Alta Equipment Group Inc.: Form 10-Q for the period ended Mar 31, 2024

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 ended December 31, 2023. 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 our 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.

Business Description

We own and operate one of the largest integrated equipment dealership platforms in North America. Through our branch network, we sell, rent, and provide parts and service support for several categories of specialized equipment, including lift trucks and other material handling equipment, heavy and compact earthmoving equipment, crushing and screening equipment, environmental processing equipment, cranes and aerial work platforms, paving and asphalt equipment, other construction equipment and allied products. We engage in five principal business activities in these equipment categories:

(i) new and used equipment sales;

(ii) parts sales;

(iii) repair and maintenance services;

(iv) equipment rentals and

(v) rental equipment sales.

We have operated as an equipment dealership for 40 years and have developed a branch network that includes over 85 total locations in Michigan, Illinois, Indiana, Ohio, Pennsylvania, Massachusetts, Maine, Connecticut, New Hampshire, Vermont, Rhode Island, New York, Virginia, Nevada and Florida and the Canadian provinces of Ontario and Quebec. We offer our customers end-to-end solutions for their equipment needs by providing sales, parts, service and rental offerings. Additionally, we provide warehouse design and build services, automated equipment installation and system integration solutions within our Material Handling segment.

Within our territories, we are primarily the exclusive distributor of new equipment and replacement parts on behalf of our OEM partners. We and our regional subsidiaries enjoy long-standing relationships with leading material handling and construction equipment OEMs, including Hyster-Yale, Volvo, JCB, CNH, Develon, McCloskey, and Kubota, among many others as well as master dealer rights throughout North America for environmental processing equipment with Doppstadt and Backers, among others. We are consistently recognized by OEMs as a top dealership partner and have been identified as an internationally recognized Hyster-Yale dealer and multi-year recipient of the Volvo Dealer of the Year award. More recently, given the Company’s successful history with electrified forklifts, battery charging and power generation as well as our material handling customer base, where customers typically employ large fleets of commercial over-the-road vehicles in their day-to-day operations, we are pursuing a strategy focused on the distribution and powering of commercial electric vehicles in the over-the-road vehicle segment. While our electromobility (“e-mobility”) business, and the industry in general, is in its early stages of development, we believe that our first-mover advantage and expertise in this emerging market represents an exciting future growth opportunity.

We are committed to providing our customers with a best-in-class equipment dealership experience. Our customers are principally focused on equipment reliability and uptime, and our teams of skilled technicians and commitment to service are key to establishing and maintaining long-term customer relationships, representing a critical competitive advantage for the Company. Parts and service are also our most predictable and profitable businesses, with the dealership model structured to drive aftermarket parts and service revenues. Through our new and used equipment sales and our sale of lightly-used rental fleet, we populate our exclusive territories with serviceable equipment. As the field population ages, we capitalize on aftermarket parts and service sales through the equipment maintenance cycle.

Strategic Acquisitions

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.

Business Segments

For a detailed description of our business segments, refer to Note 16, Segments.

Financial Statement Overview

Our revenues are primarily derived from the sale or rental of equipment and product support (e.g., parts and service) activities, and consist of:

New equipment sales. We sell new heavy construction, material handling and environmental processing equipment and are a leading regional distributor for nationally recognized equipment manufacturers. Our new equipment sales operation is a primary source of new customers for our rental, parts and service business. The majority of our new equipment sales are predicated on exclusive distribution agreements we have with best-in-class OEMs. The sale of new equipment to customers, while profitable from a gross margin perspective, 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 and services related to our material handling equipment offerings which include, but are not limited to, automated equipment and related installation, warehouse systems integration solutions and related 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 in our territories, like new equipment sales, generate parts and service business for the Company.

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 OEMs with which we have exclusive agreements to sell new equipment.

Service revenues. We provide maintenance and repair services for customer-owned equipment and 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 45% of our employees are skilled service technicians.

