Custom Truck One Source, Inc. — FY 2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2021; it is an annual report, not a stand-alone fourth-quarter report. The company rents, sells, manufactures and services specialty equipment for utility, telecom, rail and infrastructure customers. On April 1, 2021, it acquired Custom Truck One Source, L.P. for approximately $1.531 billion and changed its name from Nesco Holdings, Inc. to Custom Truck One Source, Inc. The 2021 consolidated results include the acquired business only from the acquisition date, so reported year-over-year results are not comparable.
Key financial results
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $1,167.2 million | $302.7 million |
| Gross profit | $210.0 million | $76.4 million |
| Operating income (loss) | $(42.0) million | $17.2 million |
| Net income (loss) | $(181.5) million | $(21.3) million |
| Operating cash flow | $138.9 million | $42.8 million |
| Cash and cash equivalents at year-end | $35.9 million | $3.4 million |
- FY 2021 revenue comprised $370.1 million rental, $695.3 million equipment sales and $101.8 million parts and services. Gross margin was approximately 18% of revenue.
- Cash used in investing was $1,429.5 million, largely reflecting the acquisition; cash provided by financing was $1,323.0 million. Rental-equipment purchases were $188.4 million and proceeds from rental-equipment sales were $99.8 million.
- At year-end, borrowings included $920.0 million of 5.50% secured notes due 2029 and $394.9 million under the ABL Facility, plus $32.6 million of notes payable. The company separately reported approximately $238.0 million of floorplan financing. ABL availability was $347.0 million, with $4.0 million of standby letters of credit outstanding.
- Key operating measures: fleet utilization was 81.2% versus 75.3%; OEC on rent yield was 38.0% versus 38.1%; and sales-order backlog was $411.6 million. The rental fleet exceeded 9,000 units, averaging about 3.8 years of age.
Material changes and comparability
- Most of the increase in reported revenue and operating scale reflects the acquisition, which added equipment sales and expanded rental and aftermarket operations. The company’s acquired business contributed $923.8 million of revenue and $28.2 million of pre-tax loss from April 1 through year-end.
- The net loss included $61.7 million of debt-extinguishment loss and $51.8 million of acquisition and post-acquisition integration costs. Adjusted EBITDA, a non-GAAP measure, was $277.8 million, compared with $118.6 million; it includes substantial add-backs, including purchase-accounting effects, transaction and integration costs, debt-extinguishment loss, share-based payments and other items.
- For a more comparable, unaudited pro forma view assuming the acquisition had occurred at the start of 2020, revenue was $1,483.6 million in 2021 versus $1,356.5 million in 2020; Adjusted EBITDA was $323.1 million versus $295.1 million; and net loss was $90.5 million versus $96.4 million. These illustrative pro forma figures are not necessarily indicative of actual results.
Outlook, risks and unusual items
- Management said available liquidity and operating cash flows should cover operating, debt-service and capital needs over the next 12 months. It cited infrastructure investment, grid upgrades, 5G deployment and rail spending as demand opportunities, but gave no specific financial guidance.
- The company expected approximately $50 million in 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. Achievement is uncertain.
- Material risks include acquisition integration, significant indebtedness and restrictive covenants, variable-rate borrowing and LIBOR transition, supply-chain and semiconductor constraints, higher equipment and material costs, used-equipment residual values, skilled-labor availability, and disruption or cybersecurity incidents. The company reported $394.9 million of variable-rate ABL debt and an interest-rate collar; its stated sensitivity was approximately $0.5 million of annual interest expense per one-eighth percentage-point rate change, before the collar’s effect.
- Controls are a notable concern: management and the auditor concluded internal control over financial reporting was ineffective at year-end because of material weaknesses in IT access, change-management and related controls. The acquired business, representing 76% of assets and 79% of revenue, was excluded from management’s control assessment. No resulting financial-statement misstatement was identified; remediation included a planned ERP implementation in 2022.
- Other notable matters: the acquisition purchase-price allocation remained preliminary in some respects; the company recorded an $84.6 million deferred-tax valuation allowance; and the 2021 financial-statement audit opinion was unqualified. Management reported no pending litigation expected to have a material adverse effect. In January 2022, the company acquired Hi-Rail Leasing for approximately $51 million.
Important facts for investors to verify
- How the company is progressing toward acquisition synergies, integration milestones and the planned ERP/control remediation, and whether material weaknesses are resolved.
- Current borrowing-base availability, floorplan financing terms and maturities, covenant headroom, and the effect of variable rates on interest expense and cash flow.
- Whether sales backlog converts to shipments and cash on expected timing, given stated supply-chain constraints; backlog is not a reliable measure of future net sales.
- Underlying segment profitability and cash generation, separating acquisition effects, purchase-accounting adjustments and non-GAAP add-backs from recurring performance.
- Final acquisition accounting, tax-asset usability and valuation allowances, and the integration and financing impact of the Hi-Rail Leasing acquisition.