Custom Truck One Source, Inc. — FY2022 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2022, Custom Truck One Source (CTOS) provided rentals, sales, parts, repair, maintenance, and customization of specialty equipment serving utility, telecom, rail, waste, forestry, and other infrastructure markets. It reported three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).
The year-over-year comparison requires caution: 2021 reported results include Custom Truck LP only from April 1, 2021, following its acquisition. The filing also provides unaudited pro forma 2021 results intended to offer a more comparable view.
Financial and operating metrics
| Metric | FY2022 | FY2021 reported |
|---|---|---|
| Revenue | $1,573.1 million | $1,167.2 million |
| Gross profit / margin | $383.7 million / 24.4% | $210.0 million / 18.0% |
| Operating income (loss) | $103.3 million | $(42.0) million |
| Net income (loss) | $38.9 million | $(181.5) million |
| Adjusted EBITDA (non-GAAP) | $393.0 million | $277.8 million |
| Operating cash flow | $46.0 million | $138.9 million |
| Cash and cash equivalents, year-end | $14.4 million | $35.9 million |
| Rental fleet utilization | 83.9% | 81.2% |
| Sales order backlog, year-end | $754.1 million | $411.6 million |
Revenue comprised equipment sales of $982.3 million, rental revenue of $464.0 million, and parts and services revenue of $126.7 million. Management attributed growth to strong demand, improved equipment order fulfillment, higher rental fleet utilization and pricing, and record vehicle production. Reported results also reflect the larger business following the 2021 acquisition.
On the company’s unaudited pro forma basis, FY2021 revenue was $1,483.6 million, gross profit $278.4 million, net loss $90.5 million, and Adjusted EBITDA $323.1 million. Against those figures, FY2022 revenue rose about 6%, and Adjusted EBITDA about 22%; the pro forma figures are illustrative, not actual historical results.
FY2022 investing cash outflow was $218.9 million, including $340.8 million of rental equipment purchases, partly offset by $205.9 million of rental equipment sale proceeds and the $49.8 million net cash cost of the HiRail acquisition. Operating cash flow fell year over year, which management attributed primarily to increased inventory purchases and production.
At year-end, long-term debt outstanding before deferred financing fees was $1,389.4 million: $920.0 million of 5.50% secured notes due 2029, $437.7 million drawn under the ABL Facility, and $31.7 million of notes payable. Floor-plan payables totaled $430.2 million, separately financing inventory. ABL availability was $309.4 million, with $2.9 million of standby letters of credit outstanding. ABL borrowings were variable-rate; the reported rate was 6.1% at year-end. The filing states management believes available liquidity and operating cash flow are sufficient for operating, debt-service, and capital needs over the next 12 months.
Material changes versus the prior comparable period
- Reported revenue increased 34.8% and gross profit increased 82.7% versus 2021, but the comparison is affected by the acquisition timing. The pro forma comparison shows more moderate growth.
- Net income improved to $38.9 million from a $181.5 million loss. The 2021 loss included $61.7 million of debt-extinguishment losses and significant acquisition-related expenses; FY2022 other income included a favorable change in fair value of warrants and derivatives.
- Operating cash flow decreased by $92.9 million as inventory increased to $596.7 million from $410.5 million. Year-end cash declined by $21.5 million.
- Rental fleet OEC increased 6.8% to $1,455.8 million; average OEC on rent rose 23.7% to $1,188.0 million. Higher utilization and rental yield reflected strong demand and pricing.
- Backlog grew 83.2% to $754.1 million. The company cautions that backlog may change, be delayed, or be cancelled and is not a reliable measure of future revenue.
- CTOS acquired HiRail in January 2022 for net cash consideration of $49.8 million, expanding its rail operations.
Outlook, risks, contingencies, and unusual items
- No specific quantitative revenue, earnings, or cash-flow guidance is provided. Management cites favorable infrastructure and end-market demand, while noting supply-chain constraints and inflation make future performance difficult to predict.
- Key risks include supplier and component shortages, higher equipment and labor costs, production constraints, interest-rate increases, customer credit losses, used-equipment residual values, and dependence on government-funded infrastructure spending. The company also identifies acquisition integration, cybersecurity, environmental regulation, and climate-related risks.
- CTOS reported a material weakness in internal control over financial reporting involving IT general controls, completeness and accuracy of information, and affected business-process and management-review controls. Management and the auditor concluded controls were ineffective as of December 31, 2022; the auditor issued an adverse ICFR opinion. The weakness had not been remediated, and management reported no identified financial-statement misstatement from it. The auditor issued an unqualified opinion on the financial statements.
- The ABL Facility has a springing fixed-charge coverage covenant that applies if availability falls below specified thresholds; debt agreements also restrict additional borrowing, distributions, asset sales, and other actions.
- The IRS assessed $2.4 million for historical federal excise taxes relating to 2015; CTOS appealed, and management did not consider a loss probable. Management said pending legal matters were not expected to have a material adverse effect.
- In December 2022, CTOS purchased property from related parties for approximately $15.4 million. The filing also reports ongoing related-party transactions and Platinum’s significant influence as majority stockholder.
- The company repurchased approximately 1.7 million shares for $10.5 million in 2022 under a $30 million authorization. It does not anticipate cash dividends in the foreseeable future.
Important facts for investors to verify
- Track remediation and independent testing of the material weakness, including whether future filings report effective controls.
- Reconcile inventory growth, working-capital needs, capital spending, and cash generation; assess whether elevated backlog converts to sales.
- Monitor ABL availability, variable-rate interest expense, floor-plan balances, and covenant headroom, including the PNC inventory facility’s stated August 2023 maturity.
- Compare future operating performance with the pro forma baseline, separating organic growth from acquisitions and considering the company’s non-GAAP Adjusted EBITDA adjustments.
- Review the outcome of the IRS assessment and the terms and governance of related-party transactions, including the property purchase.