Custom Truck One Source, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless otherwise noted, dollar amounts below are in millions. The company rents, sells, manufactures and services specialty equipment for utility, telecommunications, rail and other infrastructure markets.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $357.8 | $357.3 | $1,086.4 | $810.7 |
| Gross profit / margin | $88.2 / 24.6% | $65.3 / 18.3% | $255.4 / 23.5% | $132.2 / 16.3% |
| Operating income (loss) | $23.1 | $(5.3) | $51.7 | $(51.8) |
| Net income (loss) | $(2.4) | $(20.5) | $8.0 | $(177.8) |
| Adjusted EBITDA | $91.6 | $84.4 | $268.5 | $227.5 pro forma |
Q3 revenue was nearly flat year over year: rental revenue rose 5.4% to $115.0, while equipment sales fell 2.9% to $210.9; parts and services increased 2.7% to $31.9. Gross profit improved, supported by higher rental revenue, pricing and lower rental-equipment depreciation. Higher interest expense and tax expense nevertheless left the company with a quarterly net loss. Adjusted EBITDA is a non-GAAP measure; the nine-month comparison above uses 2021 pro forma results to better reflect the combined business.
Nine-month 2022 revenue increased 34.0% from reported 2021, but the periods are not directly comparable: 2022 includes Custom Truck LP for the full period, while 2021 includes it only from April 1. Against 2021 pro forma revenue of $1,127.2, 2022 revenue was lower. Nine-month net income benefited from the absence of the prior-year $61.7 debt-extinguishment loss and a favorable $18.0 change in derivative and warrant fair value; the latter is non-cash and can fluctuate.
Cash flow: Operating cash flow was $4.3 for the first nine months, down from $112.8 in 2021, principally reflecting a $155.1 increase in inventory. Investing cash outflow was $153.9, including $224.0 of rental-equipment purchases and $49.8 for the HiRail acquisition, partly offset by $135.4 of rental-equipment sale proceeds. Financing cash inflow was $141.9, including net revolving-credit borrowings and net non-trade floor-plan financing. Cash declined $9.7 to $26.2.
Debt and liquidity: At September 30, total debt outstanding was $1,393.6, comprising $447.0 under the variable-rate ABL facility, $920.0 of 5.50% secured notes due 2029, and $26.6 of other notes payable. ABL availability was $300.1, with $2.9 of standby letters of credit outstanding. In addition, floor-plan payables totaled $348.9 ($81.4 trade and $267.5 non-trade). Management stated that available liquidity and operating cash flows should cover operating, debt-service and capital needs for the next 12 months, while noting continued monitoring of macroeconomic and supply-chain conditions.
Operating developments and material changes
- Q3 sales order backlog reached $709.2, up 109.5% year over year. Management attributed the increase to strong demand, while supply constraints continued to impede completion and delivery of new equipment.
- Q3 fleet utilization was 83.8%, versus 81.4% a year earlier; average OEC on rent rose 7.2% to $1,182.5. OEC on rent yield was 38.5%, compared with 38.0%.
- ERS Q3 revenue rose 12.8% to $149.1 and gross profit increased to $53.1. TES revenue fell 8.6% to $173.8, but gross profit increased 54.4% to $27.2, reflecting pricing. APS revenue was nearly flat at $34.9 and gross profit declined 9.9% to $7.8, with management citing product mix and higher supply-chain and facility costs.
- The company acquired HiRail in January 2022 for approximately $51.0 net of working-capital adjustments. Its preliminary purchase-price allocation remained subject to revision at quarter-end. HiRail contributed $11.7 of revenue and $2.3 of pretax income from acquisition through September.
- Inventory increased to $555.8 from $410.5 at year-end 2021. Management cited supply-chain uncertainty, inflationary pressures, shipping costs and potential chassis and semiconductor shortages as risks to production and delivery.
- The board authorized a $30.0 share-repurchase program in August. Approximately 0.4 million shares were repurchased during Q3 for $2.4, including accrued amounts and fees.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or cash-flow guidance. Management described continued strong demand and pricing, but cautioned that supply-chain disruptions make future performance difficult to predict. Principal risks include economic and customer-spending weakness, supplier concentration and delays, inflation, high variable-rate debt and floor-plan costs, refinancing or access to capital, and the company’s ability to generate cash. The company reported $447.0 of variable-rate ABL debt; it estimated each 0.125 percentage-point rate change would alter annual ABL interest expense by approximately $0.6.
Disclosure controls and procedures were deemed ineffective at September 30 because of material weaknesses in IT general controls, including user-access and program-change controls, and related business-process and management-review controls. The company had implemented a new ERP system in Q2 and continued remediation; the weaknesses were not considered remediated pending sufficient operating time and testing. Management reported no identified financial-statement misstatements from these weaknesses.
Management did not expect ordinary-course legal matters to have a material adverse effect. An IRS assessment of $2.4 relating to 2015 federal excise taxes was under appeal; management did not consider a loss probable. The company also disclosed that discrete tax items contributed to $7.3 of income-tax expense for the nine-month period and an effective tax rate of 47.7%.
Key facts investors should verify
- Whether the $709.2 backlog converts to completed shipments and revenue despite supply constraints, and whether order timing or cancellations change.
- Whether inventory growth and fleet investment translate into sales, rental utilization and operating cash flow; operating cash flow was only $4.3 for nine months.
- Debt-service sensitivity and liquidity, including variable-rate ABL borrowings, floor-plan obligations and the availability conditions on the revolving facility.
- Progress and independent testing of remediation for the disclosed material weaknesses in internal control.
- How much reported earnings and Adjusted EBITDA depend on non-cash warrant/derivative remeasurement and other company-defined adjustments.
- Final purchase accounting for HiRail and the resolution of the IRS assessment and other tax exposures.