SEC Form 10-Q filed by Custom Truck One Source Inc.
$CTOS
Diversified Commercial Services
Consumer Discretionary
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2024
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-38186
_______________________________
(Exact name of registrant as specified in its charter)
_______________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices, including zip code)
(816 ) 241-4888
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | ☒ | ||||||||||||
| Non-accelerated filer | o | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding as of October 28, 2024 was 233,432,467 .
Custom Truck One Source, Inc. and Subsidiaries
TABLE OF CONTENTS
| PART I | FINANCIAL INFORMATION | Page Number | ||||||||||||
| Item 1. | Financial Statements | |||||||||||||
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023 | ||||||||||||||
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 | ||||||||||||||
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023 | ||||||||||||||
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2024 and 2023 | ||||||||||||||
| Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||||||||||||
| Item 4. | Controls and Procedures | |||||||||||||
| PART II | OTHER INFORMATION | |||||||||||||
| Item 1. | Legal Proceedings | |||||||||||||
| Item 1A. | Risk Factors | |||||||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||||||||
| Item 3. | Defaults Upon Senior Securities | |||||||||||||
| Item 4. | Mine Safety Disclosures | |||||||||||||
| Item 5. | Other Information | |||||||||||||
| Item 6. | Exhibits | |||||||||||||
| SIGNATURES | ||||||||||||||
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s, except per share data) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Rental revenue | $ | $ | $ | $ | |||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Parts sales and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||
| Cost of rental revenue | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Cost of equipment sales | |||||||||||||||||||||||
| Cost of parts sales and services | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Non-rental depreciation | |||||||||||||||||||||||
| Transaction expenses and other | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating Income | |||||||||||||||||||||||
| Other Expense | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Financing and other expense (income) | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense | |||||||||||||||||||||||
| Income (Loss) Before Income Taxes | ( | ( | |||||||||||||||||||||
| Income Tax Expense (Benefit) | ( | ||||||||||||||||||||||
| Net Income (Loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||
| Unrealized foreign currency translation adjustments | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Other Comprehensive Income (Loss) | ( | ( | ( | ||||||||||||||||||||
| Comprehensive Income (Loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Net Income (Loss) Per Share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Diluted | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Weighted-Average Common Shares Outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Custom Truck One Source, Inc.
Condensed Consolidated Balance Sheets (unaudited)
| (in $000s, except share data) | September 30, 2024 | December 31, 2023 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Financing receivables, net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Rental equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease assets | |||||||||||
| Other assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Deferred revenue and customer deposits | |||||||||||
| Floor plan payables - trade | |||||||||||
| Floor plan payables - non-trade | |||||||||||
| Operating lease liabilities - current | |||||||||||
| Current maturities of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Operating lease liabilities - noncurrent | |||||||||||
| Deferred income taxes | |||||||||||
| Total long-term liabilities | |||||||||||
| Stockholders' Equity | |||||||||||
Common stock — $ | |||||||||||
Treasury stock, at cost — | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2024 | 2023 | |||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | ( | $ | ||||||||
| Adjustments to reconcile net income (loss) to net cash flow from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Share-based compensation | |||||||||||
| Gain on sales and disposals of rental equipment | ( | ( | |||||||||
| Change in fair value of derivative and warrants | ( | ( | |||||||||
| Deferred tax expense (benefit) | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts and financing receivables | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepaids, operating leases and other | |||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Floor plan payables - trade, net | |||||||||||
| Customer deposits and deferred revenue | ( | ( | |||||||||
| Net cash flow from operating activities | ( | ||||||||||
| Investing Activities | |||||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Purchases of rental equipment | ( | ( | |||||||||
| Proceeds from sales and disposals of rental equipment | |||||||||||
| Purchase of non-rental property and cloud computing arrangements | ( | ( | |||||||||
| Net cash flow for investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from debt | |||||||||||
| Share-based payments | ( | ||||||||||
| Borrowings under revolving credit facilities | |||||||||||
| Repayments under revolving credit facilities | ( | ( | |||||||||
| Repayments of notes payable | ( | ( | |||||||||
| Finance lease payments | ( | ||||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Acquisition of inventory through floor plan payables - non-trade | |||||||||||
| Repayment of floor plan payables - non-trade | ( | ( | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Net cash flow from financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net Change in Cash and Cash Equivalents | ( | ( | |||||||||
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) — Continued
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2024 | 2023 | |||||||||
| Supplemental Cash Flow Information | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid | |||||||||||
| Non-Cash Investing and Financing Activities | |||||||||||
| Rental equipment and property and equipment purchases in accounts payable | |||||||||||
| Rental equipment sales in accounts receivable | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
Custom Truck One Source, Inc.
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Earnout share forfeitures | — | ( | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | |||||||||||||||||||||||||||||||||||||||||||||||
| (in $000s, except share data) | Common | Treasury | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | ( | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Share-based payments | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
Custom Truck One Source, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: Business and Organization
Organization
Custom Truck One Source, Inc., a Delaware corporation, and its wholly owned subsidiaries (“we,” “our,” “us,” or “the Company”) are engaged in the business of providing a range of products and services to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance and customization services related to that equipment.
We are a specialty equipment provider to the electric utility transmission and distribution, telecommunications, rail, forestry, waste management and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent, produce, sell and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. We manage the business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”).
Basis of Presentation
Our accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). Our condensed consolidated financial statements include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with GAAP requires that these Unaudited Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the current interim period ended or comparable prior period.
