Alta Equipment Group Inc.: Form 10-Q for the period ended Jun 30, 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 related to automated equipment installation and warehouse management 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.

Growth Strategy

Our growth strategy is multifaceted and primarily 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. Recent examples of strategic acquisitions were the Ault and Burris acquisitions that closed in late 2023.

In addition to strategic acquisitions, we intend to leverage our platform, deep roster of existing customers, and decades of equipment dealership experience to grow organically by establishing new relationships with equipment OEMs that are synergistic to our existing business. Recent examples of this facet of our growth strategy is evidenced by our new relationship with Case Power and Equipment in Western Pennsylvania, which launched in late 2023, and the ongoing development of our e-mobility offerings and partnerships in the class 3 through 8 commercial electric vehicle markets.

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 installation and warehouse management systems integration.

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 44% 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 $609.9 million as of June 30, 2024. The original acquisition cost of our rental fleet excludes $7.3 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-owned equipment field population within our territories that 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 Floor Plan Facilities, ABL Facility, Notes, and finance lease arrangements.

Results of Operations

The three and six months ended June 30, 2024 and 2023

Consolidated Results

27

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 $19.7 million, or 4.2%, to $488.1 million for the three months ended June 30, 2024 as compared to the same period last year. Organic sales for the three months ended June 30, 2024 increased 0.1% compared to the same period last year. Continuous headwinds from general economic uncertainty related to the outcome of the upcoming U.S. presidential election and a continued high interest rate environment have softened demand for new and used equipment, but the core long-term fundamentals in many of the markets we serve remain solid. Organic new and used equipment sales decreased by $14.2 million, or 5.6%, to $240.4 million for the three months ended June 30, 2024, partially offset by increased revenues from rental equipment sales of $5.2 million, organically. Organic parts sales increased by $2.6 million, or 3.6%, to $73.9 million for the three months ended June 30, 2024 as compared to the same period last year, and organic service sales increased $5.5 million, or 9.2%, making for a total aftermarket sales increase of $8.1 million organically, or 6.2%. Rental revenues for the quarter reached $51.0 million organically, or an increase of 2.8%.

In the six months ended June 30, 2024, organic new and used equipment revenues remained relatively steady, decreasing a modest 3.2% against a strong comparative six months ended June 30, 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 sub-dealers, as segment revenues for the six months ended June 30, 2024 were down $18.6 million from the prior year same period. While new and used equipment revenues stagnated on weaker demand versus the same period last year, our product support departments (parts and service) grew 4.4% organically for the six months ended June 30, 2024. Our rental business remained strong for the six months ended June 30, 2024 as rental revenues grew 4.8% organically from increased fleet on rent when compared to the same period last year. Rental equipment sales increased 5.8% for the six months ended June 30, 2024 as compared to the same period last year, as we look to sell rental equipment to help bolster field population for our aftermarket departments, especially as rental rates and utilization begin to moderate from their highs.

Gross profit (GP):

The consolidated gross profit for the three months ended June 30, 2024 was 27.0%, a 10 basis point decrease from the same period in 2023. New and used equipment sales margins decreased 170 basis points to 15.7%, as margin compression was observed in both our Construction Equipment and Master Distribution segments. With inventory availability normalizing, new and used equipment sales margins have also normalized modestly from pricing highs experienced in the prior year. The impact of pricing normalization also effected the sales of our rental equipment, which led to a 190 basis point decrease when comparing the year-over-year periods. Parts and service gross margins improved in the second quarter when compared to the same time last year, improving 130 basis points and 190 basis points for each department, respectively, primarily due to the 2023 acquisition of Ault's impact on overall parts margin and improved rate realization on service labor. We realized an 80 basis point decrease in rental revenues gross margin for the three months ended June 30, 2024, largely a result of replenishing and increasing the size of our rental fleet and the related incremental increase in depreciation expense.

The consolidated gross profit for the six months ended June 30, 2024 was 27.2%, a 70 basis point decrease from the 27.9% for the same period in 2023. New and used equipment sales margins decreased 210 basis points to 15.8%, a reflection of a comparably softened pricing environment. On sales of our rental equipment, gross margin compression was less, a slight 60 basis point decrease 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 80 basis points and 70 basis points for each department, respectively. We realized a 180 basis point decrease in rental revenues gross margin for the six months ended June 30, 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 $11.1 million to $121.7 million for the three months ended June 30, 2024 compared to the same period last year. The increase is primarily driven by the full period impact from our 2023 acquisitions. Rising costs of employment, such as wages and benefits, largely account for the remainder of the increase, along with non-cash adjustments to contingent consideration for earn-outs on previous acquisitions, and increased costs for certain non-recurring services and events such as new store openings.

