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Item 1A. Risk Factors.
Risks Related to the Companys Business and Industry
The Companys business ss has in the past and could in the future be adversely affected by declines in construction, material handling, and environmental processing activities, or a downturn in the economy in general, which could lead to decreased demand for equipment, depressed equipment rental rates, and lower sales prices, resulting in a decline in the Companys revenues, gross margins, and operating results.
The Companys equipment is principally used in connection with construction, material handling, and environmental processing activities. Consequently, a downturn in these activities, or the economy in general, has in the past and may in the future lead to a decrease in the demand for equipment and services or depress rental rates and the sales prices for the Companys replacement parts , services, and equipment. The Companys business has in the past and may also in the future be negatively impacted, either temporarily or long-term, by:
a reduction in spending levels by our customers;
the lack of availability of credit for our customers;
adverse changes in federal, state, and local government infrastructure spending and taxation;
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excess fleetsupply in the equipment markets we participate in;
our inability to pass along operating cost increases related to inflation tor otherwise to customers;
an increase in costs generally, including the cost of inputs for our OEMs or customers' operations, as a result of itariffs, inflation or other factors;
adverse weather conditions or natural disasters which may affect a particular region;
a pandemic or similar national or global health crisis;
a labor work stoppage or shortage of skilled technicians;
a prolongelabor market conditions in the U.S. or Canada that would impair the Companys, our OEMs, or our customers ability to hire and/or retain appropriately skilled employees to support ongoing operations;
a prolonged shutdown of the U.S., state or local government;
an increase in interest rates;
adverse foreign currency fluctuations;
terrorism, war or hostilities involving the U.S. or Canada;
our failure to execute on strategic plans generally, including those associated with commercial electric vehicle business model;
disruptions to global supply chains, specifically our major OEM partner supply chains; or
other unforeseen or catastrophic events.
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The Companys inability to forecast trends accurately may adversely impact the Companys business and financial condition.
An economic downturn or economic uncertainty makes it difficult for the Company to forecast trends, which may have an adverse impact on the Companys business and financial condition. Uncertainty regarding future equipment product ddemand could cause the Company to maintain excess equipment inventory and increase the Companys equipment inventory carrying costs. Alternatively, this forecasting difficulty could cause a shortage of equipment for sale or rental that could result in an inability to satisfy demand for the Companys products and a loss of market share.
TVariations in the Companys revenues and operating results may fluctuate, whichhave in the past and could re in the future result in a decline in the Companys profitability and make it more difficult for the Company to grow our business.
The Companys revenues and operating results may vary from quarter to quarter and by season. Periods of decline have in the past and could in the future result in an overall decline in profitability and make it more difficult for the Company to make payments on our indebtedness and grow the Companys business. We expect the Companys quarterly results to fluctuate in the future due to a number of factors, including:
general economic conditions in the markets where we operate;
the cyclical and seasonal nature of the Companys customers business and our sales and rental patterns, particularly the Companys construction customers;
the weather conditions, specifically in our northern markets;
the timeliness of OEM equipment deliveries;
changesad hoc, period-based, competitive pricing programs offered by competitive equipment OEMs and their dealers that put our products at a disadvantage in a given market from a pricing perspective;
changes in the size of the Companys rental fleet, the rate at which we rent our fleet, and the price at which we sell equipment from our fleet;
changes in corporate or government spending for commercial and infrastructure projects;
changes in interest rates and related changes in the Companys interest expense and debt service obligations;
changes or fluctuations in skilled technician headcount levels;
timing of technician non-billable hours primarily associated with holiday, paid time off and training programs;
the effectiveness of integrating acquired businesses and new start-up locations; and
timing of acquisitions and new location openings and related costs.
In addition, the Company incurs various costs when integrating newly acquired businesses or opening new start-up locations, and the profitability of a new location is generally expected to be lower in the initial months or years of operation.
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The Company is subject to competition, which may have an adverse effect on the Companys business by reducing the Companys ability to increase or maintain revenues or profitability.
The equipment dealership and rental industries are highly competitive and fragmented. Many of the markets in which the Company operates are served by a large number of competitors, ranging from national and multi-regional equipment dealerships and rental companies to small, independent businesses with a limited number of locations. Some of the Companys competitors have significantly greater financial, marketing, and other resources than the Company does, and may be able to reduce rental rates or sales prices in the market, which could negatively impact our business. The Company may encounter increased competition from existing competitors or new market entrants in the future which could have an adverse effect on the Companys business, financial condition and results of operations.
The Company is subject to the ability of our OEMs to deliver cost competitive equipment and parts timely.
