QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File Number 001-38186
_______________________________
Nesco Holdings, Inc.
(Exact name of registrant as specified in its charter)
_______________________________
Indiana
35-1841460
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6714 Pointe Inverness Way, Suite 220
Fort Wayne, IN 46804
(Address of principal executive offices, including zip code)
(800) 252-0043
(Registrant’s telephone number, including area code)
_______________________________
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
NSCO
New York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par value
NSCO.WS
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES o NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO o
The number of ordinary shares outstanding of NESCO Holdings, Inc. as of November 12, 2019, was 49,033,903.
Accounts receivable, net of allowance of $4,120 and $7,562, respectively
62,617
52,559
Inventory
21,409
11,435
Prepaid expenses and other
4,791
2,483
Total current assets
89,018
68,617
Property and equipment, net
9,195
2,763
Rental equipment, net
341,870
320,722
Other Assets
Goodwill
228,714
228,714
Other intangible assets, net
70,236
70,740
Total other assets
298,950
299,454
Total Assets
$
739,033
$
691,556
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable
$
36,178
$
20,867
Accrued expenses
5,495
6,359
Accrued interest expense
10,144
14,024
Deferred rent income
2,314
4,762
Current portion of capital lease obligations
5,313
4,866
Current maturities of long-term debt
1,280
2,531
Total current liabilities
60,724
53,409
Long-term debt, net
655,396
756,872
Capital leases
24,140
28,418
Deferred tax liabilities
12,006
11,191
Other liabilities
2,552
422
Total long-term liabilities
694,094
796,903
Commitments and contingencies (see Note 10)
Stockholders' Deficit
Common stock - $0.0001 par value, 250,000,000 shares authorized, 49,033,903 and 21,660,638 shares issued and outstanding, at September 30, 2019 and December 31, 2018, respectively
5
2
Additional paid-in capital
432,027
259,298
Accumulated deficit
(447,817
)
(417,660
)
Accumulated other comprehensive loss
—
(396
)
Total stockholders' deficit
(15,785
)
(158,756
)
Total Liabilities and Stockholders' Deficit
$
739,033
$
691,556
See accompanying notes to unaudited condensed consolidated financial statements.
3
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)
2019
2018
2019
2018
Revenue
Rental revenue
$
50,103
$
45,867
$
143,871
$
136,778
Sales of rental equipment
3,436
5,377
15,167
15,562
Sales of new equipment
1,246
8,024
8,076
12,167
Parts sales and services
7,657
4,814
19,675
13,102
Total revenue
62,442
64,082
186,789
177,609
Cost of Revenue
Cost of rental revenue, excluding depreciation
13,332
13,686
36,802
37,511
Depreciation of rental equipment
17,907
15,208
52,012
46,517
Cost of rental equipment sales
2,847
4,041
12,653
13,053
Cost of new equipment sales
1,116
7,287
6,618
10,639
Cost of parts sales and services
5,600
3,346
14,921
9,248
Major repair disposal
376
300
1,522
1,061
Total cost of revenue
41,178
43,868
124,528
118,029
Gross Profit
21,264
20,214
62,261
59,580
Operating Expenses
Transaction expenses
3,325
127
7,394
163
Selling, general, and administrative expenses
10,514
8,369
26,634
26,085
Amortization expense
724
720
2,172
2,103
Non-rental depreciation
21
58
92
161
Asset impairment
657
—
657
—
Other operating expenses
434
—
1,213
—
Total operating expenses
15,675
9,274
38,162
28,512
Operating Income
5,589
10,940
24,099
31,068
Other Expense (Income)
Loss on extinguishment of debt
4,005
—
4,005
—
Interest expense, net
16,533
14,196
46,376
41,649
Other (income) expense, net
2,567
(42
)
2,545
286
Total other expenses
23,105
14,154
52,926
41,935
Loss Before Income Taxes
(17,516
)
(3,214
)
(28,827
)
(10,867
)
Income Tax Expense
494
463
1,330
1,253
Net Loss
$
(18,010
)
$
(3,677
)
$
(30,157
)
$
(12,120
)
Loss per share:
Basic and diluted
$
(0.45
)
$
(0.17
)
$
(1.09
)
$
(0.56
)
Weighted-average common shares outstanding:
Basic and diluted
39,909,481
21,660,638
27,743,586
21,660,638
See accompanying notes to unaudited condensed consolidated financial statements.
