21.9 % 99.9 81.1 18.8 23.2 %
Rental revenue 43.6 38.2 5.4 14.1 % 81.3 71.3 10.0 14.0 %
Rental equipment
sales 35.6 36.0 (0.4 ) (1.1 )% 76.4 67.8 8.6 12.7 %
Total revenues $ 406.5 $ 292.7 $ 113.8 38.9 % $ 738.2 $ 561.5 $ 176.7 31.5 %
Cost of revenues:
New and used
equipment sales $ 182.2 $ 112.5 $ 69.7 62.0 % $ 306.1 $ 219.0 $ 87.1 39.8 %
Parts sales 40.0 30.6 9.4 30.7 % 76.7 59.3 17.4 29.3 %
Service revenue 21.9 16.4 5.5 33.5 % 42.0 30.9 11.1 35.9 %
Rental revenue 5.4 5.2 0.2 3.8 % 10.8 10.7 0.1 0.9 %
Rental depreciation 23.3 21.3 2.0 9.4 % 43.6 40.7 2.9 7.1 %
Rental equipment
sales 27.9 29.8 (1.9 ) (6.4 )% 61.8 56.7 5.1 9.0 %
Cost of revenues
$ 541.0 $ 417.3 $ 123.7 29.6 % Gross profit$ 105.8 $ 76.9 $ 28.9 37.6 %$ 197.2 $ 144.2 $ 53.0 36.8 % General and administrative expenses$ 88.8 $ 71.1 $ 17.7 24.9 %$ 171.7 $ 135.9 $ 35.8 26.3 % Depreciation and amortization expense 4.0 2.6 1.4 53.8 % 7.9 4.6 3.3 71.7 % Total general and administrative expenses$ 92.8 $ 73.7 $ 19.1 25.9 %$ 179.6 $ 140.5 $ 39.1 27.8 % Income from operations$ 13.0 $ 3.2 $ 9.8 306.3 %$ 17.6 $ 3.7 $ 13.9 375.7 %
Other (expense) income: Interest expense, floor plan payable - new equipment$ (0.5 ) $ (0.5 ) $ - -
(6.3 ) (5.5 ) (0.8 ) 14.5 % (12.1 ) (10.8 ) (1.3 ) 12.0 %
Other income 0.4 - 0.4 100.0 % 0.7 0.1 0.6 600.0 %
Loss on
extinguishment of
debt - (11.9 ) 11.9 (100.0 )%
- (11.9 ) 11.9 (100.0 )%
Total other expense
$ (12.2 ) $ (23.6 ) $ 11.4 (48.3 )% Income (loss) before taxes$ 6.6 $ (14.7 ) $ 21.3 (144.9 )%$ 5.4 $ (19.9 ) $ 25.3 (127.1 )% Income tax provision 0.5 - 0.5 100.0 % 0.5 0.5 - -
Net income (loss)
Preferred stock dividends (0.7 ) (1.1 ) 0.4 (36.4 )% (1.5 ) (1.1 ) (0.4 ) 36.4 % Net income (loss) available to common shareholders$ 5.4 $ (15.8 ) $ 21.2 (134.2 )%$ 3.4 $ (21.5 ) $ 24.9 (115.8 )% 27
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