To the extent the cost of our OEMs equipment is not competitive versus our competitions equipment, the Company could suffer lost sales and market share over time. This loss of market share would ultimately reduce our serviceable field population of equipment which yields revenues in our high-margin product support departments. Additionally, to the extent our OEMs replacement parts are not cost competitive versus the competition this could impact the total cost of ownership of a piece of equipment from a customer perspective and ultimately lead to lost sales for the Company.
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The Company purchases a significant amount of our equipment from a limited number of manufacturers. Termination of one or more of the Companys relationships with any of those manufacturers could have an adverse effect on the Companys business.
The Company purchases most of our sales and rental equipment, and aftermarket parts from leading, internationally known OEMs. ADuring the year ended December 31, 2024, approximately 4758% of the Companys equipment sales aand aftermarket parts asales were purchased from five major manufacturers (Volvo, Hyster-Yale, Kubota, JCB, Doppstadt aCNH, and VolvoJCB). Although the Company believes we have alternative sources of supply for equipment sales and aftermarket parts we purchase in each of our core product categories, termination of one or more of the Companys relationships with any of these major suppliers could have an adverse effect on the Companys business, financial condition and results of operations if we were unable to obtain an adequate replacement supplier.
The Company is dependent upon the success and continued viability of our OEM suppliers for which we are distributors.
The success of our business is, to a certain degree, dependent on our OEMs in several key respects. First, we rely on our various OEMs for our new equipment and replacement parts inventory. Our ability to sell new equipment is dependent on an OEMs ability to design, manufacture, and allocate to our branch locations an attractive, high-quality, and desirable product mix at the right time and at the right price in order to satisfy customer demand. Second, some of the Company's OEMs support their dealers by providing direct floor plan lending for new, used and rental equipment through related-party OEM captive finance companies. To the extent an OEMs commercial business suffers it could have an adverse effect on its related OEM captive finance company, and vice versa. Third, manufacturers provide product warranties and, in some cases, service contracts to customers. Our technicians perform warranty and service contract work for equipment under manufacturer product warranties and service contracts, and we direct bill the manufacturer as opposed to invoicing the customer. At any particular time, we have significant receivables from manufacturers for warranty and service work performed for customers. In addition, we rely on manufacturers to varying extents for training, product brochures and point of sale materials, and other items for our operation. Our business, results of operations, and financial condition could be adversely affected as a result of any event that has an adverse effect on our equipment OEMs.
Some of the Companys suppliers of new equipment and aftermarket parts may appoint additional distributors, sell directly, or unilaterally terminate the Companys distribution agreements, which could have an adverse effect on the Companys business due to a reduction of, or inability to increase, the Companys revenues.
The Company is a distributor of new equipment and parts supplied by leading, nationally recognized suppliers. In certain instances, under the Companys distribution agreements with these suppliers, manufacturers may generally retain the right to appoint additional dealers and sell directly to national accounts and government agencies. In these instances, the Additionally, most of our distribution agreements grant our suppliers maythe right to unilaterally terminate distribution agreements with the Company at any time without cause. Any such actions could have an adverse effect on the Companys business, financial condition and results of operations.
The cost of new equipment the Company sells or purchases for use in our rental fleet may increase and, in some cases, the Company may not be able to procure new equipment on a timely basis due to supplierass these increases along to customers or otherwise offset these constraintsst increases in our operation.
The cost of new equipment from manufacturers that the Company sells or purchases for use in our rental fleet may increase as a result of increased raw material costs, including increases in the cost of steel which is a primary material used in most of this equipment, or due to increased regulatory requirements, such as those related to taxes, tariffs or emissions. These increases could materially impact the Companys financial condition and results of operations in future periods if the Company is not able to pass such
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cost increases through to the Companys customers. Similarly, any increase in the cost of parts the Company purchases for resale could materially impact the Companys financial condition and results of operations in future periods if the Company is not able to pass such cost increases through to the Companys customers.
The Companys rental fleet iand used equipment is subject to market value risk upon disposition.
The market value of any given piece of rental eor used equipment could be less than its depreciated value at the time it is sold. The market value of used rental eequipment depends on several factors including: the market price for new equipment of a like kind; wear and tear on the equipment relative to its age; worldwide and domestic demands for used equipment; the supply of used equipment on the market; and general economic conditions. Any signifidditionally, the Companys collateral base for borrowings, and thus available liquidity, is linked to the market value, obtained via third-party appraisals, of its rental fleet and used equipment. Any significant decline in the selling prices for used equipment could have an adverse effect on the Companys business, available liquidity, financial condition and results of operations.
