Custom Truck One Source, Inc. quarterly report, Q2 FY2022

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Custom Truck One Source, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Amounts below are in millions of dollars unless stated otherwise. The company provides specialty equipment rentals, sales, parts and services to infrastructure-related industries. It reports Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).

Financial performance and liquidity

  • Q2 revenue: $362.1, down 3.5% from $375.1 a year earlier. Rental revenue rose 13.7% to $112.1 and parts and services revenue rose 9.2% to $31.5; equipment sales fell 11.8% to $218.5.
  • Q2 profitability: Gross profit increased to $82.8 from $46.7, with gross margin of 22.9% versus 12.4%. Operating income was $18.7, compared with an operating loss of $43.4. Net income was $13.6, or $0.05 per diluted share, versus a net loss of $129.4, or $0.53 per share.
  • Q2 Adjusted EBITDA: $85.4, up 21.6% from $70.2. This is a non-GAAP measure; the company’s reconciliation includes purchase-accounting, transaction, sales-type lease, share-based compensation and derivative/warrant adjustments.
  • Six-month results: Revenue was $728.6, gross profit $167.3, operating income $28.6 and net income $10.4. These reported comparisons with 2021 are not directly comparable: 2022 includes Custom Truck LP for the full half-year, while 2021 includes it only from April 1. On the company’s pro forma basis, six-month 2021 revenue was $769.9, net loss $51.3 and Adjusted EBITDA $143.1, versus 2022 revenue of $728.6, net income $10.4 and Adjusted EBITDA $176.9.
  • Cash flow: For the six months, operating cash flow was negative $21.4, versus positive $57.2 in 2021; management attributed the use of cash primarily to increased inventory purchases and production. Investing cash use was $92.7, including $127.2 of rental-equipment purchases and $49.8 net cash paid for HiRail, partly offset by $96.1 of rental-equipment sale proceeds. Financing provided $106.7. Cash declined $7.4 to $28.5.
  • Debt and liquidity: June 30 debt outstanding was $1,383.4 gross ($1,353.1 net of deferred finance fees), including $435.0 under the ABL Facility and $920.0 of 5.5% secured notes due 2029. ABL borrowing availability was $310.2, with $4.9 of standby letters of credit. The company also reported $310.8 of current floor-plan payables. Cash was $28.5. Total current assets were $782.8 and current liabilities $531.3.
  • Interest exposure: The $435.0 ABL balance carried a 3.2% rate at quarter-end and is variable-rate debt. The filing estimates that a 0.125 percentage-point rate change would change annual ABL interest expense by approximately $0.5. The company settled its interest-rate collar during Q1.

Material changes and operating indicators

  • Q2 equipment sales weakness reflected supply-chain constraints, while management said customer demand remained strong. Sales order backlog rose to $663.6, up 198% year over year; the filing cautions backlog is not a reliable measure of future net sales.
  • Rental indicators improved year over year: fleet utilization was 82.8% versus 80.9%, average OEC on rent increased 6.1% to $1,150.4, and annualized OEC on rent yield increased to 39.2% from 37.9%. Ending OEC was $1,399.5.
  • Q2 gross profit increased across all three segments: ERS $44.7, TES $27.1 and APS $11.0. Management cited rental growth, favorable equipment pricing and APS distribution-network improvements.
  • Inventory increased to $536.1 from $410.5 at year-end. The company completed the HiRail acquisition in January 2022 for approximately $51.0, net of working-capital adjustments; its preliminary purchase-price allocation remains subject to change.
  • Q2 2021 included a $61.7 debt-extinguishment loss and substantial acquisition-related costs. Their absence in 2022 contributes to the year-over-year improvement in reported earnings.

Outlook, risks and unusual items

  • The filing gives no specific numerical revenue, earnings or cash-flow guidance. Management stated that cash, operating cash flow and available credit were expected to be sufficient for operating, debt-service and capital needs over the next 12 months, while noting continued monitoring of COVID-19 and supply-chain effects.
  • Management highlighted continuing supply-chain disruption, inflation and potential shortages of commercial-vehicle chassis and semiconductors, which could constrain production and deliveries. Macroeconomic uncertainty could weaken customer demand or access to capital; other disclosed risks include cyclical demand, supplier concentration, skilled-labor availability, interest rates, and substantial indebtedness.
  • Disclosure controls and procedures were concluded to be ineffective as of June 30 because of material weaknesses in IT general controls and related business-process and management-review controls. A new ERP system was implemented in Q2, but remediation was not considered complete pending sufficient operating time and testing. The company reported no resulting identified financial-statement misstatements.
  • The company disclosed an IRS assessment of $2.4 for 2015 federal excise taxes under appeal; management did not consider a loss probable. Management said ordinary-course legal matters were not expected to have a material adverse effect.
  • After quarter-end, on August 2, the board authorized a common-stock repurchase program of up to $30.0, beginning in Q3. This is a subsequent event, not a Q2-period cash use.

Most important facts for investors to verify

  1. Whether the PNC inventory-financing facility, with $239.5 outstanding at June 30 and a stated August 25, 2022 maturity, was extended, refinanced or repaid.
  2. Whether equipment supply constraints ease, and whether the $663.6 backlog converts to shipments and revenue on expected timing and margins.
  3. Whether operating cash flow improves as inventory builds are converted to sales, and how rental-fleet purchases and equipment disposals affect cash needs.
  4. Actual ABL borrowing costs and availability as rates and working-capital requirements change; also monitor floor-plan balances alongside funded debt.
  5. Progress and independent validation of remediation of the disclosed material weaknesses in financial reporting controls.
  6. Final HiRail purchase-price allocation and the pace and terms of any repurchases under the post-quarter $30.0 authorization.