Business Context and Reporting Period
Company: Custom Truck One Source, Inc. (CTOS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2024
Business Overview: CTOS provides specialty equipment rentals, sales, and aftermarket services to the electric utility, telecommunications, rail, and infrastructure sectors in North America. Operations are managed through three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).
Key Financial Metrics
| Metric (in $000s) | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Total Revenue | $423,013 | $456,830 | $834,320 | $908,993 |
| Gross Profit | $89,267 | $110,619 | $179,976 | $220,280 |
| Gross Margin | 21.1% | 24.2% | 21.6% | 24.2% |
| Operating Income | $17,674 | $39,575 | $36,044 | $79,463 |
| Net Income (Loss) | $(24,478) | $11,610 | $(38,813) | $25,410 |
| Diluted EPS | $(0.10) | $0.05 | $(0.16) | $0.10 |
| Operating Cash Flow (YTD) | $23,408 | $(1,105) | $23,408 | $(1,105) |
| Cash & Equivalents (End of Period) | $8,059 | $42,229 | $8,059 | $42,229 |
| Total Debt (Net of Fees) | $1,532,212 | $1,495,393 | $1,532,212 | $1,495,393 |
| Net Leverage Ratio (LTM) | 4.11x | N/A | 4.11x | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 7.4% in Q2 and 8.2% YTD compared to 2023. This was driven by a 15.7% drop in rental revenue (due to lower fleet utilization and average OEC on rent) and a 5.5% drop in equipment sales.
- Profitability Compression: Operating income fell 55.3% in Q2 and 54.6% YTD. The company reported a net loss of $24.5 million in Q2 and $38.8 million YTD, compared to net income in the prior year periods.
- Interest Expense Surge: Interest expense increased significantly (47.1% in Q2, 42.3% YTD) due to higher variable interest rates on debt and floor plan financing liabilities.
- Operating Metrics: Fleet utilization dropped to 71.7% in Q2 2024 from 81.7% in Q2 2023. Sales order backlog declined 44.6% to $478.2 million.
- Segment Performance:
- ERS: Revenue down 17.9% (Q2) and 26.7% (YTD) due to utility market softness and supply chain constraints.
- TES: Revenue down 1.4% (Q2) but up 5.9% (YTD) due to strong Q1 delivery volumes.
- APS: Revenue relatively flat (-0.5% Q2, -2.5% YTD) with gross profit declining due to lower tool rentals.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management attributes the downturn to end-market supply chain constraints, regulatory delays, and customer financing factors affecting transmission project starts. They noted that while demand is soft, they are managing inventory and fleet levels accordingly.
- Goodwill Impairment Test: Management performed an interim quantitative impairment test for the ERS and APS segments due to decreased utilization. The fair value of these units exceeded carrying values by 23% and 17%, respectively; no impairment charge was recorded.
- Liquidity and Debt: The company has $159.5 million available under its ABL Facility and $328.3 million of suppressed availability. Net leverage ratio stands at 4.11x. The company remains in compliance with all debt covenants.
- Stock Repurchases: The company repurchased approximately 3.6 million shares in Q2 2024 for $16.7 million. Approximately $7.4 million remains available under the current repurchase program.
- Internal Control Weakness: The company disclosed a pervasive material weakness in internal control over financial reporting related to IT general controls (ITGCs) and business process controls. Management is actively remediating this issue, but disclosure controls were deemed ineffective as of June 30, 2024.
- Risks: Key risks include continued softness in the utility end-market, rising interest rates increasing debt service costs, supply chain disruptions, and the potential for future goodwill impairment if market conditions deteriorate further.
Investor Verification Checklist
- Utility Market Recovery: Verify the timeline for the resumption of transmission and distribution projects, which are the primary driver of rental demand.
- Interest Rate Exposure: Assess the impact of sustained high interest rates on the company's variable-rate debt and floor plan financing costs.
- Internal Control Remediation: Monitor progress on the remediation of the material weakness in ITGCs to ensure future financial reporting reliability.
- Liquidity Position: Track cash burn and the utilization of the ABL Facility given the current net loss position.
- Inventory Levels: Review inventory turnover and potential obsolescence risks given the decline in sales order backlog.