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The Company incurs maintenance and repair costs associated with our rental fleet equipment that could have an adverse effect on our business in the event these costs are greater than anticipated.
As the Companys fleet of rental equipment ages, the cost of maintaining such equipment generally increases, if not replaced within a certain period of time. Determining the optimal age for the Companys rental fleet equipment is based on subjective estimates made by the Companys management team. The Companys future operating results could be adversely affected because the Companys maintenance and repair costs on our rental fleet may be higher than anticipated.
Security breaches and other disruptions in the Companys IT systems, including the Companys ERP system, could limit the Companys capacity to effectively monitor and control our operations, compromise ours or our employees', customers and suppliers confidential information, or otherwise adversely affect the Companys operating results or business reputation.
The Companys IT systems, some of which are managed by third parties, facilitate the Companys ability to monitor and control the Companys operations and adjust to changing market conditions, including processing, transmitting, storing, managing, and supporting a variety of business processes, activities, and information. Further, as the Company pursues oura strategy to grow through acquisitions and pursue new initiatives that require IT solutions, we are expanding our information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk, including emerging risks posed by artificial intelligence.
Any disruption in any of these systems, including the Companys customer management system, or the failure of any of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect the Companys operating results by limiting the Companys capacity to effectively monitor and control the Companys operations and adjust to changing market conditions, which in turn could adversely affect our financial results, stock price and reputation.
The Company collects and stores sensitive data, including proprietary business information and the proprietary business information of the Companys customers and suppliers, in data centers and on IT networks, including cloud-based networks. The secure operation of these IT networks and the processing and maintenance of this information is critical to the Companys business operations and strategy. Despite security measures and business continuity plans, the Companys IT networks and infrastructure may bare vulnerable to damage, disruptions or shutdowns due to attthe threat of attacks by cyber criminals, breaches due to employee error or malfeasance or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures, terrorist acts, natural disasters or other catastrophic events. The growing Company faces risks from cybersecurity threats that could potentially have an adverse effect on our business, financial condition, results of operations, cash flows and reputation. Although such risks have not materially affected our business, to date, we have experienced various immaterial threats to our data and systems. The growing use and rapid evolution of technology, including mobile devices, has heightened the risk of unintentional data breaches or leaks. The occurrence of any of these events could compromise the Companys networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. In addition, the Company may need to invest additional resources to protect the security of the Companys systems or to comply with evolving privacy, data security, cybersecurity, and data protection laws applicable to the Companys business.
Any failure to effectively prevent, detect, and/or recover from any such accessbreach, disclosure or other loss of information, or to comply with any such current or future law related thereto, could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage the Companys reputation, which could adversely affect the Companys business.
, stock price and reputation.
We are in the midst of a multiyear process of implementing a new ERP system. Implementing a new ERP system is not only costly but complex and difficult. Implementing a new ERP system can negatively affect not only financial accounting and reporting processes, but also external commercial activities such as order receipt and product delivery. We cannot be assured that we will successfully implement our new ERP system or that we will avoid these and other negative impacts from our implementation efforts.
Fluctuations in fuel costs or reduced supplies of fuel could harm the Companys business.
The Company could be adversely affected by limitations on fuel supplies or significant increases in fuel prices that result in higher costs related to deploying the Companys field service fleet and for transporting equipment from one location to another. A significant or protracted disruption of fuel supplies could have an adverse effect on the Companys financial condition and results of operations.
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The Company is dependent on key personnel. A loss of key personnel could have an adverse effect on the Companys business which could result in a decline in the Companys revenues and profitability.
The Companys success is dependent, in part, on the experience and skills of the Companys management team. Competition for top management talent within the Companys industry is generally significant. If the Company is unable to fillrecruit and keep filledtalent in all of the Companys senior management positions, or if the Company loses the services of any key member of the Companys senior management team and is unable to find a suitable replacement in a timely manner, the Company may be challenged to effectively manage our business and execute our strategy.
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If the Company previously identified onefails to material weakness in ourintain an effective system of internal controls related to ineffective controls over the sales process. If we fail to maintain an effective system of internal control in the future,, the Company may not be able to accurately report financial results or prevent fraud and losses of investor confidence and an adverse impact on our stock price could result.
As disclosed in Part II, Item 9A, our Annual Report on Form 10-K as of December 31, 2022, management previously identified one material weakness inIf we are unable to maintain effective internal controls. There were ineffective controls over the sales process, including proper review and authorization of pricing and over financial reporting or discounts, work orders, sales agreements, and rental contracts, which in the aggregatelosure constituted a material weakness. Throughout 2023, the Company implemented meastrols and procedures to remediate the ineffective controls then completed the testing of the design , as such stand operating effectiveness of the controls. Management has determined the controls are adequately designed and operating effectively and consider this material weakness identifiards are modified, supplemented in the prior year to be remediated as of December 31, 2023.