4
Nesco Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(in $000s)
2019
2018
2019
2018
Net loss
$
(18,010
)
$
(3,677
)
$
(30,157
)
$
(12,120
)
Other comprehensive loss
Interest rate collar (net of taxes of $285)
—
—
(388
)
—
Other comprehensive loss
—
—
(388
)
—
Comprehensive loss
$
(18,010
)
$
(3,677
)
$
(30,545
)
$
(12,120
)
During the three and nine months ended September 30, 2019, $0.8 million (net of taxes of $0.3 million) was reclassified from accumulated other comprehensive loss and recorded in the Unaudited Condensed Consolidated Statements of Operations.
There were no reclassifications from accumulated other comprehensive loss reflected in the Unaudited Condensed Consolidated Statements of Operations during the three and nine month periods ended September 30, 2018.
See accompanying notes to unaudited condensed consolidated financial statements.
5
Nesco Holdings, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30,
(in $000s)
2019
2018
Operating Activities
Net loss
$
(30,157
)
$
(12,120
)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation
52,104
46,678
Amortization - intangibles
2,172
2,103
Amortization - financing costs
2,099
2,721
Provision for losses on accounts receivable
3,472
2,563
Share-based payments
463
850
Gain on sale of rental equipment and parts
(3,930
)
(10,798
)
Gain on insurance proceeds - damaged equipment
(570
)
—
Major repair disposal
1,522
1,061
Loss on extinguishment of debt
4,005
—
Change in fair value of derivative
2,552
—
Asset impairment
657
—
Deferred tax expense
816
844
Changes in assets and liabilities:
Accounts receivable
(13,728
)
(3,010
)
Inventory
(13,742
)
(8,544
)
Prepaid expenses and other
(2,211
)
(827
)
Accounts payable
4,792
(4,403
)
Accrued expenses and other liabilities
(4,770
)
(10,806
)
Unearned income
(4,832
)
(634
)
Net cash flow from operating activities
714
5,678
Investing Activities
Cash paid for business acquisition, net of cash acquired
—
(1,593
)
Purchase of equipment - rental fleet
(77,752
)
(33,101
)
Proceeds from sale of rental equipment and parts
22,608
32,014
Insurance proceeds from damaged equipment
1,721
—
Purchase of other property and equipment
(7,166
)
(3,976
)
Other
(1,671
)
3
Net cash flow from investing activities
(62,260
)
(6,653
)
Financing Activities
Proceeds from debt
475,000
—
Borrowings under revolving credit facilities
243,000
38,000
Repayments under revolving credit facilities
(259,000
)
(30,000
)
Repayments of notes payable
(527,348
)
(1,475
)
Capital lease payments
(3,830
)
(4,017
)
Proceeds from merger and recapitalization
147,268
—
Finance fees paid
(15,483
)
(1,645
)
Net cash flow from financing activities
59,607
863
Net Change in Cash
(1,939
)
(112
)
Cash at Beginning of Period
2,140
960
Cash at End of Period
$
201
$
848
Nine Months Ended September 30,
(in $000s)
2019
2018
Supplemental Cash Flow Information
Cash paid for interest
$
47,861
$
48,542
Cash paid for income taxes
444
347
Non-Cash Investing and Financing Activities
Transfer of parts inventory to leased equipment
3,767
3,936
Rental equipment purchases in accounts payable
21,227
11,282
Rental equipment sales in accounts receivable
169
1,291
Insurance recoveries accrued in accounts receivable
189
—
Rental equipment on capital lease
—
6,694
Acquisition
—
3,546
See accompanying notes to unaudited condensed consolidated financial statements.
6
Nesco Holdings, Inc.
