Custom Truck One Source, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company rents, sells, manufactures and services specialty trucks and equipment for utility, telecommunications, rail and other infrastructure markets. Results are unaudited and in U.S. dollars.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $452.2 million | $366.5 million | +23.4% |
| Gross profit / margin | $109.7 million / 24.3% | $84.5 million / 23.1% | +29.8%; +1.2 percentage points |
| Operating income | $39.9 million | $9.8 million | +$30.1 million |
| Net income (loss) | $13.8 million | $(3.3) million | Improved $17.1 million |
| Diluted EPS | $0.06 | $(0.01) | Improved |
| Adjusted EBITDA (non-GAAP) | $105.2 million | $91.5 million | +15.0% |
| Operating cash flow | $3.9 million | $(29.8) million | Improved |
Equipment sales were $301.3 million (+32.6%); rental revenue was $118.3 million (+8.4%); parts and services revenue was $32.6 million (+8.1%). Management attributed growth to strong demand, improved supply-chain fulfillment and higher rental fleet utilization and pricing. Gross profit increased, while operating expenses fell to $69.8 million from $74.7 million, mainly due to lower amortization and integration costs. Higher variable-rate borrowing and floor-plan interest partly offset operating improvement: net interest expense was $29.2 million versus $19.2 million.
Segment gross profit: Equipment Rental Solutions (ERS) $66.3 million, Truck and Equipment Sales (TES) $34.1 million, and Aftermarket Parts and Services (APS) $9.3 million. Fleet utilization was 83.6% versus 82.5%; OEC on rent yield was 39.6% versus 39.1%. Sales order backlog rose 45.8% year over year to $855.0 million. The company cautions that backlog is not a reliable measure of future sales.
Liquidity, debt and cash flows
Cash was $32.2 million at March 31, up from $14.4 million at year-end. Current assets were $989.8 million and current liabilities $711.3 million. Operating cash flow was $3.9 million; investing cash outflow was $39.9 million and financing cash inflow was $53.8 million. Rental-equipment purchases were $109.1 million, partly offset by $78.6 million of proceeds from rental-equipment sales. Inventory increased $117.6 million during the quarter, which management identified as a major operating-cash use.
Debt outstanding, before deferred financing fees, was $1.426 billion, including $462.4 million under the ABL Facility and $920.0 million of 5.50% secured notes due 2029. Separately, floor-plan payables totaled $471.5 million ($159.0 million trade and $312.5 million non-trade). ABL availability was $284.5 million, with $3.1 million of standby letters of credit. The PNC inventory facility, then $315 million with $312.5 million drawn, matured August 25, 2023; its capacity was increased to $370 million on April 17, 2023. Management stated liquidity and operating cash flows were expected to meet operating, debt-service and capital needs over the next 12 months.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or other quantitative guidance. Management described demand and pricing as strong and noted continued improvement in supply-chain conditions, while cautioning that disruptions, component shortages, inflation and higher input costs could affect future performance. Other stated risks include labor availability and costs, equipment values and fleet management, customer credit losses, capital-market access, significant indebtedness and floating interest rates. A 0.125 percentage-point rate change on the ABL balance would change annual interest expense by approximately $0.6 million, all else equal.
Disclosure controls and procedures were deemed ineffective at quarter-end due to an unremediated material weakness involving IT general controls and related business-process and management-review controls. The company reported no resulting financial-statement misstatement; remediation and testing were ongoing. The IRS has assessed $2.4 million related to 2015 federal excise taxes; management said a loss was not considered probable. Other ordinary-course claims were not expected to have a material effect. The company repurchased approximately 0.2 million shares for $1.1 million during the quarter, with $18.4 million remaining under its repurchase authorization.
Important facts for investors to verify
- Progress and testing of remediation for the material weakness in internal controls.
- PNC inventory-facility renewal and capacity after its August 2023 maturity, alongside borrowing costs and covenant compliance.
- Whether inventory growth converts to sales and operating cash flow, and whether backlog fulfillment and margins remain strong.
- Exposure to variable interest rates, elevated floor-plan balances and the company’s ability to fund fleet investment and debt service.
- Developments in the $2.4 million IRS assessment and the terms and pace of future share repurchases.