Custom Truck One Source, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The company rents, sells and services specialty equipment serving electric utility, telecommunications, rail and other infrastructure markets. It reports three segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).
Financial performance
| Metric | Q1 2022 | Comparison and context |
|---|---|---|
| Revenue | $366.5 million | Up from $78.3 million in Q1 2021, but that period predates the April 2021 Custom Truck LP acquisition and is not comparable. Versus Q4 2021, revenue rose 2.8%. |
| Revenue mix | Rental $109.1 million; equipment sales $227.2 million; parts and services $30.1 million | Sequentially, rental revenue fell 4.4%, equipment sales rose 6.9% and parts and services rose 1.2%. |
| Gross profit and margin | $84.5 million; 23.1% | Gross profit increased 8.5% sequentially; margin is calculated from reported revenue and gross profit. |
| Operating income | $9.8 million; 2.7% margin | Approximately flat versus Q4 2021. |
| Net loss | $3.3 million; loss per share $0.01 | Compared with a $3.7 million Q4 2021 net loss and a $27.9 million Q1 2021 loss. Year-over-year results are affected by the acquisition and warrant/derivative valuation changes. |
| Adjusted EBITDA | $91.5 million | Non-GAAP; down 4.3% from Q4 2021. The company’s pro forma Q1 2021 figure was $72.9 million, but it is not a directly reported historical result. |
| Operating cash flow | $(29.8) million | Cash use increased from $12.1 million in Q1 2021, primarily reflecting working-capital needs. |
| Investing cash flow | $(48.5) million | Includes $50.5 million net cash paid for the HiRail acquisition and $45.9 million of rental-equipment purchases, partly offset by $50.0 million of rental-equipment sale proceeds. |
| Financing cash flow and cash | $66.1 million provided; quarter-end cash $23.8 million | Cash declined $12.1 million from December 31, 2021. |
| Debt and liquidity | $1.361 billion total debt outstanding; $1.329 billion net debt after deferred financing fees; $330.9 million ABL availability | ABL borrowings were $410.1 million at a 2.1% rate; $920 million of 5.5% secured notes mature in 2029. Floor-plan payables were $280.0 million, separately reported as current liabilities. |
| Backlog and rental measures | Sales-order backlog $586.4 million; utilization 82.5%; OEC on rent yield 39.1% | Backlog rose 42.4% sequentially; management cautions it is not a reliable measure of future net sales. Utilization eased from 83.7% in Q4. |
Material changes and management commentary
- Q1 2022 revenue and segment results include Custom Truck LP for the full quarter; Q1 2021 results include only the legacy Nesco business. Management attributes most of the large reported year-over-year increase to the acquisition.
- Against Q4 2021, higher equipment sales and selling prices lifted revenue and gross profit. Management cited strong infrastructure-related demand, while rental revenue and fleet utilization declined seasonally.
- TES sales were lower sequentially because of supplier-related supply-chain constraints. Backlog nevertheless grew, reflecting continued customer demand. Management also cited semiconductor shortages and uncertainty in equipment and chassis availability.
- HiRail was acquired on January 14, 2022 for approximately $51.6 million. It contributed $3.8 million of revenue and a $1.3 million pretax loss from acquisition through quarter-end; purchase-price allocation remained preliminary.
- No specific numerical earnings guidance was provided in the supplied filing text. Management stated it believes available liquidity and operating cash flows can meet operating, debt-service and capital requirements for the next 12 months, while continuing to monitor COVID-19 and supply-chain impacts.
Risks, contingencies and unusual items
- Disclosure controls and procedures were deemed ineffective due to material weaknesses in IT general controls, including user access and program-change management, and related business-process and management-review controls. No resulting financial-statement misstatements were identified. A new ERP implementation and other remediation were underway; management had not yet concluded the weaknesses were remediated.
- Variable-rate ABL debt exposes the company to rate increases. The company estimated each 0.125 percentage-point rate change would alter annual ABL interest expense by approximately $0.5 million, before considering the interest-rate collar; the collar was settled during Q1.
- Management identified integration, cyclicality, supply-chain and equipment-cost pressures, significant indebtedness, refinancing/capital access, and skilled-labor availability among key risks. The filing also notes uncertainty surrounding COVID-19 and LIBOR’s phase-out.
- The IRS assessed $2.4 million relating to 2015 federal excise taxes; the company appealed and management did not consider a loss probable. Management did not expect pending ordinary-course legal matters to have a material effect.
- Q1 results include noncash fair-value movements: a $5.8 million net gain from derivative and warrant remeasurement was reflected in cash-flow reconciliation and contributed to lower reported other expense. Adjusted EBITDA is a non-GAAP measure and includes company-defined adjustments.
Investor verification checklist
- Compare operating trends using acquisition-adjusted or pro forma data, rather than treating reported Q1 2021 growth as like-for-like.
- Track operating cash flow, receivables and inventory growth, floor-plan financing, and cash availability alongside reported earnings and Adjusted EBITDA.
- Verify supplier delivery constraints, backlog conversion and margins on equipment sales in subsequent filings.
- Monitor ABL borrowing availability, variable-rate interest expense, floor-plan facility maturities and covenant compliance.
- Check whether the stated ERP and control-remediation measures are completed and tested, and whether the material weaknesses are formally remediated.
- Review final HiRail purchase accounting, integration performance, and the outcome of the IRS tax assessment appeal.