Condensed Consolidated Statements of Stockholders' Deficit (unaudited)
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Total Stockholders' Deficit
Common Stock
(in $000s, except share data)
Shares
Amount
Balance, January 1, 2019
21,660,638
$
2
$
259,298
$
(417,660
)
$
(396
)
$
(158,756
)
Net loss
—
—
—
(6,724
)
—
(6,724
)
Share-based payments
—
—
128
—
—
128
Interest rate collar
—
—
—
—
88
88
Balance, March 31, 2019
21,660,638
2
259,426
(424,384
)
(308
)
(165,264
)
Net loss
—
—
—
(5,423
)
—
(5,423
)
Share-based payments
—
—
52
—
—
52
Interest rate collar
—
—
—
—
(476
)
(476
)
Balance, June 30, 2019
21,660,638
2
259,478
(429,807
)
(784
)
(171,111
)
Net loss prior to reverse recapitalization
—
—
—
(10,988
)
—
(10,988
)
Net loss post reverse recapitalization
—
—
—
(7,022
)
—
(7,022
)
Reverse capitalization
27,373,265
3
172,266
—
—
172,269
Share-based payments
—
—
283
—
—
283
Interest rate collar
—
—
—
—
784
784
Balance, September 30, 2019
49,033,903
$
5
$
432,027
$
(447,817
)
$
—
$
(15,785
)
Additional Paid-in Capital
Accumulated Deficit
Accumulated Other Comprehensive Loss
Total Stockholders' Deficit
Common Stock
(in $000s, except share data)
Shares
Amount
Balance, January 1, 2018
21,660,638
$
2
$
258,168
$
(402,134
)
$
—
$
(143,964
)
Net loss
—
—
—
(3,034
)
—
(3,034
)
Share-based payments
—
—
290
—
—
290
Balance, March 31, 2018
21,660,638
2
258,458
(405,168
)
—
(146,708
)
Net loss
—
—
—
(5,409
)
—
(5,409
)
Share-based payments
—
—
280
—
—
280
Balance, June 30, 2018
21,660,638
2
258,738
(410,577
)
—
(151,837
)
Net loss
—
—
—
(3,677
)
—
(3,677
)
Share-based payments
—
—
280
—
—
280
Balance, September 30, 2018
21,660,638
$
2
$
259,018
$
(414,254
)
$
—
$
(155,234
)
See accompanying notes to unaudited condensed consolidated financial statements.
7
Nesco Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Business
Organization
Nesco Holdings, Inc. (“Holdings”), a Delaware corporation, serves as the parent for our primary operating company, NESCO, LLC. NESCO, LLC, an Indiana limited liability company, and its wholly owned subsidiaries (collectively, “we,” “our,” “us,” “Nesco,” or the "Company"), is engaged in the business of providing a range of services and products to customers through rentals of specialty equipment, sales of parts related to the specialty equipment, and repair and maintenance services related to that equipment.
Holdings' wholly-owned subsidiaries include NESCO Holdings I, Inc. (which was the ultimate parent holding company prior to the transaction described below) ("Holdings I"), NESCO Finance Corporation, a Delaware corporation, NESCO Investments, LLC, a Delaware limited liability company, NESCO International, LLC, a Delaware limited liability company, and NESCO El Alquiler S. de R.L. de C.V., an operating company in Mexico.
We are a specialty equipment rental provider to the electric utility transmission and distribution, telecommunications and rail industries in North America. Our core business relates to our fleet of specialty rental equipment that is utilized by service providers in infrastructure improvement work. Specifically, we offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade and installation of critical infrastructure assets, including electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent and sell a broad range of new and used equipment, including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, and underground equipment, which forms our Equipment Rental and Sales ("ERS") segment. To complement our fleet, we also provide a one-stop shop for existing and prospective Nesco customers to purchase or rent parts, tools, and accessories needed to outfit their specialty truck fleet. These activities form our Parts, Tools, and Accessories (“PTA”) segment. We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories via our network of over 50 locations in the United States and Canada.