Consolidated operating expenses increased by $23.4 million to $243.2 million for the six months ended June 30, 2024 compared to the same period last year. The increase is primarily driven by the full period impact from our 2023 acquisitions. Rising costs of employment, such as wages and benefits, largely account for the remainder of the increase, along with non-cash adjustments to contingent consideration for earn-outs on previous acquisitions, and increased costs for certain non-recurring services and events such as new store openings.

Other expense, net: Consolidated other expense, net for the three months ended June 30, 2024 was $24.9 million compared to $13.5 million for the same period in 2023. The increase is primarily due to the loss on extinguishment of debt of $6.7 million and an increased amount of interest expense.

Consolidated other expense, net for the six months ended June 30, 2024 was $40.1 million compared to $24.5 million for the same period in 2023. The increase is primarily due to the loss on extinguishment of debt of $6.7 million, and an increased amount of interest expense due to increased effective interest rates, higher inventory and rental fleet levels, and more debt from financed acquisitions as compared to same period last year.

Provision for income taxes: The Company recorded an income tax benefit of $2.7 million and an expense of $0.3 million for the three months ended June 30, 2024 and 2023, respectively and an income tax benefit of $6.9 million and an expense of $0.4 million for the six months ended June 30, 2024 and 2023, respectively. The income tax benefit was a result of the losses incurred during the 2024 period.

Material Handling Results

30

Non-GAAP Financial Measure: Organic Revenues

Revenues: Material Handling segment revenues increased by $6.5 million to $175.6 million for the three months ended June 30, 2024 as compared to the same period last year. Organically, the segment revenues increased 3.6% in the second quarter over the same period in the prior year despite a weakened market. New and used equipment sales are effectively flat year over year on an organic basis as we continue to work through a notable equipment sales backlog. Also, on an organic basis product support revenues, made up of the combined parts and service departments, improved by 4.7%, with service revenues increasing 7.6% in the second quarter over the same period in the prior year. Rental revenues increased 8.1% on an organic basis for the three months ended June 30, 2024 as compared to the same period last year related to a higher nominal level of fleet on rent and moderately increased rates. Rental equipment sales increased $1.9 million organically, or 211.1%, on low volume as we have strategically sold underperforming rental units or disposed of rental equipment that reached the end of its useful life in our fleet.

Material Handling segment revenues increased by $16.0 million to $349.9 million for the six months ended June 30, 2024 as compared to the same period last year. Organically, the segment revenues increased 4.3% year to date over the same period in the prior year. On an organic basis, product support revenues, made up of the combined parts and service departments, remained relatively stable, increasing by 2.3%, with similar service call volumes when compared to the same period last year. Rental revenues increased 6.6% on an organic basis for the six months ended June 30, 2024 as compared to the same period last year primarily related to a higher nominal level of fleet on rent and moderately increased rates. Rental equipment sales increased $3.0 million organically, or 130.4%, on low volume as we have strategically sold underperforming rental units or disposed of rental equipment that reached the end of its useful life in our fleet.

Gross profit (GP):

Material Handling gross profit for the three months ended June 30, 2024 increased 80 basis points to 33.9% compared to the same period in 2023. New and used equipment gross margins remained constant despite increased competitive pressures from increased availability of equipment in the marketplace relative to the prior year. Parts gross margins have similarly remained relatively consistent year over year and in line with expectations. The 290 basis point service margin increase for the three months ended June 30, 2024 compared to the prior year same period can be attributed to margin improvements in each major service category: customer and OEM warranty and fleet work. Rental revenues gross margins have declined 220 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.

Material Handling gross profit for the six months ended June 30, 2024 decreased 80 basis points to 33.2% compared to the same period in 2023. New and used equipment gross margins compressed slightly due to sales mix variances, with reduced sales coming from Peaklogix, our higher margin warehousing solutions platform, and increased pressure on used equipment pricing. Parts gross margins have remained relatively consistent year over year and in line with expectations. The 200 basis point service margin increase for the six months ended June 30, 2024 compared to the prior year same period can be attributed to margin improvements in each major service category: customer and OEM warranty and fleet work. Rental revenues gross margins have declined 510 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 $4.6 million to $49.0 million for the three months ended June 30, 2024 as compared to the same period last year, mainly due to a 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) of $4.1 million.

