Custom Truck One Source, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted otherwise.
Business context and reporting period
The company provides rentals, sales, parts, maintenance and services for specialty equipment used in utility, telecom, rail and other infrastructure markets. On April 1, 2021, it acquired Custom Truck One Source, L.P. (Custom Truck LP), changed its name from Nesco Holdings, Inc., and began reporting three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).
Reported 2021 results include Custom Truck LP only from April 1 onward; therefore, year-over-year comparisons are not like-for-like. The company also supplies pro forma results assuming the acquisition occurred January 1, 2020, but cautions these are illustrative and not predictive.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $357.3 | $69.3 | $810.7 | $219.5 |
| Gross profit | $65.3 | $15.6 | $132.2 | $53.4 |
| Operating income (loss) | ($5.3) | $5.0 | ($51.8) | $14.3 |
| Net income (loss) | ($20.5) | $15.2 | ($177.8) | ($13.9) |
| Diluted earnings (loss) per share | ($0.08) | $0.31 | ($0.99) | ($0.28) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $112.8 | $14.9 |
Q3 gross margin was approximately 18.3%. Sequentially from Q2 2021, revenue declined 4.7% to $357.3 million, while gross profit rose 39.8% to $65.3 million and net loss narrowed to $20.5 million from $129.4 million. Management attributed the sequential gross-profit improvement to revenue mix, including a larger share from higher-margin rentals, and lower transaction and integration costs. Q3 Adjusted EBITDA, a non-GAAP measure, was $84.4 million, compared with $70.2 million in Q2.
For the nine-month period, pro forma revenue was $1.127 billion, pro forma net loss was $87.9 million, and pro forma Adjusted EBITDA was $227.5 million. These figures reflect specified acquisition and financing adjustments and should not be treated as GAAP results.
Key operating indicators: Q3 fleet utilization was 81.4%, OEC on rent yield was 38.0%, and sales order backlog was $338.5 million. The backlog is not a reliable measure of future net sales, and shipment dates may change.
Liquidity, debt and capital
At September 30, 2021, cash was $21.1 million; current assets were $605.1 million and current liabilities were $416.6 million. The company reported $405.0 million outstanding on its $750 million asset-based revolving credit facility (ABL), with $337.0 million of borrowing availability and $4.0 million of standby letters of credit.
Debt included $920.0 million of 5.50% secured notes due 2029, $405.0 million drawn on the ABL, and $37.9 million of other notes payable. The filing also reports $229.2 million of floor-plan payables, which are inventory-backed financing and excluded from the company’s stated total indebtedness of $1,372.8 million. The ABL is variable-rate; the company estimates a one-eighth percentage-point rate change would affect annual interest expense by about $0.5 million, before the interest-rate collar’s impact.
Nine-month operating cash flow was $112.8 million; investing cash outflow was $1.420 billion, largely reflecting the acquisition, and financing cash inflow was $1.325 billion. Cash increased $17.7 million from year-end 2020.
Material changes, outlook and risks
- The acquisition had a preliminary purchase price of approximately $1.531 billion. Purchase-price allocation remained preliminary at quarter-end; acquired Custom Truck LP contributed $612.3 million in revenue and a $29.0 million pretax loss from closing through September 30.
- Q3 revenue was lower sequentially, principally because equipment sales fell amid supplier and supply-chain constraints. Rental revenue increased with demand in transmission and distribution and telecom markets; management also cited storm-recovery work.
- The company recorded $42.8 million of transaction and post-acquisition integration costs in the first nine months and a $61.7 million loss on extinguishment of debt, including a make-whole premium and financing-related charges.
- Management expects approximately $50 million of pro forma cost synergies within two years of closing and approximately $50 million of integration and restructuring costs, including $40 million in the first two years. These are expectations, not guarantees; no formal revenue or earnings guidance is provided in the filing.
- Management said liquidity and operating cash flows should be sufficient for operating, debt-service and capital requirements over the next 12 months, while noting continued monitoring of COVID-19 and financial-market impacts.
- Risks include integration execution, supply-chain and semiconductor shortages, equipment and input-cost inflation, cyclical demand, used-equipment residual values, skilled-labor availability, substantial indebtedness, floating interest rates, LIBOR transition, and restrictive debt covenants. The ABL has a springing fixed-charge coverage covenant if availability falls below specified thresholds.
- Disclosure controls were judged ineffective because of a material weakness in access controls and segregation of duties for a Custom Truck LP ERP system. No financial-statement misstatement was identified; management planned remediation, including a new ERP system targeted for Q2 2022.
- The IRS assessed $2.4 million of federal excise taxes for 2015 periods; the company appealed and management did not consider a loss probable. Management did not expect pending legal matters to have a material effect.
Important facts for investors to verify
- Track integration progress, realized synergies, and remaining transaction, integration and restructuring costs against the stated estimates.
- Assess sales recovery, backlog conversion, supplier delivery constraints, and whether rental utilization and yield remain strong.
- Monitor ABL borrowing availability, floor-plan financing, total debt service, variable-rate exposure, and covenant headroom.
- Review final acquisition accounting and the effects of purchase-accounting step-ups, goodwill and intangible-asset amortization.
- Follow remediation of the ERP access-control material weakness and whether disclosure controls become effective.