Merger with Capitol Investment Corp. IV
On April 7, 2019, Holdings I entered into a definitive agreement (as amended, the “Merger Agreement”) with Capitol Investment Corp. IV ("Capitol"), a public investment vehicle, whereby the parties agreed to merge, resulting in the parent of Holdings I becoming a publicly listed company. This merger closed on July 31, 2019 (“Merger”), which consummated as a result of the following (the “Transactions”):
•
Holders of 26,091,034 shares of Capitol Class A ordinary shares sold in its initial public offering exercised their rights to convert those shares to cash at a conversion price of $10.24 per share, or an aggregate of approximately $267.2 million. The per share conversion price of $10.24 for holders of public shares electing conversion was paid out of Capitol’s trust account, which had a balance immediately prior to the closing of approximately $412.3 million. Concurrently, NESCO Holdings, LP, a Delaware limited partnership controlled by Energy Capital Partners ("Nesco Owner") and the sole shareholder of Holdings I, purchased 4,500,000 newly-issued shares of common stock at a price of $10.00 per share in exchange for a combination of cash and full repayment of certain outstanding indebtedness, and the founders of Capitol (the "Capitol Sponsors") purchased in aggregate 1,000,000 newly-issued shares of common stock at a price of $10.00 per share, paid in cash (see Note 5).
•
Of the remaining funds in the trust account and amounts from the sale of the newly-issued common stock described above: (i) approximately $17.8 million was used to pay Capitol’s transaction expenses, (ii) $127.8 million was used to pay down Nesco's debt, and (iii) the balance of approximately $10.2 million was released to Nesco to be used to pay certain of Nesco's transaction-related costs. The amount remaining (after deducting direct equity issuance costs of $10.0 million) from the combination of the trust account funds and consideration received from Nesco Owner and the Capitol Sponsors discussed above of $172.3 million was reflected as contributed capital in the Company's Condensed Consolidated Statements of Stockholders' Deficit in the three months ended September 30, 2019.
•
In connection with the Merger, Capitol became Holdings by domesticating from the Cayman Islands as a corporation formed under the laws of the State of Delaware named Nesco Holdings, Inc.
•
Immediately after giving effect to the Transactions (including as a result of the conversions described above and certain forfeitures of Capitol common stock and warrants immediately prior to the closing), there were 49,033,903 shares of common stock issued
8
and outstanding, which excludes the additional shares that Nesco Owner may be entitled to as further described below. Additionally, there were warrants to purchase 20,949,980 shares of common stock issued and outstanding.
•
Upon the closing, Capitol’s common stock, warrants and units ceased trading, and upon the opening of trading on August 1, 2019, Holdings' common stock and warrants began trading on the NYSE, respectively, under the symbol “NSCO” and “NSCO WS,” respectively.
•
Upon the completion of the Transactions, NESCO Holdings, LP, a Delaware limited partnership controlled by Energy Capital Partners ("Nesco Owner"), and certain members of management of the Company received 21,660,638 shares of Holdings and warrants to purchase 2,500,000 shares of Holdings, in exchange for all of the share capital. Nesco Owner also obtained the right to receive up to 3,451,798 additional common shares of the Company upon the occurrence of certain events.
•
At the closing of the Transactions, Nesco Owner and certain members of management of Holdings held approximately 53% of the issued and outstanding ordinary shares of Holdings and stockholders of Capitol held approximately 47% of the issued and outstanding shares of Holdings.
Accordingly, the Merger transactions were treated as the equivalent of Holdings I issuing stock for the net assets of Capitol. Consistent with SEC Topic 12, Reverse Acquisitions and Reverse Recapitalizations, the acquisition of a private operating company by a non-operating public shell corporation typically results in the owners and management of the private company having actual or effective voting control and operating control of the combined company. Therefore, the transaction is, in substance, a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that of a reverse acquisition, except that no goodwill or other intangible assets should be recorded. The net assets of Capitol as of July 31, 2019, were stated at historical cost, and no goodwill or other intangible assets were recorded.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with Holdings I’s audited financial statements for the year ended December 31, 2018, included in Capitol's final prospectus and definitive proxy statement filed with the Securities and Exchange Commission on June 4, 2019 (as supplemented on June 24, 2019 and July 11, 2019), and incorporated by reference in the Current Report on Form 8-K filed with the SEC on August 1, 2019.