The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and the Condensed Consolidated Balance Sheet at December 31, 2023 has been derived from the audited consolidated financial statements of Custom Truck One Source, Inc. at that date. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements, have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other periods. These interim statements should be read in conjunction with the Custom Truck One Source, Inc. audited consolidated financial statements included in the Custom Truck One Source, Inc. Annual Report on Form 10-K for the year ended December 31, 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
Income Taxes
In December 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2023-09, Income Taxes—Improvements to Income Tax Disclosures (Topic 740) (“ASU 2023-09”), which expands income tax disclosure requirements to include additional information related to the rate reconciliation of our effective tax rates to statutory rates as well as additional disaggregation of taxes paid. The amendments in the ASU also remove disclosures related to certain unrecognized tax benefits and deferred taxes. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. The amendments may be applied prospectively or retrospectively, and early adoption is permitted. We are currently assessing the impact of the requirements on our condensed consolidated financial statements and disclosures.
8
Segment Reporting
In November 2023, the FASB issued Accounting Standards Update No. 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280) (“ASU 2023-07”), which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with retrospective application required and early adoption permitted. We are currently assessing the impact of the requirements on our condensed consolidated financial statements and disclosures.
Note 2: Revenue
Revenue Disaggregation
Geographic Areas
The Company had total revenue in the following geographic areas:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Major Product Lines and Services
Equipment leasing and equipment sales are the core businesses of the Company, with leasing complemented by the sale of rental units from the rental fleet. The Company’s revenue by major product and service line for the three and nine months ended September 30, 2024 and 2023 are presented in the table below.
9
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| (in $000s) | Topic 842 | Topic 606 | Total | Topic 842 | Topic 606 | Total | |||||||||||||||||||||||||||||
| Rental: | |||||||||||||||||||||||||||||||||||
| Rental | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Shipping and handling | |||||||||||||||||||||||||||||||||||
| Total rental revenue | |||||||||||||||||||||||||||||||||||
| Sales and services: | |||||||||||||||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||||||||||||||
| Total sales and services | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| (in $000s) | Topic 842 | Topic 606 | Total | Topic 842 | Topic 606 | Total | |||||||||||||||||||||||||||||
| Rental: | |||||||||||||||||||||||||||||||||||
| Rental | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Shipping and handling | |||||||||||||||||||||||||||||||||||
| Total rental revenue | |||||||||||||||||||||||||||||||||||
| Sales and services: | |||||||||||||||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||||||||||||||
| Total sales and services | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. Equipment sales recognized pursuant to sales-type leases are recorded within equipment sales revenue. Charges to customers for damaged rental equipment are recorded within parts and services revenue.
Receivables, Contract Assets and Liabilities
As of September 30, 2024 and December 31, 2023, the Company had net receivables related to contracts with customers of $81.5 million and $112.1 million, respectively. As of September 30, 2024 and December 31, 2023, the Company had net receivables related to rental contracts and other of $94.3 million and $103.0 million, respectively.
The Company manages credit risk associated with its accounts receivable at the customer level. Because the same customers generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below address how credit risk and the Company's allowance for credit losses impact the Company's total revenues.
The Company’s allowance for credit losses reflects its estimate of the amount of receivables that it will be unable to collect. The estimated losses are based upon a review of outstanding receivables, the related aging, including specific accounts if deemed necessary, and on the Company’s historical collection experience. The estimated losses are calculated using the loss rate method based upon a review of outstanding receivables, related aging, and historical collection experience. The Company's estimates reflect changing circumstances, including changes in the economy or in the particular circumstances of individual customers, and, as a result, the Company may be required to increase or decrease its allowance.
Accounts receivable, net consisted of the following:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Accounts receivable | $ | $ | |||||||||
| Less: allowance for doubtful accounts | ( | ( | |||||||||
| Accounts receivable, net | $ | $ | |||||||||
For the nine months ended September 30, 2024 and 2023, the Company wrote-off $8.4 million and $9.6 million, respectively, of receivables, net of recoveries.
10
When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of both September 30, 2024 and December 31, 2023, the Company had approximately $2.8 million of deferred rental revenue. Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $17.3 million and $25.9 million in deposits as of September 30, 2024 and December 31, 2023, respectively. All of the $25.9 million deposit liability balance as of December 31, 2023, was recorded as revenue during the nine months ended September 30, 2024 due to performance obligations being satisfied. The Company’s remaining performance obligations on its equipment deposit liabilities have original expected durations of one year or less.
The Company does not have material contract assets, and as such, did not recognize any material impairments of any contract assets.
Note 3: Sales-Type Leases
Revenue from rental agreements qualifying as sales-type leases was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Equipment sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of equipment sales | |||||||||||||||||||||||
| Gross margin | $ | ( | $ | $ | $ | ||||||||||||||||||
As these transactions remained under rental contracts, $3.7 million and $7.1 million for the three months ended September 30, 2024 and 2023, respectively, and $14.6 million and $22.2 million for the nine months ended September 30, 2024 and 2023, respectively, were billed under the contracts as rentals. Interest income from financing receivables was $2.8 million and $4.5 million for the three months ended September 30, 2024 and 2023, respectively, and $8.8 million and $12.3 million for the nine months ended September 30, 2024 and 2023, respectively.