Rental revenues. We rent heavy construction, compact, aerial, material handling, and a variety of other types of 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 $601.0 million as of March 31, 2024. The original acquisition cost of our rental fleet excludes $8.3 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. In our Construction Equipment segment, our rental equipment sales are primarily related to lightly-used equipment that is in the initial years of its useful life. Selling lightly-used construction equipment from our rental fleet allows us to meet customer demand for specific model years of equipment at various price points (versus only offering brand new equipment to the market). 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 service revenues for us.

Principal Costs and Expenses

Our cost of revenues are primarily related to the costs associated with the sale or rental of equipment and product support activities, which include direct labor costs for our skilled technicians. Our operating expenses consist principally of selling, general and administrative expenses, which primarily include 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 floor plan payables, finance leases, line of credit, and senior secured second lien notes. These principal costs and expenses are described further below:

New equipment sales. Cost of new equipment sold consists of the total acquisition costs of the new equipment we purchase from third parties.

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 the average 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 sales).

Services revenues. Cost of service revenues primarily represents the labor costs attributable to services provided for the maintenance and repair of customer-owned equipment. Training, paid time off, and other non-billable costs of maintaining our expert technicians are recorded in this line item in addition to the costs of direct customer-billable labor.

Rental revenues. 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 and damage waiver policies.

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, Summary of Significant Accounting Policies, of the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2023 for information on our rental equipment depreciation methods.

Rental equipment sales. Cost of previously rented equipment sold consists of the net book value (e.g., net of accumulated depreciation) of rental equipment sold from our rental fleet.

Operating expenses. These costs are comprised of three main components: personnel, operational, and occupancy costs. Personnel costs are comprised of hourly and salaried wages for administrative employees, including incentive compensation and employee benefits, such as medical benefits. Operational costs include marketing activities, costs associated with deploying and leasing our service vehicle fleet, insurance, IT, 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 expense, net. This section of the Condensed Consolidated Statements of Operations is mostly comprised of interest expense and other miscellaneous items that result in income or expense. Interest expense is driven by our OEM floor plan financing arrangements, line of credit, senior secured second lien notes, and finance lease arrangements.

Results of Operations

The three months ended March 31, 2024 and 2023

Consolidated Results

26

Non-GAAP Financial Measure: Organic Revenues

The above table contains a non-GAAP financial measure. A “non-GAAP financial measure” is defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the condensed consolidated statements of operations, balance sheets or statements of cash flows of the company. The non-GAAP financial measure used by the Company is organic revenues and growth rates associated with organic revenues. We define organic revenue growth as revenue growth excluding the impact of acquisitions that do not appear fully in both periods in the current and prior years. We believe organic revenue growth is a meaningful metric to investors as it provides a more consistent comparison of our revenues to prior periods as well as to industry peers.

Pursuant to the requirements of Regulation G, we have provided a reconciliation of organic revenues to the most directly comparable GAAP financial measure in the table above and in subsequent tables, where applicable, in management's discussion and analysis of our individual business segments. This measure is supplemental to, and should be used in conjunction with, the most comparable GAAP measure. Management uses this non-GAAP financial measure to monitor and evaluate financial results and trends.

Revenues: Consolidated revenues increased by $20.9 million, or 5.0%, to $441.6 million for the three months ended March 31, 2024 as compared to the same period last year. Organic sales growth in the three months ended March 31, 2024 reached 0.9% compared to the same period last year. Despite headwinds from higher interest rates, inflation and tight labor markets, we have experienced continued demand for our products and services as the fundamentals in many of the markets we serve remain solid. Nonetheless, demand for our construction equipment has historically been lower in the winter months, and equipment rental and service revenues will generally correlate to the levels of current construction activities, so severe winter weather conditions typically have a negative impact on our business in our northern territories in the first quarter of our fiscal year and can lead to large variances when comparing quarterly performance on a sequential basis. Our performance for the period ended March 31, 2024, in line with our history, was again negatively impacted by winter weather. Further, a milder than normal winter in our northern geographies this year reduced snow-related equipment sales, rental and service activity, which typically mitigates some of the negative impacts of the construction “off-season” in our Construction Equipment segment.

