Business context and reporting period
Custom Truck One Source, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company rents, sells, produces and services specialty equipment for utility, telecommunications, rail and other infrastructure markets. Its reporting segments are Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS). Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $434.4 | $357.8 | $1,343.3 | $1,086.4 |
| Gross profit (margin) | $107.2 (24.7%) | $88.2 (24.6%) | $327.4 (24.4%) | $255.4 (23.5%) |
| Operating income | $38.0 | $23.1 | $117.5 | $51.7 |
| Net income (loss) | $9.2 | ($2.4) | $34.6 | $8.0 |
| Diluted EPS | $0.04 | ($0.01) | $0.14 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $100.2 | $91.6 | $308.6 | $268.5 |
- Q3 revenue grew 21.4% year over year, led by equipment sales (+34.2%); rental revenue rose 2.8%. For the nine months, revenue increased 23.7%, including 35.0% growth in equipment sales.
- Q3 net income improved from a loss to a profit; nine-month net income rose 334.1%. Management attributed improvement primarily to higher gross profit, partly offset by increased interest expense.
- Q3 interest expense, net, was $34.1 million versus $22.9 million; nine-month expense was $94.9 million versus $62.3 million. SG&A rose to $57.0 million in Q3 and $172.0 million for the nine months.
- Nine-month operating cash flow was negative $2.7 million, versus positive $4.3 million a year earlier. Inventory growth used $290.3 million of cash. Investing cash outflow was $145.6 million; financing provided $142.6 million.
- At September 30, cash was $8.8 million and current assets were $1,116.8 million against current liabilities of $825.0 million. Inventory was $888.8 million, up from $596.7 million at year-end 2022.
- Total debt outstanding was $1,451.2 million, including $492.4 million under the ABL facility and $920.0 million of 5.50% secured notes due 2029. Floor-plan payables totaled $591.8 million. ABL borrowing availability was $254.5 million; the company also reported $3.1 million of standby letters of credit.
- Rental fleet ending original equipment cost was $1,466.0 million. Q3 fleet utilization was 78.9%, down from 83.8%; OEC on-rent yield was 40.8%, up from 38.5%. Sales backlog was $779.3 million, up 9.9% year over year but down 9.8% from June 30.
Changes, outlook and risks
Management attributed higher sales to strong customer demand and improved supply-chain availability, enabling more order fulfillment and inventory replenishment. Q3 gross margin was broadly stable year over year, while nine-month gross margin improved. Segment gross profit increased year over year in all three segments for the nine-month period. Management said Q3 fleet utilization declined partly because high North American temperatures delayed transmission and distribution projects; favorable rental pricing supported higher OEC on-rent yield.
The company provided no specific numerical earnings or revenue guidance. Management stated that liquidity sources and operating cash flows should be sufficient for operating, debt-service and capital requirements, including rental-fleet investment, over the next 12 months and beyond. This outlook is subject to the risks described in the filing, including supply-chain availability and costs, labor and equipment costs, customer demand and project delays, variable-rate debt exposure, access to capital, and the company’s substantial indebtedness. A 0.125 percentage-point rate change was estimated to change annual interest expense on variable-rate debt and floor-plan financing by approximately $1.4 million.
Disclosure controls and procedures were deemed ineffective because a previously identified material weakness in information-technology general controls and related business-process controls remained unremediated. The company reported no resulting financial-statement misstatements. The IRS has an outstanding $2.4 million assessment relating to 2015 federal excise taxes; management said a loss was not probable and did not expect the matter to have a material effect. Ordinary-course legal matters were not expected to have a material adverse effect.
Other notable items: the company repurchased approximately 2.5 million shares for $15.8 million during Q3 and authorized a new $25 million repurchase program; $24.4 million remained available at quarter-end. Nine-month tax expense was $2.7 million (7% effective tax rate), compared with $7.3 million (48%) a year earlier, with the difference primarily attributed to discrete 2022 tax items. Changes in the fair value of private warrants also affected reported financing and other income.
Important facts for investors to verify
- Whether inventory can be sold and converted to cash without materially pressuring margins, given its increase and the negative nine-month operating cash flow.
- Debt, floor-plan financing costs, borrowing availability and covenant compliance as interest rates and inventory needs change.
- Whether weaker fleet utilization and delayed infrastructure projects persist, and whether rental pricing and backlog convert into revenue and cash flow.
- Progress and testing results for remediation of the material weakness in internal controls.
- Updates on the IRS assessment, supply-chain constraints, and the use of the remaining share-repurchase authorization.