Material Handling operating expenses increased by $10.7 million to $100.1 million for the six months ended June 30, 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 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) of $7.8 million.

Other expense, net: Material Handling other expense, net decreased by $2.8 million to $5.8 million for the three months ended June 30, 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 due to increased effective interest rates and higher inventory and rental fleet levels.

Material Handling other expense, net decreased by $5.2 million to $10.8 million for the six months ended June 30, 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 due to increased effective interest rates and higher inventory and rental fleet levels.

Construction Equipment Results

33

Non-GAAP Financial Measure: Organic Revenues

Revenues: Construction Equipment segment revenues increased by $13.4 million to $294.9 million for the three months ended June 30, 2024 as compared to the same period last year. Organic segment revenues decreased 1.9% for the three months ended June 30, 2024 over the same period in the prior year, amid a softer demand backdrop. New and used equipment sales decreased organically by $14.7 million, or 9.9%, while rental equipment sales increased for the three months ended June 30, 2024 by $4.0 million. Market demand for equipment from medium and small contractors has declined as interest rates have stayed elevated and new project funding has become more challenging. Further, heightened new equipment availability and dealer stock levels throughout the industry have resulted in an increased competitive environment compared to a year ago making holding market share in certain regions and product categories more difficult. Product support revenues increased 8.1% organically as we have been able to increase skilled technician headcount and improved rate realization on service labor. Rental revenues decreased 1.0%, on an organic basis for the three months ended June 30, 2024 as compared to the same period last year on reduced utilization and as rental rates have moderated.

Construction Equipment segment revenues increased by $35.9 million to $550.5 million for the six months ended June 30, 2024 as compared to the same period last year. Organic segment revenues increased 0.2% for the six months ended June 30, 2024 over the same period in the prior year. New and used equipment sales decreased organically by $10.4 million, or 4.0%, while rental equipment sales increased for the six months ended June 30, 2024 by $0.6 million. Product support revenues increased 6.8% organically due to higher technician headcount and favorable pricing. Rental revenues increased 3.0%, on an organic basis for the six months ended June 30, 2024 as compared to the same period last year, as rental demand remains stable yet pricing is moderating.

Gross profit (GP):

Construction Equipment gross profit decreased by 30 basis points to 22.9% in the three months ended June 30, 2024 from 23.2% in the same period in 2023. New and used equipment sales margins decreased 270 basis points to 12.9%, primarily related to greater equipment supply in the market resulting in tighter sales margins this year when compared to the same period last year. Notably, the 12.9% margin realized in the second quarter is similar to our first quarter 2024 new and used equipment sales margin of 12.8%. Parts sales margins for the three months ended June 30, 2024 increased when compared to the same time last year and in line with expectations on favorable pricing and have been helped by a growing mix of aggregate parts sales from our 2023 acquisition of Ault. Service gross margins increased by 80 basis points year over year with improved rate realization on service labor. Rental revenues gross margin for the three months ended June 30, 2024 was unchanged from a year ago, as costs moved in tandem with sales.

Construction Equipment gross profit decreased by 50 basis points to 23.2% in the six months ended June 30, 2024 from 23.7% in the same period in 2023. New and used equipment sales margins decreased 220 basis points to 12.8%, primarily related to greater equipment supply in the market resulting in tighter sales margins this year when compared to the same period last year. Parts sales margins for the six months ended June 30, 2024 increased when compared to the same time last year and have been helped by improving parts gross margins from our 2023 acquisition of Ault. Service gross margins decreased by 80 basis points year over year mainly from an increase of non-billable time in the first quarter of the year 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 six months ended June 30, 2024 increased 60 basis points from a year ago, primarily related to lower repair and maintenance costs associated with the fleet year over year.

Operating expenses: Construction Equipment operating expenses increased by $11.4 million to $61.5 million for the three months ended June 30, 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 higher wage levels, rising benefit costs, and increased customer, service vehicle, and facility related expenses. Additionally, and similar to the Material Handling segment, a $3.3 million change in the Condensed Consolidated Statements of Operations classification of the allocation of intercompany expenses for shared service functions increased the level of operating expenses compared to the prior year but were offset by a reduction of expense allocated in Other expense, net.