If we are unable to maintain effective internal control over financial reporting or disclosure controls and proceduresamended from time to time, our ability to record, process and report financial information accurately, aprevent fraud, and to prepare financial statements within required time periods could be adversely affected, which. This could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and adversely impact ourregulatory scrutiny, civil or criminal penalties, stock price.
If the Company fails to maintain an effective system of internal controls, the Company may not be able to accurately report financial results or prevent fraud.
Effective internal controls are necessary to provide reliable financialholder litigation or investigations requiring management reportsources and to assist in the effective preventionpayment of fraud. Any inability to provide reliable financial reports or prevent fraud could harm the Companys business. If the Company fails to maintain the adequacy of our internal controls,legal and other expenses as well as such standards are modified, supplemented or amended from time to time, the Company could be subject to regulatory scrutiny, civil or criminal penalties negatively affect investor stockholder litigation.
In addition, failure to maintain effectivconfidence internal controls could result in our financial statements that do not accuratand adversely reflect the Coimpanys financial condition or results of operations. ct our stock price.
There can be no assurance the Company will be able to maintain a system of internal controls that fully complies with the requirements of the Sarbanes-Oxley Act or that the Companys management and independent registered public accounting firm will conclude the Companys internal controls are effective.
Labor disputes could disrupt the Companys ability to serve our customers and/or lead to higher labor costs.
The Company has approximately 63700 employees who are covered by a collective bargaining agreement and approximately 2,37200 employees who are not represented by unions or covered by collective bargaining agreements. Various unions periodically seek to organize certain departments and/or locations of the Companys non-union employees. Union organizing efforts or collective bargaining negotiations could potentially lead to work stoppages, strikes and/or slowdowns by certain employees of the Company, which could adversely affect the Companys ability to serve our customers. Further, the inability to reach a feasible agreement could lead to the exit of a region, business line or segment, which could have an adverse effect on our results of operations. Lastly, settlement of actual or threatened labor disputes or an increase in the number of the Companys employees covered by collective bargaining agreements could have adverse effects on the Companys labor costs, productivity and business flexibility.
Increases in healthcare, pension and other costs under the Companys benefit plans could adversely affect our financial condition and results of operations.
We provide single employer and multiemployer health, defined benefit pension and defined contribution benefits to many of our employees. The costs of such benefits continue to increase, and the extent of any increase depends on a number of different factors, many of which are beyond our control. These factors include governmental regulations such as The Patient Protection and Affordable Care Act, which resulted in changes to the U.S. healthcare system and impose mandatory types of coverage, reporting and other requirements on U.S. companies; return on plan assets; changes in actuarial valuations, estimates, or assumptions used to determine our benefit obligations for certain benefit plans, which require the use of significant estimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and healthcare costs; for multiemployer plans, the outcome of collective bargaining and actions taken by trustees who manage the plans; and potential changes to applicable legislation or regulation.
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The Company has various health plans that cover eligible employees, including a self-insured group health plan, workers compensation, and auto coverage which contain certain stop-loss provisions. While we endeavor to purchase insurance coverage appropriate to our risk assessment, we are unable to predict with certainty the frequency, nature or magnitude of claims. Our business may be adversely impacted if our insurance proves to be inadequate. In addition, claims associated with risks we have retained through our self-insurance may exceed our recorded liabilities which could negatively impact future earnings. Accrued health insurance for both known claims and an estimated amount of claims incurred but not reported was $35.1 million and $1.83.1 million, as of December 31, 20234 and 202223, respectively. Also, if there are significant increases in healthcare costs, the premiums paid by the Company could adversely affect the Company's financial condition and results of operations. Health benefit plan expenses, including benefits paid and insurance premiums, totaled approximately $2930.9 million, $25.69.9 million, and $21.35.6 million for the years ended December 31, 20234, 20223 and 20212, respectively. If we are unable to control these benefits and costs, we may experience increased operating costs, which may adversely affect our financial condition and results of operations.
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Risks Related to the Companys Growth, Acquisitions and Integration
The Company may not be able to identify or complete transactions with attractive acquisition candidates. Future acquisitions may result in significant transaction expenses, and the Company may experience integration and consolidation risks.
