Custom Truck One Source, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and reporting period
The company provides specialty equipment rentals and sales, parts, maintenance and repair services to electric utility, telecom, rail and other infrastructure markets. On April 1, 2021, it acquired Custom Truck One Source, L.P. and changed its name from Nesco Holdings, Inc. to Custom Truck One Source, Inc. The acquired business is included in reported results only from April 1 onward, so GAAP comparisons with 2020 are not like-for-like. The company reports three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $375.1 | $68.5 | $453.4 | $150.2 |
| Gross profit / margin | $46.7 / 12.4% | $16.3 / 23.9% | $66.9 / 14.8% | $37.7 / 25.1% |
| Operating income (loss) | $(43.4) | $2.5 | $(46.5) | $9.3 |
| Net income (loss) | $(129.4) | $(13.2) | $(157.3) | $(29.1) |
| Diluted loss per share | $(0.53) | $(0.27) | $(1.07) | $(0.59) |
| Adjusted EBITDA (non-GAAP) | $70.2 | $26.2 | $97.8 | $58.2 |
GAAP revenue and Adjusted EBITDA comparisons are affected by the acquisition. On a pro forma basis, as if the acquisition occurred January 1, 2020, revenue was $375.1 million versus $294.5 million in Q2 and $769.9 million versus $648.3 million for the six-month periods. Pro forma Adjusted EBITDA was $70.2 million versus $64.0 million in Q2 and $143.1 million versus $137.5 million for six months. Pro forma net loss was $57.6 million versus $18.6 million in Q2, and $51.3 million versus $117.2 million for six months. These illustrative, adjusted figures are not forecasts.
Cash flow and liquidity: Six-month operating cash flow was $57.2 million, investing cash outflow was $1,360.2 million (including $1,334.3 million for the acquisition), and financing cash inflow was $1,326.8 million. Cash was $27.2 million at June 30, compared with $3.4 million at year-end 2020. ABL borrowing availability was $355.2 million, with $385.0 million drawn and $3.7 million of standby letters of credit outstanding.
Debt: Reported debt outstanding was $1,345.8 million before deferred financing fees, including $920.0 million of 5.50% second-lien notes due 2029 and $385.0 million under the variable-rate ABL facility; net debt was $1,310.3 million. Floor-plan payables were a further $252.3 million. Management stated that cash, operating cash flow and borrowing capacity should be sufficient for operating, debt-service and capital needs over the next 12 months, while noting continued monitoring of COVID-19 effects.
Operating indicators: Fleet utilization was 81% in Q2 versus 71% in the prior-year quarter; average original equipment cost (OEC) on rent was $1,084.7 million versus $461.1 million, and annualized OEC on-rent yield was 38% versus 36%. Sales order backlog was $222.7 million at June 30; management cautioned that backlog is not a reliable measure of future net sales.
Material changes versus the prior comparable period
- Most of the reported revenue increase reflects the acquired business, including new whole-goods sales. Q2 equipment sales were $247.7 million, compared with $10.4 million; rental revenue was $98.5 million versus $47.0 million.
- Gross margin fell to 12.4% from 23.9%, reflecting the larger share of lower-margin equipment sales and purchase-accounting inventory step-ups. TES Q2 gross margin was 9.4%; management cited freight costs and purchase accounting.
- Q2 net loss included a $61.7 million loss on extinguishment of debt, comprising debt-related fees and a make-whole premium, as well as $24.6 million of acquisition transaction expenses. Six-month transaction expenses were $35.0 million.
- Interest expense increased with the post-acquisition debt structure. The company also recorded fair-value expenses related to warrants and derivatives; non-public warrants were reclassified from equity to a liability following SEC staff guidance, which the company said corrected an immaterial prior-period error.
Outlook, commentary, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management cited demand opportunities in transmission and distribution, 5G telecom, rail and infrastructure, and said utilization improved as project work and rental demand rebounded from pandemic impacts.
- Management expects approximately $50 million of pro forma cost synergies within two years of closing and estimates approximately $50 million of integration and restructuring costs to achieve them, including $40 million in the first two years. Achievement is uncertain; the filing reports ongoing integration and preliminary acquisition accounting.
- Key risks include integration execution and retaining customers, suppliers and key staff; supply-chain delays and cost inflation; equipment residual values and aging; cyclical demand and COVID-19 uncertainty; and substantial leverage, variable-rate debt, borrowing-base availability and restrictive covenants. A fixed-charge coverage covenant can spring into testing if ABL availability falls below specified thresholds.
- The company reported no legal matter expected to have a material effect. An IRS assessment of $2.4 million related to 2015 excise taxes is under appeal; management did not consider a loss probable. Purchase-price allocations remained preliminary at June 30, and reported goodwill and acquired asset values may change.
- Management reported disclosure controls were effective as of June 30. Integration of the acquired company’s processes and controls was still underway.
Important facts for investors to verify
- How final purchase-price accounting, inventory step-ups and acquired asset valuations affect future gross profit, depreciation and amortization.
- Whether the company achieves the stated synergies and integration timetable, and how total integration costs compare with estimates.
- Whether backlog converts to sales, and whether utilization, rental yield and TES margins remain sustainable as freight, equipment and input costs change.
- Actual liquidity under the ABL borrowing base, covenant headroom, debt-service capacity and exposure to variable interest rates and LIBOR transition.
- Whether acquisition-related costs and unusual debt-extinguishment charges cease, and how recurring profitability compares with non-GAAP Adjusted EBITDA and pro forma measures.