Note 4: Inventory
Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, aerial lifts, digger derricks, dump bodies, etc.) and the in-process costs incurred in the final assembly of those units. As part of the business model, the Company sells unassembled individual whole goods and whole goods with varying levels of customization direct to consumers or dealers. Whole goods inventory also includes new equipment purchased specifically for resale to customers. Inventory consisted of the following:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Whole goods | $ | $ | |||||||||
| Aftermarket parts and services inventory | |||||||||||
| Inventory | $ | $ | |||||||||
Note 5: Floor Plan Financing
Floor plan payables represent financing arrangements to facilitate the Company’s purchase of new and used trucks, cranes, and construction equipment inventory. All floor plan payables are collateralized by the inventory financed. These payables become due and payable upon the sale, transfer, or reclassification of each unit of inventory. Certain floor plan arrangements require the Company to satisfy various financial ratios consistent with those under the ABL Facility (as defined below). As of September 30, 2024, the Company was in compliance with these covenants.
The amounts owed under floor plan payables are summarized as follows:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Trade: | |||||||||||
| Daimler Truck Financial | $ | $ | |||||||||
| PACCAR Financial Services | |||||||||||
| Ford Motor Credit Company, LLC | |||||||||||
| Trade floor plan payables | $ | $ | |||||||||
| Non-trade: | |||||||||||
| PNC Equipment Finance, LLC | $ | $ | |||||||||
| Non-trade floor plan payables | $ | $ | |||||||||
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Interest on outstanding floor plan payable balances is due and payable monthly. Floor plan interest expense was $16.7 million and $45.0 million for the three and nine months ended September 30, 2024, respectively, and $10.1 million and $25.0 million for the same periods in 2023.
Trade Floor Plan Financing:
Daimler Truck Financial
The Company is party to the Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”), which bears interest at a rate of U.S. Prime Rate plus 0.80 % after an initial interest free period of up to 150 days. The total borrowing capacity under the Daimler Facility is $225.0 million, however, from time to time, Daimler extends credit to the Company in excess of this amount. The Daimler agreement is evergreen and is subject to termination by either party through written notice.
PACCAR
The Company has an Inventory Financing Agreement with PACCAR Financial Corp that provides the Company with a line of credit of $150.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of U.S. Prime Rate minus 0.71 %. The PACCAR agreement extends automatically each April and is subject to termination by either party through written notice. In October 2024, the revolving credit facility limit was increased to $175.0 million.
Ford Motor Credit Company, LLC
On April 2, 2024, the Company entered into the Master Loan and Security Agreement with Ford Motor Credit Company, LLC (the “FMCC Facility”), which allows the Company to enter into individual loan supplements which bear interest based on the bank prime loan rate as reported by the Federal Reserve Board for the Friday preceding the last Monday of a given month. The total borrowing capacity under the FMCC Facility as of September 30, 2024 was $42.0 million. The FMCC agreement is evergreen and is subject to termination by either party through written notice.
References to the U.S. Prime Rate in the foregoing agreements represent the rate as published in The Wall Street Journal.
Non-Trade Floor Plan Financing:
PNC Equipment Finance, LLC
The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement, as of September 30, 2024, provides the Company with a $500.0 million revolving credit facility, which matures on August 25, 2025 and bears interest at a three-month term secured overnight financing rate (“SOFR”) plus 3.00 %.
Note 6: Rental Equipment
Rental equipment, net consisted of the following:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Rental equipment | $ | $ | |||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Rental equipment, net | $ | $ | |||||||||
Note 7: Goodwill
We recognize goodwill when the purchase price of an acquired business exceeds the fair value of net assets acquired. Goodwill is not amortized for financial reporting purposes. Goodwill is impaired when its carrying value exceeds its implied fair value. We perform our goodwill impairment analysis annually on October 1 or more frequently if an event or circumstance (such as a significant adverse change in the business climate, operating performance metrics, or legal factors) indicates that an impairment may have occurred. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, then there is an indication impairment may exist.
During the quarter ended June 30, 2024, we identified factors indicating goodwill may be impaired related to two of our reporting units, ERS and APS. These factors were decreased utilization levels driven by continuing transmission project declines and delays. To derive the fair value of each reporting unit, we utilized the income approach, specifically the discounted cash flow method, as well as the market approach, which included analysis of comparable publicly-traded companies, to determine the fair value of the reporting
12
units. The income method approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. The market approach analyzed how the market values of comparable publicly-traded companies’ operating metrics, such as sales and earnings, compare to each of the respective metrics of the reporting units. These methodologies are consistent with how we estimate the fair value of reporting units during the annual goodwill impairment test. Inputs used to calculate fair value of our reporting units are considered “Level 3” inputs of the fair value hierarchy and include the following:
•Our projections were based on management's assessment of macroeconomic variables, industry trends and market opportunities, as well as our strategic objectives and future growth plans. Revenue growth rates assumed from approximately 5 % to 7 % for 2025 and from approximately 3 % to 8 % for 2026 and beyond.
•The discount rate used to measure the present value of the projected future cash flows is set using a weighted-average cost of capital method that considers market and industry data, as well as our specific risk factors that are likely to be considered by a market participant. The weighted-average cost of capital is our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The discount rates applied to the reporting units ranged from 10.0 % to 10.5 %.
