Custom Truck One Source, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company rents, sells, manufactures and services specialty equipment for utility, telecommunications, rail and other infrastructure markets, primarily in North America. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $456.8m | $362.1m | $909.0m | $728.6m |
| Gross profit / margin | $110.6m / 24.2% | $82.8m / 22.9% | $220.3m / 24.2% | $167.3m / 23.0% |
| Operating income | $39.6m | $18.7m | $79.5m | $28.6m |
| Net income | $11.6m | $13.6m | $25.4m | $10.4m |
| Diluted earnings per share | $0.05 | $0.05 | $0.10 | $0.04 |
| Adjusted EBITDA | $103.2m | $85.4m | $208.4m | $176.9m |
Q2 revenue rose 26.2%, led by equipment sales, up 38.3%; rental revenue increased 9.0%. H1 revenue rose 24.8%. Management attributed growth to strong demand, fleet expansion, favorable rental pricing and improved supply availability that enabled more equipment deliveries. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Q2 net income declined 14.8% despite higher gross profit, primarily reflecting increased interest expense and less favorable private-warrant fair-value movements. For H1, net income increased 145.5%, supported by gross profit growth and lower amortization, partly offset by higher interest expense. Q2 operating margin was approximately 8.7% versus 5.2%; net margin was approximately 2.5% versus 3.8%.
Segment highlights: Q2 gross profit was $54.6m in Equipment Rental Solutions (ERS), $46.0m in Truck and Equipment Sales (TES), and $10.1m in Aftermarket Parts and Services (APS). ERS and TES gross profit increased year over year; APS gross profit declined 8.1%, which the company attributed to product mix.
Cash flow, balance sheet and liquidity
- H1 operating cash flow was negative $1.1m, improved from negative $21.4m in H1 2022. The company cited increased inventory purchases and production; inventory rose to $765.4m from $596.7m at year-end.
- H1 investing cash outflow was $102.9m, including $210.4m of rental-equipment purchases and $130.2m of proceeds from rental-equipment sales and disposals. Financing provided $131.6m.
- Cash was $42.2m at June 30, 2023, versus $14.4m at December 31, 2022. ABL borrowing availability was $254.5m, with $3.1m of standby letters of credit outstanding.
- Total debt outstanding was $1.454bn, including $492.4m under the variable-rate ABL, $920.0m of 5.50% secured notes due 2029, and $366.1m of non-trade floor-plan payables. Long-term debt, net of financing fees and current maturities, was $1.425bn. Interest expense, net, was $31.6m in Q2 and $60.8m in H1.
- Stockholders’ equity was $919.5m. The company repurchased approximately 0.7m shares for about $4.3m, including commissions, during H1; $15.2m remained under the $30m authorization at June 30.
Outlook, risks and unusual items
- No specific revenue, earnings or other formal financial guidance is provided in the supplied filing text. Management stated that available liquidity and operating cash flows should be sufficient for operating, debt-service and capital needs over the next 12 months and beyond.
- Management reported strong customer demand and a sales-order backlog of $863.8m, up 30.2% year over year, but cautioned that backlog is not an accurate measure of future net sales. Q2 fleet utilization was 81.7%, down from 82.8%; management cited project delays associated with elevated North American temperatures. H1 utilization was unchanged at 82.6%.
- Interest-rate exposure is material: the ABL and floor-plan facilities carry floating rates. The filing estimates that a one-eighth percentage-point rate move would change annual ABL interest expense by approximately $0.6m, all else equal. The company does not currently hedge its Canadian-dollar exposure.
- Key operating risks include supply-chain disruption, availability and cost of equipment and components, labor costs and skilled-worker retention, equipment residual values, customer demand and access to capital. Management noted continuing uncertainty around supply chains and potential commercial-vehicle chassis and semiconductor constraints.
- The $370m PNC inventory facility, with $366.1m drawn, was scheduled to mature August 25, 2023. The company had notified PNC of its intent to renew for two years; the supplied filing does not confirm that renewal was completed.
- Disclosure controls and procedures were deemed ineffective due to an unremediated material weakness involving IT general controls and related business-process controls. Management reported no identified financial-statement misstatements; remediation and testing were ongoing.
- An IRS audit concerns a $2.4m federal excise-tax assessment for 2015. The company appealed and management did not consider a loss probable. The filing states ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the PNC floor-plan facility was renewed before its August 25, 2023 maturity, and on what terms.
- Progress in remediating and testing the material weakness in internal controls.
- How inventory growth, equipment purchasing and working-capital needs affect operating cash flow and borrowing requirements.
- The effect of higher variable interest rates and floor-plan financing costs on earnings and liquidity.
- Whether demand, backlog conversion, utilization and equipment residual values remain consistent with management’s expectations.
- The status and potential outcome of the IRS assessment and appeal.