An important element of the Companys growth strategy is to selectively pursue, on an opportunistic basis, acquisitions of additional businesses, in particular companies that complement the Companys existing business and footprint. The success of this element of the Companys growth strategy depends, in part, on selecting strategic acquisition candidates at attractive prices and effectively integrating their businesses into the Companys own, including with respect to financial reporting and regulatory matters. The Company cannot assure you we will be able to identify attractive acquisition candidates or complete the acquisition of any identified candidates at favorable prices or upon advantageous terms and conditions.
The Company may not have sufficient management, financial, and other resources to integrate and consolidate any future acquisitions. Any significant diversion of managements attention or any major difficulties encountered in the integration of the businesses the Company acquires could have an adverse effect on the Companys business, financial condition and results of operations, which could decrease the Companys profitability and make it more difficult for the Company to grow. Among other things, these integration risks could include:
the loss of key employees;
disruption of operations and business;
retention or transition of existing customers and vendors;
integration of corporate cultures and maintenance of employee morale;
inability to maintain and increase competitive presence;
customers and revenue losses;
inconsistencies inthe inability to properly implement the Company's standards, control procedures, and policies;
problems with the assimilation of new operations, sites or personnel, which could divert resources from the Companys regular operations;
impairment of goodwill or other acquisition-related intangible assets;
integration of financial reporting, treasury, and regulatory reporting functions; and/or
potential unknown liabilities.
In addition, general economic conditions or unfavorable capital and credit markets could affect the timing and extent to which the Company can successfully acquire or integrate new businesses, which could limit the Companys revenues and profitability and make it more difficult for the Company to grow.
The Company may not be able to facilitate our growth strategy by identifying and opening start-up locations, which could limit the Companys revenues and profitability.
An element of the Companys growth strategy is to selectively identify and implement start-up locations in order to add new customers. The success of this element of the Companys growth strategy depends, in part, on identifying strategic start-up locations. The Company cannot be sure we will be able to identify attractive start-up locations and opening start-up locations may involve significant costs and limit the Companys ability to expand our operations.
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The Company may not have sufficient management, financial, and other resources to successfully operate new locations. Any significant diversion of managements attention or any major difficulties encountered in the locations the Company opens in the future could have an adverse effect on the Companys business, financial condition and results of operations, which could decrease the Companys profitability and make it more difficult for the Company to grow.
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The Company may not be able to successfully or profitably launch our commercial electric vehicle and hydrogen related businesses.
With our existing expertise in electro-mobility, we have elected to pursue the strategic opportunity to leverage our knowledge to meet the growing demand for zero-emission commercial electric vehicles and deliver world-class sservice to commercial electric vehicle fleet customers within our existing territories. Accordingly, the Company has an agreement with Nikola Corporation to become the authorized dealer to sell and service Nikola medium and long-haul class 8 electric vehicle trucks in the New York, New Jersey, eastern Pennsylvania, New England, Florida, Michigan and Illinois markets. This strategic opportunity requires us to devote certain resources to it, including the time and attention of management. Failure to execute on this plan or a failure of the Company, or Nikola, to successfully capitalize on the transitour partners, in its choice of strategy to pursue zero-emission of long-haul truckingcommercial vehicles or to battery electric and fuel cell powered vehiclessuccessfully capitalize on its strategy could cause a diversion of managements attention and have an adverse effect on the Companys business, financial condition and results of operations, which could decrease the Companys profitability and make it more difficult for the Company to grow. In an effort related to accelerating the adoption of zero- emissions commercial electric vehicles and lift trucks, the Company is also in the process of investing in a hydrogen gas production plant, as compressed hydrogen gas powers hydrogen fuel cells for several of our current lift truck customers. HWe believe, like several other market participants, that hydrogen gas will also power Nikolas fuel cell electric vehicles in the future. To the extent we are unable to execute on our plan to produce and sell hydrogen gas to our customers, or the adoption of hydrogen consuming vehicles and lift trucks in the marketplace does not develop, it could have an adverse effect on the Companys profitability and make it more difficult for the Company to grow.
If we determine our goodwill or other intangible assets have become impaired, we may incur impairment charges which would negatively impact our operating results.
At December 31, 20234, we had $76.77.5 million of goodwill and $66.354.7 million of other intangible assets on our Consolidated Balance Sheet. Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. We assess potential impairment of our goodwill and other intangible assets at least annually. Impairment may result from significant changes in the manner of use of the acquired assets, negative industry or economic trends, and/or significant underperformance relative to historic or projected operating results. For a discussion of our goodwill and long-lived assets impairment testing, see Evaluation of Goodwill Impairment and "Evaluation of Long-lived Asset Impairment (excluding goodwill)" in Note 2, Summary of Significant Accounting Policies.