Note 8: Long-Term Debt
Debt obligations and associated interest rates consisted of the following:
| (in $000s) | September 30, 2024 | December 31, 2023 | September 30, 2024 | December 31, 2023 | |||||||||||||||||||
| ABL Facility | $ | $ | |||||||||||||||||||||
| 2029 Secured Notes | |||||||||||||||||||||||
| 2023 Credit Facility | |||||||||||||||||||||||
| Other notes payable | |||||||||||||||||||||||
| Total debt outstanding | |||||||||||||||||||||||
| Deferred financing fees | ( | ( | |||||||||||||||||||||
| Total debt net of deferred financing fees | |||||||||||||||||||||||
| Less: current maturities | ( | ( | |||||||||||||||||||||
| Long-term debt | $ | $ | |||||||||||||||||||||
As of September 30, 2024, borrowing availability under the ABL Facility was $319.0 million, and outstanding standby letters of credit were $3.1 million.
ABL Facility
On August 9, 2024, the Company and certain of its direct and indirect subsidiaries entered into an amendment to its asset-based revolving credit agreement (the “ABL Amendment,” and the credit agreement as amended, supplemented or modified, including by the ABL Amendment, the “ABL Credit Agreement”), to increase the borrowing capacity under its first lien senior secured asset-based revolving credit facility (the “ABL Facility”) from $750.0 million to $950.0 million, and extend the maturity date of the agreement from April 1, 2026 to August 9, 2029, or, if earlier, the date that is 91 days prior to the maturity date of the Company’s existing senior notes or any debt that refinances such existing notes. Additionally, the ABL Amendment changes the rate provisions for Canadian dollar denominated loans from the Canadian dollar offered rate to the term Canadian Overnight Repo Rate Average (the “CORRA” rate), and adds a leverage based step-down to the pricing grid otherwise based on Average Availability (as defined in the ABL Credit Agreement).
Borrowings under the ABL Facility bear interest at a floating rate, which, at the Company’s election, could be (a) in the case of U.S. dollar denominated loans, either (i) SOFR plus an applicable margin or (ii) the base rate plus an applicable margin; or (b) in the case of Canadian dollar denominated loans, the CORRA rate plus an applicable margin. The applicable margin varies based on Average Availability (as defined in the ABL Credit Agreement) from (a) with respect to base rate loans, 0.50 % to 1.00 % and (b) with respect to SOFR loans and CORRA rate loans, 1.50 2.00
13
2023 Credit Facility
On January 13, 2023, the Company entered into a new credit agreement allowing for borrowings of up to $18.0 million (the “2023 Credit Facility”). Proceeds from the credit agreement were used to finance a portion of the Company’s acquisition of real property from a related party in December 2022. A portion of the loan proceeds has been used to finance improvements to the property. In connection with entering into the agreement, the Company received net proceeds of $13.7 million. During the first quarter of 2024, the Company drew down an additional $4.2 million, as certain required construction milestones were met. Borrowings bear interest at a fixed rate of 5.75 % per annum and are required to be repaid monthly in an amount of approximately $0.1 million with a balloon payment due on the maturity date of January 13, 2028. Borrowings are secured by the real property and improvements.
Note 9: Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of shares of common stock outstanding. Diluted earnings (loss) per share includes the effects of potentially dilutive shares of common stock, if dilutive. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, or share-based compensation. Our potentially dilutive shares aggregated 9.8 million and 24.8 million for the three and nine months ended September 30, 2024, respectively, and 29.1 million and 29.0 million for the same periods in 2023, and were not included in the computation of diluted earnings (loss) per share because the impact would have been anti-dilutive.
The following tables set forth the computation of basic and dilutive earnings per share:
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||
| (in $000s, except per share data) | Net Income (loss) | Weighted Average Shares | Per Share Amount | Net Income | Weighted Average Shares | Per Share Amount | ||||||||||||||||||||||||||||||||
| Basic earnings (loss) per share | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Dilutive common share equivalents | — | — | ||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||||
| (in $000s, except per share data) | Net Income (loss) | Weighted Average Shares | Per Share Amount | Net Income | Weighted Average Shares | Per Share Amount | ||||||||||||||||||||||||||||||||
| Basic earnings (loss) per share | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
| Dilutive common share equivalents | — | — | ||||||||||||||||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||
Note 10: Equity
Preferred Stock
As of both September 30, 2024 and December 31, 2023, we were authorized to issue 10,000,000 0.0001 no
Common Stock
As of both September 30, 2024 and December 31, 2023, we were authorized to issue 500,000,000 0.0001
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On August 2, 2022, the Company’s Board of Directors authorized a stock repurchase program, allowing for the repurchase of up to $30 million of the Company’s shares of common stock, which authorization was further increased by $25 million of shares on September 14, 2023, and increased again by $25 million of shares on March 11, 2024, upon exhaustion of prior authorization. Under the repurchase program, repurchases can be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions, or otherwise, all in accordance with the rules of the Securities and Exchange Commission and other applicable legal requirements. The specific timing, price and size of purchases will depend on prevailing stock prices, general economic and market conditions, and other considerations. The repurchase program does not obligate the Company to acquire any particular amount of its common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.
During the three and nine months ended September 30, 2024, the Company repurchased approximately 1.3 million and 5.9 million shares of its common stock, respectively, which are held in treasury, for a total cost of $5.5 million and $28.6 million, including commission fees. During the three and nine months ended September 30, 2023, the Company repurchased approximately 2.5 million and 3.1 million shares of common stock, respectively, for a total cost of $15.8 million and $20.1 million. At September 30, 2024, $1.9 million was available under the stock repurchase program.