Construction Equipment operating expenses increased by $22.6 million to $122.4 million for the six months ended June 30, 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 primarily by higher wage levels, rising benefit costs, and increased customer, service vehicle, and facility related expenses. Lastly, a $6.2 million change in the Condensed Consolidated Statements of Operations classification of the allocation of intercompany expenses for shared service functions increased the level of operating expenses compared to the prior year but were 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 $11.3 million for the three months ended June 30, 2024 as compared to the same period in 2023. The variance was mainly due to increased floor plan interest expense related to increased new inventory levels that were no longer subsidized by our OEMs and higher effective interest rates, higher inventory and rental fleet levels, and increased debt from financed acquisitions partially offset by the aforementioned change in shared service function intercompany segment allocations.

Construction Equipment other expense, net increased by $1.2 million to $20.7 million for the six months ended June 30, 2024 as compared to the same period in 2023. The variance was driven by the same aforementioned factors for the three months ended June 30, 2024.

Master Distribution Results

36

Revenues: Master Distribution segment revenues for the three months ended June 30, 2024 were $16.7 million, a decrease of $4.7 million from the prior year same period. The Master Distribution segment has two primary sales channels for which it sells equipment: (1) through its dealer channel whereby contractual relationships are established with sub-dealers that hold stock inventory and ultimately sell to end users and (2) through direct sale relationships whereby end customers source specific types of equipment direct. During the three months ended June 30, 2024, the dealer channel exhibited a softer demand dynamic than what existed in the second quarter of 2023, as the market for environmental processing equipment was down overall. As dealer channel sales depend on sub-dealer stocking levels, in 2023 the 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 segment for the three months ended June 30, 2023. With the dealer channel full and a challenging equipment demand environment, volumes and revenues have suffered comparably. Conversely, the Master Distribution segment's direct sale business, primarily consisting of compost turning and bulk commercial food waste processing machinery, has improved as we sell to environmentally conscious customer end-users throughout North America. Parts sales were slightly down as end-market dynamics negatively influenced aftermarket sales as well, and an uptick in aftermarket (non-OEM) part competitors, primarily on high-volume wear parts, have added some pricing pressure to the recent quarter.

Master Distribution segment revenues for the six months ended June 30, 2024 were $29.5 million, a decrease of $18.6 million from the prior year same period. Softer demand for dealer channel equipment stock relative to the needs of the first half of 2023 was the main driver for the lower segment revenue. Higher interest rates affecting end-customer purchasing behaviors and overall dealer stocking levels contributed to the softer demand throughout the segment's dealer channel. Direct sales, on the other hand, have exhibited positive volume and sales increases in the first half of 2024, albeit a smaller portion of the total sales mix. Parts sales were slightly down based on mix, as we sold multiple large component parts in the six months ended June 30, 2023 when compared to the same period this year, and increased aftermarket parts competitors in the marketplace.

Gross profit (GP):

For the three months ended June 30, 2024, gross profit margin on new and used equipment sales were 25.0%, down 300 basis points from prior year, but in line with expectations. Parts gross profit margin was 50.0% for the three months ended June 30, 2024, down 200 basis points compared to the same period last year primarily related to the margin pressures from aftermarket competitors.

For the six months ended June 30, 2024, gross profit margin on new and used equipment sales were 25.1%, down slightly from prior year but in line with expectations. Parts gross profit margin was 44.9% for the six months ended June 30, 2024, down 510 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 $4.6 million for the three months ended June 30, 2024, an increase of $0.4 million primarily related to non-cash adjustments for contingent consideration earn-outs associated with the acquisition of Ecoverse in November 2022. Personnel costs, such as wages, benefits, and commissions, and sales-related expenses are the primary operating expenses of the Master Distribution segment and attribute the remainder of the increase in operating expenses for the quarter.

Master Distribution segment operating expenses were $9.5 million for the six months ended June 30, 2024, an increase of $1.9 million primarily related to non-cash adjustments for contingent consideration earn-outs 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 relatively flat year over year.