In the three months ended March 31, 2024, organic new and used equipment revenues remained relatively steady, decreasing a modest 0.5%, against a strong comparative three months ended March 31, 2023 when supply of new equipment was in the initial phase of meeting high levels of pent-up demand that existed post-pandemic. This dynamic was most prominent in our Master Distribution segment, which sells equipment to stocking dealers, as segment revenues for the three months ended March 31, 2024 were down $13.9 million from the prior year same period. While new and used equipment revenues stagnated versus the same period last year, our product support departments (parts and service) grew 2.5% organically during the quarter. Our rental business remained strong for the period as rental revenues grew 7.1% organically on higher rates and increased fleet on rent when compared to the same period last year. Rental equipment sales declined 5.5% for the three months ended March 31, 2024 as compared to the same period last year, primarily related to the heightened demand for lightly-used equipment in the first quarter of 2023.

Gross profit (GP):

27

The consolidated gross profit for the three months ended March 31, 2024 was 27.3%, a 150 basis point decrease from the 28.8% for the same period in 2023. New and used equipment sales margins decreased 270 basis points to 15.8%, a reflection of sales mix, as we generated less volume from our higher-margin warehouse solutions platform, Peaklogix, and our Master Distribution segment in the period when compared to the same period last year. With inventory availability normalizing, new and used equipment sales margins in our core businesses (construction and material handling) have also normalized modestly from pricing highs experienced in the prior year. However, on sales of our rental equipment, our flexible rent-to-sell model, which allows us to sell previously depreciated but well-maintained rental fleet, led to a 140 basis point increase when comparing the year-over-year periods. Parts and service gross margins remained consistent year to date when compared to the same time last year, improving 10 basis points and declining 50 basis points for each department, respectively. We realized a 300 basis point decrease in rental revenues gross margin for the three months ended March 31, 2024, largely a result of replenishing and increasing the size of our rental fleet and the related incremental increase in depreciation expense.

Operating expenses: Consolidated operating expenses increased by $12.3 million to $121.5 million for the three months ended March 31, 2024 compared to the same period last year. The increase is primarily driven by the full period impact from our 2023 acquisitions. Organic headcount growth and rising costs of employment, such as wages and benefits, largely account for the remainder of the increase.

Other expense, net: Consolidated other expense, net for the three months ended March 31, 2024 was $15.2 million compared to $11.0 million for the same period in 2023. The increase is primarily due to an increase in interest expense from higher interest rates and more debt outstanding as a result of debt-financed acquisitions in the fourth quarter of 2023 and higher inventory and rental fleet levels relative to the first quarter of 2023.

Provision for income taxes: The Company recorded a $4.2 million income tax benefit and $0.1 million income tax expense for the three months ended March 31, 2024 and 2023, respectively. The income tax benefit was a result of the losses incurred during the 2024 period.

Material Handling Results

28

Non-GAAP Financial Measure: Organic Revenues

Revenues: Material Handling segment revenues increased by $9.5 million to $174.3 million for the three months ended March 31, 2024 as compared to the same period last year. Organically, the segment revenues increased 4.9% year to date over the same period in the prior year based on a favorable demand backdrop and equipment availability, allowing for throughput on our equipment sales backlog. On an organic basis, product support revenues, made up of the combined parts and service departments, remained relatively stable, decreasing slightly by 0.2%, with similar service call volumes when compared to the same period last year. Rental revenues increased 5.0% on an organic basis for the three months ended March 31, 2024 as compared to the same period last year on higher rental rates and nominal level of fleet on rent. Rental equipment sales increased $1.1 million organically, or 78.6%, on low volume as we dispose of rental equipment that has reached the end of its useful life in our fleet.