The Transactions were accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Capitol was treated as the acquired company and Holdings I was treated as the acquirer for financial reporting purposes. Therefore, the consolidated financial results include information regarding Holdings I as Nesco Holdings, Inc.'s predecessor entity. Thus, the financial statements included in this report reflect: (i) the historical operating results of Holdings I prior to the Transactions; (ii) the combined results of Capitol and Holdings I following the Transactions (effectively, Nesco Holdings, Inc.); (iii) the assets, liabilities and stockholder's equity of Holdings I at their historical costs; and (iv) Nesco Holdings, Inc.’s equity and earnings per share presented for the period from the Closing Date of the Transactions.
Use of Estimates
These consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include, but are not limited to, the useful lives and salvage values of our rental equipment. Actual results may differ from these estimates and assumptions.
In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results. These consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2018.
9
Recently Issued Accounting Pronouncements
Leases
The FASB’s new guidance to account for leases (“Topic 842”) by entities that are lessees, requires (1) recognition of lease assets and lease liabilities on the balance sheet and (2) disclosure of key information about leasing arrangements. Topic 842 provides two classifications for leases: financing or operating.
Finance leases - The accounting and recognition for leases qualifying as finance leases is similar to the accounting and recognition required under ASC Topic 840, Leases (“Topic 840”), for capital leases. As of September 30, 2019, we have capital lease obligations of approximately $29.5 million. When we make our contractually required payments under the capital leases, we allocate a portion to reduce the capital lease obligation and a portion is recognized as interest expense. The assets leased under the capital leases are included in rental equipment, and depreciation thereon is recognized in cost of rental revenue.
Operating leases - Under Topic 842, operating leases result in the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, upon adoption of Topic 842, we will use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets will also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease that we are reasonably certain to exercise. Lease expense under Topic 842 will be recognized on a straight-line basis over the lease term. Upon adoption of Topic 842, we expect to recognize operating lease ROU assets and lease liabilities that reflect the present value of these future payments, which we currently estimate to be in the range of $8.0 million to $10.0 million.
In October 2019, the FASB approved its proposal to defer the effective date of Topic 842 by one year. Accordingly, we will adopt Topic 842 effective January 1, 2021, using the transition method that allows us to recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We expect to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. We additionally expect to use the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component.
Under Topic 842, lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”), specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. On July 30, 2018, the FASB issued ASU 2018-11, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. We are currently in the process of evaluating whether our lease arrangements will meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which would alleviate the requirement upon adoption of Topic 842 that we reallocate or separately present lease and non-lease components.
Derivatives
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which includes changes to its accounting guidance for derivatives and hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Some changes resulting from this new guidance include the elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow hedges, changes to the recognition and presentation of changes in the fair value of the hedging instrument, enhancement of the ability to use the critical-terms-match method for the cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date, and the addition of new disclosure requirements and amendments to existing ones. This new guidance is effective for us as of January 1, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
Revenue Recognition
Following the adoption of Topic 606, as of January 1, 2018, we recognized revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 840, which addresses lease accounting, for which we will adopt an update to this standard using the modified retrospective approach, as described herein. For the three and nine months ended September 30, 2019 and 2018, we recognized rental revenue in accordance with Topic 840 Leases, which is the lease accounting standard.
10
Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A “performance obligation” is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. As reflected below, most of our revenue is accounted for under Topic 840. Our contracts with customers generally do not include multiple performance obligations.The inset below presents our revenue types based on the accounting standard used to determine the accounting.
