Custom Truck One Source, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report; the supplied filing text does not provide standalone fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Custom Truck One Source provides specialty-equipment rentals and sales, aftermarket parts, and repair and customization services to infrastructure-related industries in North America. Its segments are Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS). The company reported a fleet of more than 10,300 units, averaging about 3.5 years old, and more than 35 locations.
Key financial results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $1,865.1 million | $1,573.1 million | +18.6% |
| Gross profit / margin | $454.3 million / 24.4% | $383.7 million / 24.4% | +18.4% profit |
| Operating income | $170.9 million | $103.3 million | +$67.6 million |
| Net income | $50.7 million | $38.9 million | +30.3% |
| Diluted earnings per share | $0.21 | $0.16 | +$0.05 |
| Net cash from operating activities | $(30.9) million | $46.0 million | Down $76.9 million |
| Cash and cash equivalents, year-end | $10.3 million | $14.4 million | Down $4.1 million |
Equipment sales were $1,253.5 million, up 27.6%; rental revenue was $478.9 million, up 3.2%; parts and services revenue was $132.7 million, up 4.8%. Gross margin was flat at 24.4%; operating margin was approximately 9.2% and net margin approximately 2.7%.
ERS revenue was $726.2 million and gross profit $242.2 million; TES sales were $990.4 million and gross profit $172.8 million; APS revenue was $148.5 million and gross profit $39.3 million.
Liquidity, debt and operating metrics
- Year-end debt outstanding was $1,517.8 million, excluding $662.3 million of floor-plan payables. Debt included $920.0 million of 5.5% secured notes due 2029 and $552.4 million outstanding under the ABL facility. ABL borrowings carried a reported 7.7% rate.
- ABL borrowing availability was $194.5 million at year-end. The company reported its springing fixed-charge coverage covenant was not applicable at that date and stated that liquidity and operating cash flows should be sufficient for operating, debt-service and capital needs over the next 12 months.
- Company-reported net debt was $1,507.5 million and net leverage was 3.53x, using its defined Adjusted EBITDA of $426.9 million. Adjusted EBITDA is a non-GAAP, credit-agreement measure.
- Interest expense, net, was $131.3 million versus $88.9 million; cash interest paid was $122.9 million versus $81.2 million. The company cited higher variable-rate debt and floor-plan financing costs.
- Operating cash use reflected a $388.1 million inventory increase. Investing cash use was $176.6 million, including $364.2 million in rental-equipment purchases and $229.6 million of proceeds from rental-equipment sales. Financing provided $202.9 million, including higher revolving-credit borrowings; stock repurchases used $38.8 million.
- Fleet utilization declined to 80.4% from 83.9%, while OEC on rent yield rose to 40.4% from 39.1%. Ending original equipment cost was approximately unchanged at $1,455.7 million. Sales backlog fell 8.7% to $688.6 million.
Changes, outlook and risks
Revenue growth was led by equipment sales as supply-chain conditions improved and more customer orders could be fulfilled. Gross profit increased, but higher interest expense and weaker operating cash flow tempered the improvement. Management described demand across infrastructure end-markets as supportive and cited utility-grid investment, telecom build-out and rail and infrastructure spending as potential long-term drivers. The filing provides no formal revenue, earnings or cash-flow guidance.
Key risks include substantial indebtedness and variable-rate exposure, inventory and working-capital needs, supplier concentration and supply-chain disruption, equipment residual values and fleet utilization, competition, labor availability, and dependence on government-funded infrastructure activity. Two vendors accounted for approximately 31% of 2023 purchases, primarily chassis. The company reported no goodwill impairment; goodwill was $704.0 million, and ERS and APS valuations involved significant estimation and judgment.
Controls and audit: The financial-statement audit opinion was unqualified, but management and Ernst & Young reported ineffective internal control over financial reporting as of year-end. The remaining material weakness concerns the design and operation of business-process controls over accounts and disclosures; the auditor issued an adverse ICFR opinion. Management said IT general-control deficiencies were remediated in 2023, but the broader weakness remains until controls are implemented and tested as effective.
Contingencies: Management did not expect ordinary-course legal matters to have a material adverse effect. An IRS assessment of $2.4 million concerning 2015 federal excise taxes remained under appeal; management did not consider a loss probable. No goodwill impairment was recorded.
Most important facts for investors to verify
- Whether inventory growth converts to sales and operating cash flow, and how much additional borrowing or floor-plan financing is required.
- Debt-service capacity, variable-rate exposure, ABL availability and covenant headroom; note that floor-plan payables are additional to reported debt.
- Whether the decline in utilization and backlog persists, and whether improved equipment-sales demand and pricing continue.
- Progress in remediating the material weakness in business-process controls and the timing of a return to effective ICFR.
- Goodwill valuation assumptions, used-equipment resale values, vendor concentration and the outcome of the IRS tax appeal.