Contingently Issuable and Earnout Shares
Contingently Issuable Shares
NESCO Holdings, LP is a Delaware limited partnership holding shares of our common stock. NESCO Holdings, LP is owned and controlled by Energy Capital Partners, and, as of September 30, 2024, had the right to receive 1,651,798 shares of common stock if during the seven-year period ending July 31, 2026, the trading price of common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.
Earnout Shares
Pursuant to the Stockholders’ Agreement dated July 31, 2019 (as amended and restated from time to time, the “Stockholders’ Agreement”), certain stockholders agreed to restrictions on approximately 3,100,000 of their shares of the Company’s Common Stock (the “Earnout Shares”). The Earnout Shares shall be automatically forfeited by the holders thereof to the Company for no consideration with respect to (i) 2.8 million shares unless the trading price of the Common Stock equals or exceeds certain price targets by July 31 2024 (the “Minimum and Second Target Earnout Shares”) and (ii) 0.3 million shares unless the trading price of the Common Stock equals or exceeds $19.00 per share for any period of 20 trading days out of 30 consecutive trading days to and including July 31, 2026 (the “Maximum Target Earnout Shares”). On July 31, 2024, the price targets for the Minimum and Second Target Earnout Shares were not met, and such shares were forfeited by the respective holders pursuant to the Stockholders’ Agreement.
Note 11: Fair Value Measurements
The FASB accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs.
The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:
| Carrying Value | Fair Value | ||||||||||||||||||||||
| (in $000s) | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| September 30, 2024 | |||||||||||||||||||||||
| ABL Facility | $ | $ | $ | $ | |||||||||||||||||||
| 2029 Secured Notes | |||||||||||||||||||||||
| 2023 Credit Facility | |||||||||||||||||||||||
| Other notes payable | |||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| ABL Facility | $ | $ | $ | $ | |||||||||||||||||||
| 2029 Secured Notes | |||||||||||||||||||||||
| 2023 Credit Facility | |||||||||||||||||||||||
| Other notes payable | |||||||||||||||||||||||
15
The carrying amounts of the ABL Facility, 2023 Credit Facility and other notes payable approximated fair value as of September 30, 2024 and December 31, 2023 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the 2029 Secured Notes is calculated using Level 2 inputs, based on bid prices obtained from brokers.
Note 12: Income Taxes
For interim periods, we estimate our annual effective tax rate, exclusive of discrete items, which is derived primarily by our estimate of our valuation allowance as of the end of our fiscal year. The Company’s effective tax rate for the nine months ended September 30, 2024 and 2023 differs from the U.S. federal statutory tax rate due to the recording of valuation allowances. We recorded an income tax expense of $0.5 million for the nine months ended September 30, 2024 resulting in an effective tax rate of (0.9 )% compared to an income tax expense of $2.7 million for the comparable prior year period, at an effective tax rate of 7.2 %. The decrease in the effective tax rate for the nine months ended September 30, 2024 compared to same period in 2023, was primarily due to state and local income tax updates enacted during the current period.
The Organization for Economic Cooperation and Development (“OECD”) has issued “Pillar Two” model rules introducing a new global minimum tax of 15% effective on January 1, 2024. While the US has not adopted the Pillar Two rules, effective June 20, 2024, Canada has enacted legislation formally adopting Pillar Two. As currently designed, Pillar Two will ultimately apply to our worldwide operations. Considering we do not have material operations in jurisdictions with tax rates lower than the Pillar Two minimum, these rules are not expected to materially increase our global tax liability. We will continue to monitor US and global legislative activities related to Pillar Two.
Note 13: Commitments and Contingencies
We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Legal Matters
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. At this time, no claims of these types, certain of which are covered by insurance policies, have had a material effect on the Company. Certain jurisdictions in which the Company operates do not allow insurance recoveries related to punitive damages. For matters pertaining to the pre-acquisition activities of Custom Truck One Source, L.P. (“Custom Truck LP”), the sellers of Custom Truck LP have agreed to indemnify the Company for losses arising out of the breach of pre-closing covenants in the purchase agreement and certain indemnified tax matters discussed below, with recourse limited to $10.0 million and $5.0 million escrow accounts, respectively.
From time to time, the Company is audited by state and local taxing authorities. These audits typically focus on the Company’s withholding of state-specific sales tax and rental-related taxes.
Custom Truck LP’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the IRS. The IRS issued an assessment on October 28, 2020 in an aggregate amount of $2.4 million for the 2015 periods, alleging that certain types of sold equipment are not eligible for the Mobile Machinery Exemption set forth in the Internal Revenue Code (the “Code”). An appeal was filed on January 28, 2021. Based on management’s understanding of the facts and circumstances, including the relevant provisions of the Code, and historical precedent, including previous successful appeals of similar assessments in prior years, management does not believe the likelihood of a loss resulting from the IRS assessment to be probable at this time.
While it is not possible to predict the outcome of the foregoing matters with certainty, it is the opinion of management that the final outcome of these matters will not have a material effect on the Company’s consolidated financial condition, results of operations and cash flows.
Purchase Commitments
16
Note 14: Related Parties
The Company has transactions with related parties as summarized below.
Rentals and Sales — The Company rents and sells equipment and provides services to R&M Equipment Rental, a business partially owned by members of the Company’s management. The Company also rents equipment and purchases inventory from R&M Equipment Rental.
Other — The Company has purchased aircraft charter services from entities owned by members of the Company’s management and their immediate families. Charter services payments related to these transactions are immaterial. Air travel expenses are recorded in selling, general, and administrative expenses.