Gross profit (GP):

29

Material Handling gross profit for the three months ended March 31, 2024 decreased 240 basis points to 32.5% compared to the same period in 2023. New and used equipment gross margins compressed due to sales mix variances, with reduced sales coming from Peaklogix, our higher margin warehousing solutions platform, and increased competitive pressures from increased availability of equipment in the marketplace relative to the prior year. Parts gross margins have remained relatively consistent year over year and in line with expectations. The 120 basis point service margin increase for the three months ended March 31, 2024 compared to the prior year same period can be attributed to margin improvements in each major service category: customer, warranty, and fleet work. Rental revenues gross margins have declined 810 basis points primarily due to replenishing and increasing the size of our rental fleet and the associated incremental increase in depreciation expense. Rental equipment sales margins remained relatively consistent and in line with expectations on low volume of sales.

Operating expenses: Material Handling operating expenses increased by $6.1 million to $51.1 million for the three months ended March 31, 2024 as compared to the same period last year, mainly due to the full period impact from the M&G acquisition in March 2023, personnel-related cost increases in wages and benefits, and a $3.7 million change in the Condensed Consolidated Statements of Operations classification of the intercompany allocation of shared service expenses with an offsetting impact in Other income (expense).

Other expense, net: Material Handling other expense, net decreased by $2.4 million to $5.0 million for the three months ended March 31, 2024 as compared to the same period last year. The decrease is mainly related to the aforementioned change in intercompany expense allocation for shared service functions and contingent consideration adjustments for previous acquisitions partially offset by increased interest expense associated with an increase in total borrowings used to support a larger rental fleet, higher inventory levels, and debt-financed acquisitions, combined with a rise in interest rates on our floating-rate debt versus the same period last year.

Construction Equipment Results

30

Non-GAAP Financial Measure: Organic Revenues

Revenues: Construction Equipment segment revenues increased by $22.5 million to $255.6 million for the three months ended March 31, 2024 as compared to the same period last year. Organic segment revenues increased 2.8% for the three months ended March 31, 2024 over the same period in the prior year, amid a stable demand backdrop. New and used equipment sales increased organically by $4.3 million, or 3.8%, while rental equipment sales decreased for the three months ended March 31, 2024 by $3.4 million, resulting in overall equipment sales comparable to prior year same period. New equipment availability increased throughout the industry, resulting in an increased competitive environment compared to a year ago. With the greater availability of new equipment, our sales mix shifted toward new equipment and away from sales out of our rental fleet. Product support revenues increased 5.4% organically due to higher technician headcount and favorable pricing. Rental revenues increased 7.9%, on an organic basis for the three months ended March 31, 2024 as compared to the same period last year primarily attributable to an increased rental rate environment and a greater dollar amount of fleet on rent between the comparable periods.

Gross profit (GP):

31

Construction Equipment gross profit decreased by 80 basis points to 23.6% in the three months ended March 31, 2024 from 24.4% in the same period in 2023. New and used equipment sales margins decreased 130 basis points to 12.8%, primarily related to greater equipment supply in the market resulting in more normalized equipment sales margins this year when compared to the same period last year. The flexibility afforded by the availability of new equipment in our markets allowed for a more deliberate approach to rental equipment sales which led to rental equipment sales margins remaining flat despite lower sales volume when comparing the year-over-year periods. Our "rent-to-sell" approach in our Construction Equipment segment allows us to offer differing, well-maintained, vintages of equipment at various price points to a wide range of customers and applications with the goal of increasing our equipment field population leading to additional future high-margin product support revenues. Parts sales margins for the three months ended March 31, 2024 remained consistent when compared to the same time last year and in line with expectations. Service gross margins decreased by 240 basis points year over year on increased non-billable time as the mild winter in our northern regions led to less heavy machinery being used on soft grounds and there were fewer instances of snow equipment repair or startup issues related to extreme cold. Rental revenues gross margin for the three months ended March 31, 2024 increased 130 basis points from a year ago, primarily related to lower repair and maintenance costs associated with the fleet, on a relative basis, year over year.