Financial Risks and Risks Related to our Indebtedness and Liquidity
The Companys substantial indebtedness could adversely affect the Companys financial condition.
The Company has, and will continue to have, a significant amount of indebtedness outstanding. The Companys indebtedness may result in important consequences, such as:
increasing the Companys vulnerability to general adverse economic, industry, and competitive conditions;
requiring the Company to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions, and other general corporate purposinitiatives;
limiting the Companys flexibility in planning for, or reacting to, changes in the Companys business and the industry in which we operate;
making it more difficult to refinance or pay our debts as they become due during adverse economic, financial market, or industry conditions;
placing the Company at a competitive disadvantage compared to our competitors that have less debt; and
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resulting in a downgrade in our credit rating, which could increase the cost of further borrowings;
requiring our debt to become due and payable upon a change in control; and
limiting the Companys ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes.
The Company expects to use cash flow from operations and borrowings under our credit facilities to meet our current and future financial obligations, including funding our operations, service debt, and capital expenditures. The Companys business may not generate sufficient cash flow from operations in the future, which could result in the Company being unable to repay indebtedness or to fund other liquidity needs.
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The Company may not be able to generate sufficient cash flow to service all of the Companys indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
The Companys ability to make scheduled debt payments depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, economic, legislative, regulatory and other factors beyond the Companys control. The Company cannot make assurances we will maintain a level of cash flows from operating activities sufficient to permit us to pay scheduled payments of principal and interest on the Companys indebtedness. In the absence of adequate operating performance, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The Company may not be able to consummate those dispositions, and any proceeds we do receive from a disposition may not be adequate to meet any debt service obligations then due.
If the Companys cash flows and capital resources are insufficient to fund our debt service obligations, the Company may be forced to reduce or delay business activities and capital expenditures, sell assets or operations, seek additional capital or restructure or refinance all or a portion of our indebtedness. The Company cannot make any assurances we will be able to accomplish any of these alternatives on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
The agreements governing credit facilities may restrict the Companys business and our ability to engage in certain corporate and financial transactions.
The agreements governing the credit facilities contain certain covenants that, among other things, may restrict or limit the Company and its subsidiaries ability to:
incur more debt;
pay dividends (including dividends on preferred and common stock) and make distributions;
make acquisitions or investments;
repurchase stock;
create liens;
enter into transactions with affiliates;
enter into sale and lease-back transactions;
merge or consolidate; and
transfer and sell assets.
Events beyond the Companys control may also affect our ability to comply with other provisions governing the Companys credit facilities. The Companys failure to comply with obligations under the agreements may result in an event of default. A default, if not cured or waived, may permit acceleration of this indebtedness and the Companys other indebtedness. The Company may not be able to remedy these defaults. If the Companys indebtedness is accelerated, we may not have sufficient funds available to pay the accelerated indebtedness and may not have the ability to refinance the accelerated indebtedness on terms favorable to the Company or at all.
The Companys business could be ad relies on OEM captive finance companies to provide floor plan financing primarily for new equipment. This OEM captive floor plan financing provides for a large portion of the Companys ongoing working capital requirements. The Companys liquidity position, financial condition, cash flows and results from operations could be adversely affected in the event any of our OEM captive finance company agreements were terminated and/or amended to the detriment of the Company.
As our OEM captive floor plan finance agreements are annually renewing and subject to ongoing credit review, which can be judgment-based and over which the Company has no control, the Company cannot make any assurances that our OEM captive finance agreements will be renewed in the future or renewed with terms that are favorable to the Company. To the extent we are unable to renew, or renew on favorable terms, any of our OEM captive floor plan finance agreements our liquidity position, financial condition, cash flows and results from operations could be adversely aimpacted.
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The Companys business could be adversely affected if we are unable to obtain additional capital as required and could result in a decrease in the Companys revenues and profitability. In addition, the Companys inability to refinance our indebtedness on favorable terms, or at all, could adversely affect the Companys liquidity and our ongoing results of operations.
The cash the Company generates from our business, together with cash we may borrow, if credit is available, may not be sufficient to fund the Companys operations or capital requirements. The Company may require additional financing to obtain capital for, among other purposes, purchasing equipment, completing acquisitions, establishing new locations and to repay or refinance existing indebtedness. Any additional indebtedness the Company incurs will make us more vulnerable to economicbusiness downturns and limit the Companys ability to withstand competitive pressures. Moreover, the Company may not be able to obtain additional capital on acceptable terms, if at all. If we are unable to obtain sufficient additional financing in the future, the Companys business could be adversely affected.