Other expense, net: Master Distribution other expense was $1.1 million for the three months ended June 30, 2024, a slight increase over prior year primarily due to higher floor plan interest expense primarily from higher inventory levels.

Master Distribution other expense was $2.0 million for the six months ended June 30, 2024, a slight increase over prior year primarily due to higher floor plan interest expense primarily from higher inventory levels.

Liquidity and Capital Resources

The six months ended June 30, 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 six months ended June 30, 2024, operating activities resulted in net cash used in operations of $21.0 million. Our reported net loss of $23.8 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, loss on debt extinguishment, deferred income taxes, and stock-based compensation, provided net cash inflows of $38.4 million. Changes in working capital included $109.6 million of inventory purchased (of which $83.0 million was transferred into our rental fleet for replenishment and growth purposes), and a $6.5 million increase in accounts receivable. Cash flows from operating activities were favorably impacted by $66.3 million due to proceeds from the sale of rental equipment, and $5.2 million in net inflows related to manufacturer floor plans and unfavorably impacted by a $14.5 million decrease in accounts payable, accrued expenses, customer deposits, and other current liabilities, and a $0.3 million net change in leases, deferred revenue, net of current portion and other liabilities.

For the six months ended June 30, 2023, operating activities resulted in net cash used in operations of $33.8 million. Our reported net income of $3.4 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, inventory obsolescence and bad debt reserves, and share-based compensation, provided net cash inflows of $56.4 million. Changes in working capital included $200.6 million of inventory purchased (of which $96.4 million was transferred into our rental fleet for replenishment and growth purposes), and a $1.5 million decrease in accounts receivable. Cash flows from operating activities were favorably impacted by $62.2 million due to proceeds from the sale of rental equipment, $86.1 million in net inflows related to manufacturer floor plans and unfavorably impacted by a $27.7 million decrease in accounts payable, accrued expenses, customer deposits, and other current liabilities and by a $11.7 million net change in prepaid expenses and other assets and leases, deferred revenue, and other liabilities.

Cash Flow from Investing Activities. For the six months ended June 30, 2024, our cash used in investing activities was $37.4 million. This was mainly due to $39.3 million purchases of rental equipment, non-rental property and equipment, and other investing activities partially offset by $1.9 million proceeds from the sale of non-rental property and equipment.

For the six months ended June 30, 2023, our cash used in investing activities was $40.6 million. This was mainly due to $41.3 million purchases of rental equipment, non-rental property and equipment, and other investing activities as well as acquisition activity partially offset by $0.7 million proceeds from the sale of non-rental property and equipment.

Cash Flow from Financing Activities. For the six months ended June 30, 2024, cash provided by financing activities was $32.1 million. This cash inflow was mainly due to $373.1 million of net proceeds from our line of credit and long-term borrowings which funded the extinguishment of our Senior Secured Second Lien Notes due April 2026 and the increase in net working capital previously noted. These cash inflows were partially offset by payments of $5.4 million for preferred and common stock dividends, net payments of $3.3 million related to non-manufacturer floor plans, $2.0 million for common stock repurchases, and $9.1 million related to other financing activities.

For the six months ended June 30, 2023, cash provided by financing activities was $74.1 million. The favorable impact was mainly due to $70.0 million of net proceeds under our line of credit, long-term debt, and finance lease obligations, which funded the increase in net working capital and rental fleet as previously noted, net proceeds of $5.0 million related to non-manufacturer floor plans, and $4.3 million related to other financing activities. This was partially offset by payments of $5.2 million for preferred and common stock dividends.

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 $4.5 million in cash for the period ended June 30, 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, stock repurchases, 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 June 30, 2024 was $113.6 million, including $83.0 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 $66.3 million for the period ended June 30, 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 June 30, 2024, we had $339.0 million of available borrowings under the ABL Facility and Floor Plan Facilities.

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 June 30, 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 June 30, 2024 and December 31, 2023, we had $217.6 million and $317.5 million, respectively, outstanding borrowings under the ABL Facility. At June 30, 2024 and December 31, 2023, we had $398.8 million and $397.5 million, respectively, outstanding borrowings under the Floor Plan Facilities. As of June 30, 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 $2.4 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 $500.0 million which are due in 2029. We do not have any exposure to changing interest rates as of June 30, 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 June 30, 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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2024, our disclosure controls and procedures were effective.

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) of the Exchange Act) during the quarter ended June 30, 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.