Operating expenses: Construction Equipment operating expenses increased by $11.2 million to $60.9 million for the three months ended March 31, 2024 as compared to the same period in 2023. The increase is mainly due to the full period impact from the Burris and Ault acquisitions made in the fourth quarter of 2023 but is also influenced by general headcount increases in the segment reflected in higher wage levels, and rising benefit costs. Lastly, a $3.0 million change in the Condensed Consolidated Statements of Operations classification of the allocation of intercompany expenses for shared service functions increases the level of operating expenses compared to the prior year but are offset by a reduction of expense allocated in Other expense, net.

Other expense, net: Construction Equipment other expense, net increased by $0.6 million to $9.4 million for the three months ended March 31, 2024 as compared to the same period in 2023. The variance was mainly due to the increase in interest rates on our floating-rate debt and the interest expense related to a larger rental fleet and higher inventory levels partially offset by the aforementioned change in shared service function intercompany segment allocations.

Master Distribution Results

32

Revenues: Master Distribution segment revenues for the three months ended March 31, 2024 were $12.8 million, a decrease of $13.9 million from the prior year same period. This variance is primarily related to, 1) the Master Distribution segments business model, which is to sell equipment to sub-dealers that hold stock inventory and ultimately sell to end users and, 2) the supply and demand dynamic that existed in the first quarter of 2023, as supply of new equipment was in the initial phase of meeting high levels of pent-up post-pandemic demand and our Master Distribution sub-dealers fulfilled stocking needs. This dealer-stocking dynamic led to higher than typical sales volume for our Master Distribution for the three months ended March 31, 2023. Parts sales were slightly down based on mix, as we sold multiple large component parts in the three months ended March 31, 2023 when compared to the same period this year.

Gross profit (GP):

Gross profit margin on new and used equipment sales were 25.3%, down slightly from prior year but in line with expectations. Parts gross profit margin was 40.0% for the three months ended March 31, 2024, down 830 basis points compared to the same period last year primarily related to the aforementioned large component parts sales in first quarter of last year.

Operating expenses: Master Distribution segment operating expenses were $4.9 million for the year ended March 31, 2024, an increase of $1.5 million primarily related to non-cash adjustments for contingent consideration earnouts associated with the acquisition of Ecoverse in November 2022. Personnel costs, such as wages and commissions, and sales-related expenses are the primary operating expenses of the Master Distribution segment and remained flat year over year.

Other expense, net: Master Distribution other expense was $0.9 million for the three months ended March 31, 2024 a slight increase over prior year primarily due to higher floor plan interest expense from higher interest rates and inventory levels.

Liquidity and Capital Resources

The three months ended March 31, 2024 and 2023 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 three months ended March 31, 2024, operating activities resulted in net cash used in operations of $11.9 million. Our reported net loss of $11.9 million, when adjusted for non-cash income and expense items, primarily depreciation and amortization, the gain on sale of rental equipment, inventory obsolescence and bad debt reserves, and stock-based compensation, provided net cash inflows of $17.8 million. Changes in working capital included $66.3 million of inventory purchased (of which $38.8 million has been transferred into our rental fleet for replenishment and growth purposes), and an $8.0 million decrease in accounts receivable. Cash flows from operating activities were favorably impacted by $27.6 million due to proceeds from the sale of rental equipment, $0.4 million in net inflows related to manufacturer floor plans, and a $5.0 million net change in prepaid expenses and other assets and unfavorably impacted by a $4.4 million decrease in accounts payable, accrued expenses, customer deposits, and other current liabilities and leases, deferred revenue, net of current portion and other liabilities.

For the three months ended March 31, 2023, operating activities resulted in net cash used in operations of $20.1 million. Our cash flows from operating activities related to net income adjusted for non-cash income and expenses, primarily depreciation and amortization, the gain on sale of rental equipment, inventory obsolescence and bad debt reserves, and stock-based compensation, generated $23.9 million for the three months ended March 31, 2023. This was partially offset by $44.0 million of net working capital investments. Changes in working capital included $114.3 million of inventory purchased (of which $42.7 million was transferred into our rental fleet for replenishment and growth purposes), and a $1.3 million decrease in accounts receivable. Cash flows from operating activities were favorably impacted by $29.0 million due to proceeds from the sale of rental equipment, $57.0 million in net inflows related to manufacturer floor plans and unfavorably impacted by a $6.5 million decrease in accounts payable, accrued expenses, customer deposits, and other current liabilities and a $10.5 million net change in prepaid expenses and other assets and leases, deferred revenue, net of current portion and other liabilities.