Three Months Ended September 30,
Three Months Ended September 30,
2019
2018
(in $000s)
Topic 840
Topic 606
Total
Topic 840
Topic 606
Total
Rental:
Rental revenue
$
47,821
$
—
$
47,821
$
43,944
$
—
$
43,944
Shipping and handling
—
2,282
2,282
—
1,923
1,923
Total rental revenue
47,821
2,282
50,103
43,944
1,923
45,867
Sales and services:
Sales of rental equipment
—
3,436
3,436
—
5,377
5,377
Sales of new equipment
—
1,246
1,246
—
8,024
8,024
Parts and services
—
7,657
7,657
—
4,814
4,814
Total sales and services
—
12,339
12,339
—
18,215
18,215
Total revenue
$
47,821
$
14,621
$
62,442
$
43,944
$
20,138
$
64,082
Nine Months Ended September 30,
Nine Months Ended September 30,
2019
2018
(in $000s)
Topic 840
Topic 606
Total
Topic 840
Topic 606
Total
Rental:
Rental revenue
$
137,194
$
—
$
137,194
$
130,905
$
—
$
130,905
Shipping and handling
—
6,677
6,677
—
5,873
5,873
Total rental revenue
137,194
6,677
143,871
130,905
5,873
136,778
Sales and services:
Sales of rental equipment
—
15,167
15,167
—
15,562
15,562
Sales of new equipment
—
8,076
8,076
—
12,167
12,167
Parts and services
—
19,675
19,675
—
13,102
13,102
Total sales and services
—
42,918
42,918
—
40,831
40,831
Total revenue
$
137,194
$
49,595
$
186,789
$
130,905
$
46,704
$
177,609
Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers as well as charges to customers for damaged equipment. Effective July 1, 2019, damage billings are classified in rental revenue, given that the amounts are directly related to the Company's rental arrangements with its customers. Amounts for damages in comparable prior periods have been reclassified to rental revenue from parts and services in the above table ($0.9 million and $2.5 million for the three and nine months ended September 30, 2018, respectively, and $3.2 million and $2.6 million for the years ended December 31, 2018 and 2017, respectively). Additionally, sales of equipment, which are presented separately between sales of rental equipment and new equipment, were previously presented on a combined basis as equipment sales. For the years ended December 31, 2018 and 2017, sales of rental equipment were $26.0 million and $17.2 million, respectively, and sales of new equipment were $18.4 million and $10.1 million, respectively.
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Rental Equipment
Rental equipment consisted of the following:
(in $000s)
September 30, 2019
December 31, 2018
Rental equipment
$
603,506
$
541,529
Less: accumulated depreciation
(261,636
)
(220,807
)
Rental equipment, net
$
341,870
$
320,722
We recorded a major repair disposal expense of $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $1.1 million for the nine months ended September 30, 2019 and 2018, respectively, related to units needing major repairs.
On September 27, 2019, we commenced closure of the Company's operations in Mexico due to continued delays in contracts from the Mexican government. An impairment loss of $0.7 million was recorded to reduce the carrying amount of rental equipment to its fair value, which was determined based on a recent analysis of market activity (i.e., Level 3 fair value as defined in Note 8 herein) for the equipment at these operations. The Company also recorded a $0.2 million charge for the statutorily-required minimum benefits to be be provided to employees due to their involuntary termination. These charges are included in Impairment loss and Selling, General, and Administrative expenses on the Unaudited Condensed Consolidated Statements of Operations, respectively.
Note 3: Segments
We operate and have two reportable business segments, Equipment Rental and Sales (“ERS”) and Parts, Tools, and Accessories (“PTA”). ERS provides rental solutions to utilities and contractors serving multiple infrastructure end-markets, including electric transmission and distribution, telecom, rail, lighting and signage. We rent and sell specialized equipment to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rental to the telecom, rail, lighting and signage end-markets. The majority of our existing equipment can be used across multiple end-markets and many of our customers operate in multiple end-markets. We rent and sell a broad range of new and used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted equipment and underground equipment. Our PTA segment offers customers sale and rental solutions for parts, tools, and accessories to complement our specialty equipment line.
Our reportable segments align with the information our chief operating decision maker (“CODM”) receives on a regular basis to evaluate the performance of the business and to allocate resources. The accounting principles applied at the operating segment level in determining gross profit are generally the same as those applied at the consolidated financial statement level. There are no inter-segment revenues, and cost allocations to operating segment cost of revenue are minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to each of the operating segments.The following tables present our financial information by segment: