Custom Truck One Source, Inc. — Q1 2024 Form 10-Q
Business and period: The company rents, sells, assembles and services specialty equipment used in utility, telecommunications, rail and other infrastructure markets. This unaudited report covers the three months ended March 31, 2024; comparisons are with Q1 2023 unless noted. All amounts below are in millions of dollars except per-share data and percentages.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $411.3 | $452.2 | Down 9.0% |
| Gross profit / gross margin | $90.7 / 22.1% | $109.7 / 24.3% | Margin down 2.2 percentage points |
| Operating income | $18.4 | $39.9 | Down 53.9% |
| Net income (loss) | $(14.3) | $13.8 | Change of $(28.1) |
| Diluted EPS | $(0.06) | $0.06 | |
| Operating cash flow | $(14.4) | $3.9 | |
| Investing cash flow | $(33.4) | $(39.9) | |
| Cash at quarter end | $8.0 | $10.3 at Dec. 31, 2023 | Down $2.3 from year-end |
Revenue comprised rental revenue of $106.2 million (down 10.2%), equipment sales of $272.6 million (down 9.5%), and parts and services of $32.5 million (approximately flat). Operating expenses rose 3.7% to $72.3 million. Net interest expense increased to $37.9 million from $29.2 million, primarily reflecting higher costs on variable-rate debt and floor-plan financing. The reported tax benefit was $1.9 million; management says the effective tax rate was affected by the pretax loss and valuation allowances.
Segments and operating indicators
- Equipment Rental Solutions (ERS): Revenue was $136.0 million, down 33.9%; gross profit was $39.4 million, down 40.5%. Rental revenue fell 9.2% and equipment sales from the rental fleet fell 64.5%.
- Truck and Equipment Sales (TES): Revenue was $239.9 million, up 14.7%; gross profit increased 26.5% to $43.2 million. Management cited healthy inventory, improved supply availability and favorable demand and pricing for new products.
- Aftermarket Parts and Services (APS): Revenue was $35.4 million, down 4.5%; gross profit fell 12.6% to $8.1 million.
- Fleet utilization was 73.3%, versus 83.6%; average OEC on rent fell 12.2% to $1.066 billion. Ending OEC was approximately flat at $1.453 billion. Sales order backlog declined 37.2% to $537.3 million.
Balance sheet, debt and liquidity
At March 31, 2024, total assets were $3.451 billion and stockholders’ equity was $896.7 million. Inventory increased to $1.103 billion from $985.8 million at year-end, while cash and net accounts receivable declined. Total debt outstanding, before deferred financing fees, was $1.519 billion; long-term debt, net of fees and current maturities, was $1.492 billion. Separately, trade and non-trade floor-plan payables totaled $767.4 million, up from $662.3 million at year-end.
ABL borrowings were $552.4 million, with $194.5 million of availability and $3.1 million of standby letters of credit. The company reported an additional $331.9 million of potential suppressed availability subject to upsizing the facility. Net debt was $1.511 billion and the reported net leverage ratio was 3.79x, compared with 3.53x at year-end; the ratio uses trailing Adjusted EBITDA of $399.1 million. Management said available liquidity and operating cash flows should cover operating, debt-service and capital needs over the next 12 months.
Operating cash use was attributed primarily to higher inventory purchases and production. Investing cash use included $75.6 million of rental-equipment purchases, partly offset by $60.1 million of proceeds from rental-equipment sales. Financing cash flow was positive $45.5 million, including inventory financing activity; the company repurchased approximately 1.04 million shares for $6.4 million during the quarter.
Changes, outlook and risks
- Compared with Q1 2023, lower rental utilization and lower used-equipment sales—particularly from the rental fleet—reduced revenue and gross profit. Management attributed utility-market softness and delayed transmission job starts to supply-chain, environmental, regulatory and customer-financing factors.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It noted that sales backlog is not a reliable measure of future net sales and that interim results are not necessarily indicative of full-year results.
- Variable-rate exposure is significant: $1.320 billion of aggregate variable-rate debt, including floor-plan financing and the ABL Facility. A one-eighth percentage-point rate change would affect annual interest expense by approximately $1.6 million, all else equal. The company does not currently hedge its Canadian-dollar exposure.
- Disclosure controls were deemed ineffective as of March 31, 2024 because a pervasive material weakness in internal control over financial reporting remained under remediation. The filing reports no resulting identified financial-statement misstatements. Management says some IT general-control deficiencies were remediated in 2023, but remediation is not complete.
- The filing describes an IRS assessment of $2.4 million concerning 2015 federal excise taxes, which the company appealed. Management does not consider a loss probable and does not expect the matter or other ordinary-course claims to have a material impact.
- After quarter-end, the company amended its PNC inventory facility to increase capacity from $460 million to $480 million and entered into a $30 million Ford Motor Credit inventory facility; no Ford loan supplements had been executed as of filing. The ABL Facility matures April 1, 2026, and the PNC facility matures August 25, 2025.
Important facts for investors to verify
- Whether rental utilization, average OEC on rent and utility-sector job starts stabilize, and whether the substantial backlog converts to deliveries and revenue.
- Inventory levels, sales velocity and floor-plan balances, including the cost and availability of inventory financing.
- Interest expense, variable-rate exposure, ABL availability and progress toward debt maturities and covenant requirements.
- Cash generation and capital spending relative to share repurchases and management’s stated 12-month liquidity assessment.
- Remediation and independent testing of the material weakness, and any subsequent changes in disclosure-control effectiveness.