Cash Flow from Investing Activities. For the three months ended March 31, 2024, our cash used in investing activities was $18.1 million. This was mainly due to $18.2 million purchases of rental equipment, non-rental property and equipment, and other investing activities partially offset by $0.1 million proceeds from the sale of non-rental property and equipment.

For the three months ended March 31, 2023, our cash used in investing activities was $18.9 million. This was mainly due to $17.7 million purchases of rental equipment and non-rental property and equipment and $1.7 million net use of cash for 2023 acquisitions and adjustments to the purchase prices of our 2022 acquisitions partially offset by $0.5 million of proceeds from other investing activities.

Cash Flow from Financing Activities. For the three months ended March 31, 2024, cash provided by financing activities was $4.6 million. This cash inflow was mainly due to $12.9 million of net borrowings under our line of credit which funded the increase in net working capital previously noted. Additionally, there were net borrowings of $1.9 million related to non-manufacturer floor plans. These cash inflows were partially offset by payments of $2.7 million for preferred and common stock dividends, $5.5 million related to other financing activities and $2.0 million payments on finance lease obligations.

For the three months ended March 31, 2023, cash provided by financing activities was $37.9 million. The favorable impact was mainly due to $38.3 million of net proceeds under our line of credit, which funded the increase in net working capital and rental fleet as previously noted, net borrowings of $1.0 million related to non-manufacturer floor plans and $2.4 million related to other financing activities. These cash inflows were partially offset by $2.7 million related to preferred and common stock dividend payments and $1.1 million payments on finance lease obligations.

Sources of Liquidity

Our principal sources of liquidity have been from cash provided by our service, parts and rental related operations and the sales of new, used, and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under our line of credit and floor plans. The Company reported $5.6 million in cash for the period ended March 31, 2024. For more information on our available borrowings under the revolving line of credit, senior secured second lien notes, and floor plans, please refer to Note 8, Floor Plans and Note 9, Long-term Debt. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested as we do not anticipate the need to repatriate funds to the U.S. to satisfy domestic liquidity needs.

Cash Requirements Related to Operations

Our principal uses of cash have been to fund operating activities and working capital, including but not limited to new and used equipment inventories, purchases of rental fleet equipment and personal property, payments due under line of credit and floor plans, acquisitions, debt service requirements, and preferred stock and common stock dividends. 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 line of credit and floor plans 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 period ended March 31, 2024 was $51.7 million, including $38.8 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 $27.6 million for the period ended March 31, 2024 as our business model is to sell lightly-used inventory to customers from our rental fleet 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 line 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 flows from operations, available cash, and available borrowings under the line of credit will be adequate to meet our future liquidity needs for the foreseeable future. As of March 31, 2024, we had $173.1 million of available borrowings under the revolving line of credit and floor plans.

Critical Accounting Policies and Estimates

In the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 reviews these estimates and assumptions on an ongoing basis. While we believe the estimates and judgments we use in preparing our consolidated financial statements are reasonable and appropriate, they are subject to future events and uncertainties regarding their outcome; therefore, actual results may materially differ from these estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts first become known. See Note 2 to our condensed consolidated financial statements for a summary of our significant accounting policies.

Additionally, see Note 2 to the consolidated financial statements contained in the Company’s 2023 Annual Report on Form 10-K for a summary of our significant accounting policies.

Our exposure to market risk primarily consists of interest rate risk associated with our variable and fixed rate debt, prices of certain commodities and foreign currency exchange rate risks. From time to time, we employ financial instruments to manage the Company's exposure to changes in interest rates, diesel and unleaded fuel and foreign currencies. See Note 14, Fair Value of Financial Instruments, for more information.