In addition, prevailing interest rates or other factors at the time of refinancing could increase the Companys interest expense. A refinancing of the Companys indebtedness could also require us to comply with more onerous covenants and further restrict the Companys business operations. The Companys inability to refinance the Companyits indebtedness or to do so upon attractive terms
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could materially and adversely affect the Companys business prospects, results of operations and cash flows, financial condition and cash flowsn, and make us vulnerable to adverse industry and general economic conditions.
Unfavorable conditions or disruptions in the capital and credit markets may adversely impact business conditions and the availability of credit.
Disruptions in the global capital and credit markets as a result of an economic downturn, economic uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect the Companys customers ability to access capital and could adversely affect the Companys access to liquidity needed to fund business operations in the future. Additionally, unfavorable financial market conditions may depress demand for the Companys products and services and/or make it difficult for the Companys customers to obtain financing and credit on reasonable terms. Unfavorable financial market conditions also may cause more of the Companys customers to be unable to meet their payment obligations to the Company, increasing delinquencies and credit losses. If the Company is unable to manage credit risk or customer risk adequately, the Companys credit losses could increase above historical levels and the Companys operating results would be adversely affected. The Companys suppliers may also be adversely impacted by unfavorable capital and credit markets, causing disruption or delay of product availability or their competitiveness in the market overall. All dditionally, many of these evour key OEM suppliers provide floor plan financing to the Company through related party captive finance companies (e.g. Volvo Financial Services). To the extents could n our OEM captive finance partners are impacted by unfavorable capital and/or credit market conditions, the Companys liquidity position, ability to borrow, or ability to borrow at favorable rates could be adversely impacted. These events could negatively impact the Companys business, financial condition, results of operations and cash flows.
Risk Related to Our Series A Preferred Stock and Depositary Shares
The Series A Preferred Stock and the depositary shares rank junior to all our indebtedness and other liabilities and are effectively junior to all indebtedness and other liabilities of our subsidiaries.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock only after all our indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of our assets will rank junior to the priority claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series A Preferred Stock. In addition, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities (as well as any preferred equity interests held by others) os of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and any future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts with respect to dividends due on the Series A Preferred Stock. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Preferred Stock then outstanding. We and our subsidiaries have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock. We may incur additional indebtedness and become more highly leveraged in the future, which could harm our financial position and potentially limit our cash available to pay dividends. As a result, we may not have sufficient funds remaining to satisfy our dividend obligations relating to our Series A Preferred Stock if we incur additional indebtedness. In addition, our existing credit arrangements include events of default which could result in acceleration of such indebtedness upon the occurrence of certain events, including failure to meet certain financial covenants.
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We may not be able to pay dividends on the Series A Preferred Stock if we have insufficient cash or available surplus as defined under Delaware law to make such dividend payments.
Our ability to pay cash dividends on the Series A Preferred Stock reis restricted by Delaware law and generally requires us to have either net profits or positive net assets (total assets less total liabilities) as calculated in accordance with the Delaware General Corporation Law, and that we have sufficient working capital in order to be able to pay our debts as they become due in the usual course of business. Our ability to pay dividends may be impaired by a number of factors, including the other risks identified herein. Also, our payment of dividends depends upon our financial condition and other factors as our Board of Directors may deem relevant from time to time. Our businesses may not generate sufficient cash flow from operations or future borrowings may not be available to us in an amount sufficient to enable us to fund our liquidity needs and pay dividends on the Series A Preferred Stock.
Our depositary shares representing interests in the Series A Preferred Stock have extremely limited voting rights.
The voting rights of holders of our depositary shares are limited. Our common stock is the only class of our securities that carries full voting rights. Voting rights for holders of depositary shares exist primarily with respect to the ability to elect (together with the holders of other outstanding series of our preferred stock, or depositary shares representing interests in our preferred stock, or additional series of preferred stock we may issue in the future and upon which similar voting rights have been or are in the future conferred and are exercisable) two additional directors to our Board of Directors in the event six quarterly dividends (whether or not declared or consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our articles of incorporation or certificate of designation (in some cases voting together with the holders of other outstanding series of our preferred stock as a single class) that adversely affect the rights of the holders of depositary shares representing interests in the Series A Preferred Stock (and other series of preferred stock, as applicable) or create additional classes or series of our stock that are senior
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to the Series A Preferred Stock, provided that in any event adequate provision for redemption has not been made. Other than the limited circumstances included in the certificate of designations for the Series A Preferred Stock and the agreement creating the depositary shares, holders of depositary shares will not have any voting rights.