Management Fees — The Company is obligated under a Corporate Advisory Services Agreement with Platinum, under which management fees are payable to Platinum quarterly. The management fees are recorded in transaction expenses and other in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).
A summary of the transactions with the foregoing related parties included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Total revenues from transactions with related parties | $ | $ | $ | $ | |||||||||||||||||||
| Expenses incurred from transactions with related parties included in cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Expenses incurred from transactions with related parties included in operating expenses | $ | $ | $ | $ | |||||||||||||||||||
Amounts receivable from/payable to related parties included in the Condensed Consolidated Balance Sheets are as follows:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Accounts receivable from related parties | $ | $ | |||||||||
| Accounts payable to related parties | $ | $ | |||||||||
Note 15: Segments
Our operations are primarily organized and managed by operating segment. Operating segment performance and resource allocations are primarily based on gross profit. Intersegment sales and any related profits are eliminated in consolidation. We manage the business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”).
17
The Company’s segment results are presented in the tables below:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | $ | $ | $ | |||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | |||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | $ | $ | ||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | |||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
18
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | $ | $ | $ | |||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | |||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2023 | |||||||||||||||||||||||
| (in $000s) | ERS | TES | APS | Total | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Rental | $ | $ | $ | $ | |||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Parts and services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Rentals/parts and services | |||||||||||||||||||||||
| Equipment sales | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Total cost of revenue | |||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
Total assets by operating segment are not disclosed herein because asset by operating segment data is not reviewed by the chief operating decision-maker (“CODM”) to assess performance and allocate resources.
Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of consolidated gross profit to consolidated income (loss) before income taxes:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Amortization | |||||||||||||||||||||||
| Non-rental depreciation | |||||||||||||||||||||||
| Transaction expenses and other | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Financing and other expense (income) | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The following table presents total assets by country:
| (in $000s) | September 30, 2024 | December 31, 2023 | |||||||||
| Assets: | |||||||||||
| United States | $ | $ | |||||||||
| Canada | |||||||||||
| Total Assets | $ | $ | |||||||||
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Any statements made in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and should be evaluated as such. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “project,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this report, you should understand that these statements are not guarantees of performance or results and are subject to and involve risks, uncertainties and assumptions. You should not place undue reliance on these forward-looking statements or projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections:
•increases in labor costs, our inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner, and our inability to manage our rental equipment in an effective manner;
•competition in the equipment dealership and rental industries;
•our sales order backlog may not be indicative of the level of our future revenues;
•increases in unionization rate in our workforce;
•our inability to recruit and retain the experienced personnel, including skilled technicians, we need to compete in our industries;
•our inability to attract and retain highly skilled personnel and our inability to retain or plan for succession of our senior management;
•material disruptions to our operation and manufacturing locations as a result of public health concerns, equipment failures, natural disasters, work stoppages, power outages or other reasons;
•potential impairment charges;
•any further increase in the cost of new equipment that we purchase for use in our rental fleet or for sale as inventory;
•aging or obsolescence of our existing equipment, and the fluctuations of market value thereof;
•disruptions in our supply chain;
•our business may be impacted by government spending;
•we may experience losses in excess of our recorded reserves for receivables;
•uncertainty relating to macroeconomic conditions, unfavorable conditions in the capital and credit markets and our inability to obtain additional capital as required;
•increases in price of fuel or freight;
•regulatory technological advancement, or other changes in our core end-markets may affect our customers’ spending;
•difficulty in integrating acquired businesses and fully realizing the anticipated benefits and cost savings of the acquired businesses, as well as additional transaction and transition costs that we will continue to incur following acquisitions;
•the interest of our majority stockholder, which may not be consistent with the other stockholders;
•our significant indebtedness, which may adversely affect our financial position, limit our available cash and our access to additional capital, prevent us from growing our business and increase our risk of default;
•our inability to generate cash, which could lead to a default;
•significant operating and financial restrictions imposed by our debt agreements;
•changes in interest rates, which could increase our debt service obligations on the variable rate indebtedness and decrease our net income and cash flows;
•disruptions or security compromises affecting our information technology systems or those of our critical services providers could adversely affect our operating results by subjecting us to liability, and limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, or implement strategic initiatives;
•we are subject to complex laws and regulations, including environmental and safety regulations that can adversely affect cost, manner or feasibility of doing business;
•material weakness in our internal control over financial reporting which, if not remediated, could result in material misstatements in our financial statements;
•we are subject to a series of risks related to climate change; and
•increased attention to, and evolving expectations for, sustainability and environmental, social and governance initiatives.
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These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. See “Risk Factors” in Part I, Item 1A of the Annual Report for the year ended December 31, 2023 and in Part II, Item 1A of this report, for additional risks.
Custom Truck One Source, Inc., a Delaware corporation, and its wholly owned subsidiaries (“we,” “our,” “us,” or “the Company”) are engaged in the business of providing a range of products and services to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance and customization services related to that equipment.
We are a specialty equipment provider to the electric utility transmission and distribution, telecommunications, rail, forestry, waste management and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent, produce, sell and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. We manage the business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”).
Financial and Performance Measures
Financial Measures
Revenue — As a full-service equipment provider, we generate revenue through renting, selling, assembling, upfitting, and servicing new and used heavy-duty trucks and cranes, as well as the sale of related parts. We also sell and rent specialized tools on an individual basis and in kits. Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. The Company records changes in estimated collectability directly against rental revenue. Equipment sales revenue reflects the value of vocational trucks and other equipment sold to customers. Parts and service revenue is derived from maintenance and repair services, light upfit services, and parts, tools and accessories sold directly to customers. Rental revenue excludes active rental contracts which qualify to be accounted for as sales-type leases.
