Custom Truck One Source(CTOS) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited condensed consolidated financial statements for Q1 2023 report $452.2 million in revenue, a $13.8 million net income, and $3.07 billion in total assets Unaudited Condensed Consolidated Balance Sheets The balance sheet as of March 31, 2023, indicates total assets of $3.07 billion, an increase from $2.94 billion, primarily due to growth in inventory and rental equipment Condensed Consolidated Balance Sheet Data (in $000s) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $32,218 | $14,360 | | Inventory | $714,354 | $596,724 | | Rental equipment, net | $894,557 | $883,674 | | Total Assets | $3,069,383 | $2,938,212 | | Liabilities & Equity | | | | Total current liabilities | $711,328 | $634,878 | | Long-term debt, net | $1,394,039 | $1,354,766 | | Total Liabilities | $2,164,546 | $2,049,769 | | Total stockholders' equity | $904,837 | $888,443 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For Q1 2023, the company reported $452.2 million in total revenue, a 23.4% increase, achieving a $13.8 million net income Statement of Operations Highlights (in $000s, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total revenue | $452,163 | $366,476 | | Gross Profit | $109,661 | $84,493 | | Operating Income | $39,888 | $9,808 | | Net Income (Loss) | $13,800 | $(3,273) | | Basic EPS | $0.06 | $(0.01) | | Diluted EPS | $0.06 | $(0.01) | Unaudited Condensed Consolidated Statements of Cash Flows For Q1 2023, net cash from operating activities was $3.9 million, a significant improvement, ending the quarter with $32.2 million in cash Cash Flow Summary (in $000s) | Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash flow from operating activities | $3,906 | $(29,771) | | Net cash flow from investing activities | $(39,948) | $(48,458) | | Net cash flow from financing activities | $53,849 | $66,138 | | Net Change in Cash | $17,858 | $(12,091) | | Cash at End of Period | $32,218 | $23,811 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's business structure, accounting policies, and financial activities, including segment performance and the 2022 HiRail acquisition - The company operates through three main segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS)[291][29][51] - On January 14, 2022, the company acquired HiRail for $51.0 million to expand its presence in strategic markets, which is included in the ERS segment[64][88] Revenue by Segment (in $000s) - Q1 2023 vs Q1 2022 | Segment | Q1 2023 Revenue | Q1 2022 Revenue | % Change | | :--- | :--- | :--- | :--- | | ERS | $205,920 | $164,914 | 24.9% | | TES | $209,154 | $167,833 | 24.6% | | APS | $37,089 | $33,729 | 10.0% | | Total | $452,163 | $366,476 | 23.4% | Gross Profit by Segment (in $000s) - Q1 2023 vs Q1 2022 | Segment | Q1 2023 Gross Profit | Q1 2022 Gross Profit | % Change | | :--- | :--- | :--- | :--- | | ERS | $66,267 | $52,927 | 25.2% | | TES | $34,110 | $23,785 | 43.4% | | APS | $9,284 | $7,781 | 19.3% | | Total | $109,661 | $84,493 | 29.8% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 23.4% year-over-year revenue growth to strong demand, with Adjusted EBITDA increasing 15.0% and sales order backlog growing 45.8% Results of Operations Consolidated revenue for Q1 2023 increased by 23.4% YoY, driven by equipment sales and rental revenue, resulting in a $13.8 million net income from a prior-year loss - The increase in total revenue was primarily due to strong customer demand for new and rental equipment, as well as for parts sales and services, and record levels of vehicle production[187] - Operating expenses decreased primarily due to the runoff of amortization expense associated with a prior trade name intangible asset and a reduction in post-acquisition integration expenses[215] - The improvement to net income was primarily the result of gross profit expansion, which was partially offset by higher interest expense on variable-rate debt and floor plan liabilities[190] Key Performance Measures and Non-GAAP Financial Measures The company tracks key metrics including OEC, fleet utilization, and sales order backlog, with ending OEC growing 6.8% and Adjusted EBITDA rising 15.0% Key Performance Measures | Measure | March 31, 2023 | March 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Ending OEC (in $000s) | $1,457,870 | $1,364,660 | 6.8% | | Fleet utilization | 83.6% | 82.5% | 1.3% | | OEC on rent yield | 39.6% | 39.1% | 1.3% | | Sales order backlog (in $000s) | $855,049 | $586,368 | 45.8% | Adjusted EBITDA Reconciliation (in $000s) | Line Item | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income (loss) | $13,800 | $(3,273) | | EBITDA | $89,116 | $79,677 | | Adjusted EBITDA | $105,200 | $91,477 | Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its ABL Facility, with $32.2 million in cash and $284.5 million available under the ABL Facility - As of March 31, 2023, the company had $32.2 million in cash and cash equivalents and $284.5 million of borrowing availability under its ABL Facility[256][205] - In Q1 2023, net cash from operating activities was $3.9 million, a significant improvement from a $29.8 million use of cash in Q1 2022, despite increased inventory purchases[264] - On April 17, 2023, the revolving credit facility with PNC Equipment Finance was increased from $315.0 million to $370.0 million[236] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate fluctuations on its variable-rate debt and foreign currency exchange rate changes - The company's principal market risk is from interest rate changes on its variable-rate debt, including the ABL Facility and floor plan financing[268] - A 0.125% (one-eighth percentage point) increase or decrease in applicable interest rates would change the annual interest expense on the ABL Facility by approximately $0.6 million[268] - The company generated $13.9 million of U.S. dollar-denominated revenues in Canadian dollars during Q1 2023 and does not currently hedge this foreign currency exposure[245] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were not effective as of March 31, 2023, due to a material weakness in internal control over financial reporting - The CEO and CFO concluded that as of March 31, 2023, the Company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting[246] - The material weakness stems from deficiencies in IT general controls (user access, change-management) and related business process controls, identified after the acquisition of Custom Truck LP[247][270] - Remediation efforts are ongoing, including the implementation of a new ERP system in Q2 2022 to address segregation of duties and enhance controls. The weakness is not yet considered fully remediated[278][1] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various claims and litigation, which management does not expect to have a material adverse financial impact - Management does not expect any pending lawsuits, investigations, or claims to have a material adverse impact on the business[3] - The IRS is auditing Custom Truck LP's 2015 federal excise tax withholdings and issued a $2.4 million assessment, which the company has appealed and does not believe will probably result in a loss[135] Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes occurred to the indicated risk factors as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[280] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 218,687 shares under its $30.0 million stock repurchase program during Q1 2023, with $18.4 million remaining available - On August 2, 2022, the Board authorized a stock repurchase program for up to $30.0 million of common stock with no expiration date[281] Issuer Purchases of Equity Securities (Q1 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Value Remaining under Program (in $000s) | | :--- | :--- | :--- | :--- | | Jan 2023 | 65,178 | $6.37 | $19,311 | | Feb 2023 | 0 | $0.00 | $19,311 | | Mar 2023 | 153,509 | $6.44 | $18,394 | | Total | 218,687 | $6.42 | $18,394 | Item 6. Exhibits The report lists several exhibits filed with the Form 10-Q, including a Stockholders' Agreement, CEO and CFO certifications, and XBRL data files - Exhibits filed include CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act) and XBRL interactive data files[283]