Interest rate risk: Our earnings may be affected by changes in interest rates on the ABL Facility and Floor Plan Facilities. The interest rates applicable to any loans under the ABL Facility are based, at the option of the borrowers, on (i) a floating rate based on the SOFR (for loans denominated in U.S. dollars) or Canadian Dollar Offered Rate (for loans denominated in Canadian dollars) plus an initial margin of 1.75% or (ii) CBFR (for loans denominated in U.S. dollars) or the Canadian Prime Rate (for loans denominated in Canadian dollars) less an initial margin of 0.75%, in each case, where margin is adjusted under the ABL Facility based on the quarterly average excess availability under the ABL Facility. The interest rates applicable to any loans under various Floor Plan Facilities ("Floor Plan Rates") are based on a wide range of benchmark rates (including SOFR, Prime, Bloomberg Short-Term Bank Yield Index, and the Canadian Bankers' Acceptance Rate) plus an applicable margin. As of March 31, 2024 the lowest Floor Plan Rate was SOFR plus an initial margin of 2.75%, and the highest was SOFR plus a margin of 5.1145% per annum.

At March 31, 2024 and December 31, 2023, we had $330.0 million and $317.5 million, respectively, outstanding borrowings under the ABL Facility. At March 31, 2024 and December 31, 2023, we had $399.4 million and $397.5 million, respectively, outstanding borrowings under the Floor Plan Facilities. As of March 31, 2024, based upon the amount of our variable rate debt outstanding, each one percentage point increase in the interest rates applicable to our variable rate debt, when including the hedge impact of our interest rate cap, would reduce our annual pre-tax earnings by $3.3 million. The amount of variable rate indebtedness outstanding may fluctuate significantly. See Note 8, Floor Plans, and Note 9, Long-Term Debt, in our condensed consolidated financial statements for additional information concerning the terms of our variable rate debt.

We have a fixed rate on the Notes of $315.0 million which are due in 2026. We do not have any exposure to changing interest rates as of March 31, 2024 on the fixed rate Notes. For additional information concerning the terms of our fixed rate debt, see Note 9, Long-Term Debt.

Commodity price risk: The market prices of diesel and unleaded fuels are unpredictable and can fluctuate significantly. Because of the volume of fuel we purchase each year, a significant increase in the price of fuel could adversely affect our business and reduce our operating margins. To manage a portion of this risk, we enter into fixed price swap contracts to purchase gasoline and diesel fuel related to forecasted fuel purchases. For the purchases of unleaded and diesel fuel that we expect to purchase at market prices in the next 12 months, each $0.10 per gallon increase in the price of diesel and unleaded fuel, holding other variables constant, would not have a material impact on our pre-tax income when including the fixed price swap contracts.

Foreign currency exchange rate risk: Due to our international operations, a portion of our revenues, cost of revenues, and operating expenses are subject to foreign currency exchange rate risk. Changes in the exchange rate of the U.S. dollar versus the Canadian dollar and European currencies affect the translated value and relative level of revenues and net income that we report from one period to the next. Based upon balances and exchange rates as of March 31, 2024, holding other variables constant, we believe that a hypothetical 10% increase or decrease in all applicable foreign exchange rates would not have a material impact on our results of operations or cash flows.

Management’s Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal controls over financial reporting are a combination of processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management utilized the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2024.

Refer to Item 9A. Controls and Procedures in the 2023 Annual Report on Form 10-K for more information on the conclusion that our internal control over financial reporting was effective as of December 31, 2023. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, our disclosure controls and procedures were effective.

Our Chief Executive Officer and Chief Financial Officer have certified that, based on each such officer’s knowledge, the financial statements, and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations, and cash flows as of, and for, the periods presented in this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

We face a number of uncertainties and risks that are difficult to predict and many of which are outside of our control. For a detailed discussion of the risks that affect our business, please refer to Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.