Legal and Regulatory Risks Related to the Companys Operations
The Company is exposed to various risks related to legal proceedings or claims that could adversely affect the Companys operating results. The nature of the Companys business exposes us to various liability claims, which may exceed the level of the Companys insurance coverage resulting in the Company not being fully protected.
The Company is a party to lawsuits in the normal course of business. Litigation in general can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Responding to lawsuits brought against the Company, or legal actions that the Company may initiate, can often be expensive and time-consuming. Unfavorable outcomes from these claims and/or lawsuits could adversely affect the Companys business, results of operations and financial condition, and the Company could incur substantial monetary liability and/or be required to change our business practices.
The Companys business exposes us to claims for personal injury, death or property damage resulting from the use of the equipment we rent or sell and from injuries caused in motor vehicle accidents in which the Companys delivery and service personnel are involved and oclaims related to other employee related matters. Additionally, the Company could be subject to potential litigation associated with compliance with various laws and governmental regulations at the federal, state or local levels, such as those relating to the protection of persons with disabilities, employment, health, safety, security and other regulations under which the Company operates.
The Company carries comprehensive insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims made during the respective policy periods. However, the Company may be exposed to multiple claims, and, as a result, could incur significant out-of-pocket costs before reaching the deductible amount which could adversely affect the Companys financial condition and results of operations. In addition, the cost of such insurance policies may increase significantly upon renewal of those policies as a result of general rate increases for the type of insurance the Company carries as well as the Companys historical experience and experience in the Companys industry. Although the Company has not experienced any material losses that were not covered by insurance, the Companys existing or future claims may exceed the coverage level of the Companys insurance, and such insurance may not continue to be available on economically reasonable terms, or at all. If the Company is required to pay significantly higher premiums for insurance, is not able to maintain insurance coverage at affordable rates or if we must pay amounts in excess of claims covered by the Companys insurance, the Company could experience higher costs that could adversely affect the Companys financial condition and results of operations.
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The Company has operations throughout the U.S. and Canada and purchases capital goods from Europe which exposes us to multiple international, federal, state and local regulations. Changes in applicable law, regulations or requirements, or the Companys material failure to comply with any of them, can increase the Companys costs and have other negative impacts on the Companys business.
The Companys 7680 branch locations in the U.S. are located in 15 different states, which exposes us to different federal, state, and local regulations and taxation. The Company also has seven locations throughout Canada and acquires inventory from Europe which exposes us to foreign regulations and taxation as well. These laws and requirements address multiple aspects of the Companys operations, such as worker safety, consumer rights, privacy, employee benefits, taxation, securities law compliance and more, and can often have different requirements in different jurisdictions. Changes in these requirements, or any material failure by the Company to comply with them, could increase the Companys costs, affect our reputation, limit our business, consume managements time and attention or otherwise generally impact our operations and financial results in adverse ways.
The Company could be adversely affected by environmental and safety requirements which could force us to use significant capital resources, increase operational costs and/or may subject us to unanticipated liabilities.
The Companys operations, like those of other companies engaged in similar businesses, require the handling, use, storage, and disposal of certain regulated materials. As a result, the Company is subject to the requirements of federal, state, and local environmental and occupational health and safety laws and regulations. The Company is subject to potentially significant civil or criminal fines or penalties if we fail to comply with any of these requirements. The Company has made, and will continue to make, capital and other expenditures in order to comply with these laws and regulations, but the requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these requirements will change or that liabilities will arise in the future in a manner that could have an adverse effect on the Companys business, financial condition and results of operations.
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Environmental laws also impose obligations and liability for the cleanup of properties affected by hazardous substance spills or releases. These liabilities can be imposed on the parties generating or disposing of such substances or the operator of the affected property, often without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances. Accordingly, the Company may become liable, either contractually or by operation of law, for remediation costs even if a contaminated property is not currently owned or operated by the Company, or if the contamination was caused by third parties during or prior to the Companys ownership or operation of the property. Given the nature of the Companys operations (which involve the use of batteries, petroleum products, solvents and other hazardous substances for fueling and maintaining the Companys equipment and vehicles), there can be no assurance that prior site assessments or investigations have identified all potential instances of soil or groundwater contamination.
In the future, international, federal, state, or local governments could enact new or more stringent laws or issue new or more stringent regulations concerning environmental and worker health and safety matters or effect a change in their enforcement of existing laws or regulations, that could affect our operations. There can be no assurance that we, or various environmental regulatory agencies, will not discover previously unknown environmental non-compliance or contamination, for which we could be held liable. It is possible that changes in environmental and worker health and safety laws or liabilities from newly discovered non-compliance or contamination could have an adverse effect on our business, financial condition and results of operations.