Cost of rental revenue — Cost of rental revenue reflects repairs and maintenance costs of rental equipment, parts costs, labor and other overheads related to maintaining the rental fleet, and freight associated with the shipping of rental equipment.
Depreciation of rental equipment — Depreciation of rental equipment is comprised of depreciation expense on the rental fleet. We allocate the cost of rental equipment generally over the rentable life of the equipment. The depreciation allocation is based upon estimated lives ranging from five to seven years. The cost of equipment is depreciated to an estimated residual value using the straight-line method.
Cost of equipment sales — Cost of equipment sales reflects production and inventory costs associated with new units sold, parts costs, labor and other overheads related to production, and freight associated with the shipping and receiving of equipment and parts. Cost of equipment sales also includes the net book value of rental units sold, including active rental contracts which qualify to be accounted for as sales-type leases.
Selling, general and administrative expenses — Selling, general and administrative expenses include sales compensation, fleet licensing fees and corporate expenses, including salaries, stock-based compensation expense, insurance, advertising costs, professional services, fees earned on customer arranged financing, gains or losses resulting from insurance settlements, and information technology costs.
Amortization and non-rental depreciation — Amortization expense relates to intangible assets such as customer lists, trade names, etc. Non-rental depreciation expense reflects the depreciation of property and equipment that is not part of the rental fleet.
Transaction expenses and other — Transaction expenses and other include expenses directly related to the acquisition of businesses. These expenses generally are comprised of travel and out-of-pocket expenses and legal, accounting and valuation or appraisal fees incurred in connection with pre- and post-closure activities. We also include costs and expenses associated with post-acquisition integration activities related to the acquired businesses.
Financing and other expense (income) — Financing and other expense (income) reflects the financing expense (income) associated with lease agreements qualifying to be accounted for as a sales-type lease, foreign currency gains and losses related to our Canadian
operations, as well as other miscellaneous gains or losses from non-operating activities. Also included in financing and other expense (income) are the unrealized remeasurement gains and losses related to derivative financial instruments.
Interest expense — Interest expense consists of contractual interest expense on outstanding debt obligations, floorplan financing facilities, amortization of deferred financing costs and other related financing expenses.
Income Tax Expense (Benefit) — We have net operating loss carryforward and disallowed interest deduction carryforward assets, which are generally available to be used to offset taxable income generated in future years. Due to limitations on the use of these carryforwards under U.S. federal and state income tax regulations, we record valuation allowances to reduce the carryforward assets to amounts that we estimate will be realized. Accordingly, income tax expense or benefit generally is comprised of changes to these valuation allowance estimates and does not reflect taxes on current period income (or tax benefit on current period losses). For these reasons, our effective tax rate differs from the federal statutory tax rate.
Operating Metrics
We consider the following key operational metrics, which are consistent with those defined by the American Rental Association, when evaluating our performance and making day-to-day operating decisions:
Ending OEC — Ending original equipment cost (“OEC”) is the original equipment cost of units at the end of the measurement period. OEC represents the original equipment cost, and excludes the effect of adjustments to rental equipment fleet acquired in business combinations. OEC is the basis for calculating certain of the measures set forth below. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and we measure a rate of return from our rentals and sales using OEC. OEC is a widely used industry metric to compare fleet dollar value independent of depreciation.
Average OEC on rent — Average OEC on rent is calculated as the weighted-average OEC on rent during the stated period.
Fleet utilization — Fleet utilization is defined as the total number of days the rental equipment was rented during a specified period of time divided by the total number of days available during the same period and weighted based on OEC. Utilization is a measure of fleet efficiency expressed as a percentage of time the fleet is on rent and is considered to be an important indicator of the revenue generating capacity of the fleet.
OEC on rent yield — OEC on rent yield (“ORY”) is a measure of return realized by our rental fleet during a period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the average OEC on rent for the same period. For periods less than 12 months, ORY is adjusted to an annualized basis.
Sales order backlog — Sales order backlog consists of purchase orders received for customized and stock equipment. Sales order backlog should not be considered an accurate measure of future net sales.
Operating Segments
We operate in three reportable operating segments: Equipment Rental Solutions, Truck and Equipment Sales and Aftermarket Parts and Services.
Equipment Rental Solutions (“ERS”) Segment — We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. As of September 30, 2024, this equipment (the “rental fleet”) is comprised of approximately 10,200 units. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options (“RPOs”) on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet of the foregoing products.
Truck and Equipment Sales (“TES”) Segment — We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated sales force of industry and product managers, who are focused on driving national and local sales. We also
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opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In the majority of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.
Aftermarket Parts and Services (“APS”) Segment — The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to our customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.
Results of Operations
Three and nine months ended September 30, 2024, compared to the same periods in 2023
Consolidated Results of Operations
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | % of revenue | September 30, 2023 | % of revenue | $ Change | % change | June 30, 2024 | % of revenue | |||||||||||||||||||||||||||
| Rental revenue | $ | 108,324 | 24.2% | $ | 118,209 | 27.2% | $ | (9,885) | (8.4)% | $ | 102,997 | 24.3% | |||||||||||||||||||||||
| Equipment sales | 305,476 | 68.3% | 283,079 | 65.2% | 22,397 | 7.9% | 285,633 | 67.5% | |||||||||||||||||||||||||||
| Parts sales and services | 33,420 | 7.5% | 33,065 | 7.6% | 355 | 1.1% | 34,383 | 8.1% | |||||||||||||||||||||||||||
| Total revenue | 447,220 | 100.0% | 434,353 | 100.0% | 12,867 | 3.0% | 423,013 | 100.0% | |||||||||||||||||||||||||||
| Cost of revenue, excluding rental equipment depreciation | 309,435 | 69.2% | 284,728 | 65.6% | 24,707 | 8.7% | 289,161 | 68.4% | |||||||||||||||||||||||||||
| Depreciation of rental equipment | 45,956 | 10.3% | 42,469 | 9.8% | 3,487 | 8.2% | 44,585 | 10.5% | |||||||||||||||||||||||||||
| Gross profit | 91,829 | 20.5% | 107,156 | 24.7% | (15,327) | (14.3)% | 89,267 | 21.1% | |||||||||||||||||||||||||||
| Operating expenses | 68,792 | 69,145 | (353) | (0.5)% | 71,593 | ||||||||||||||||||||||||||||||
| Operating income | 23,037 | 38,011 | (14,974) | (39.4)% | 17,674 | ||||||||||||||||||||||||||||||
| Total other expense | 41,057 | 28,399 | 12,658 | 44.6% | 39,082 | ||||||||||||||||||||||||||||||
| Income (loss) before income taxes | (18,020) | 9,612 | (27,632) | (287.5)% | (21,408) | ||||||||||||||||||||||||||||||
| Income tax expense (benefit) | (604) | 432 | (1,036) | (239.8)% | 3,070 | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | (17,416) | $ | 9,180 | $ | (26,596) | (289.7)% | $ | (24,478) | ||||||||||||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| (in $000s) | 2024 | % of revenue | 2023 | % of revenue | $ Change | % of change | ||||||||||||||||||||
| Rental revenue | $ | 317,492 | 24.8 | % | $ | 358,666 | 26.7% | $ | (41,174) | (11.5) | % | |||||||||||||||
| Equipment sales | 863,711 | 67.4 | % | 886,486 | 66.0% | (22,775) | (2.6) | % | ||||||||||||||||||
| Parts sales and services | 100,337 | 7.8 | % | 98,194 | 7.3% | 2,143 | 2.2 | % | ||||||||||||||||||
| Total revenue | 1,281,540 | 100.0 | % | 1,343,346 | 100.0% | (61,806) | (4.6) | % | ||||||||||||||||||
| Cost of revenue, excluding rental equipment depreciation | 875,450 | 68.3 | % | 889,495 | 66.2% | (14,045) | (1.6) | % | ||||||||||||||||||
| Depreciation of rental equipment | 134,285 | 10.5 | % | 126,415 | 9.4% | 7,870 | 6.2 | % | ||||||||||||||||||
| Gross profit | 271,805 | 21.2 | % | 327,436 | 24.4% | (55,631) | (17.0) | % | ||||||||||||||||||
| Operating expenses | 212,724 | 209,962 | 2,762 | 1.3 | % | |||||||||||||||||||||
| Operating income | 59,081 | 117,474 | (58,393) | (49.7) | % | |||||||||||||||||||||
| Total other expense | 114,792 | 80,201 | 34,591 | 43.1 | % | |||||||||||||||||||||
| Income (loss) before income taxes | (55,711) | 37,273 | (92,984) | (249.5) | % | |||||||||||||||||||||
| Income tax expense | 518 | 2,683 | (2,165) | (80.7) | % | |||||||||||||||||||||
| Net income (loss) | $ | (56,229) | $ | 34,590 | $ | (90,819) | (262.6) | % | ||||||||||||||||||
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Total Revenue - The increase in total revenue for the three months ended September 30, 2024, compared to the same period in 2023 is a result of higher volumes of new equipment sales due to the robust demand for our products in the forestry and utility end-markets, partially offset by decreased rental revenue due to lower utilization and a decline in average OEC on rent.
The decrease in total revenue for the nine months ended September 30, 2024, compared to the same period in 2023 was the result of lower rental revenue as described above, as well as lower volume of used equipment sales. The Company continues to be impacted by factors affecting its customers, including their supply chain constraints, environmental, regulatory and customer financing factors that have impacted the timing of transmission job starts. These delays contributed to both lower rental revenue and rental asset sales during the year.
Cost of Revenue, Excluding Rental Equipment Depreciation - The increase in cost of revenue, excluding rental equipment depreciation for the three months ended September 30, 2024, compared to the same period in 2023, was driven primarily by the increase in equipment sales volume during the quarter.
The decrease in cost of revenue, excluding rental equipment depreciation for the nine months ended September 30, 2024, compared to the same period in 2023, was driven primarily by the decrease in equipment sales volume during the nine months ended September 30, 2024.
Depreciation of Rental Equipment - Depreciation of our rental equipment increased in the three and nine months ended September 30, 2024, compared to the same periods in 2023, as a result of higher rental equipment levels.
Operating Expenses - Operating expenses remained flat for the three months ended September 30, 2024, compared to the same period in 2023. Operating expenses increased in the nine months ended September 30, 2024, compared to the same period in 2023, primarily as a result of an increase in general and administrative expenses due to increased headcount and wages, increased insurance due to higher inventory levels and rental assets, and additional expense associated with various information technology projects.
Total Other Expense - Other expense increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023, primarily due to the increase in interest expense from variable rate debt and floor plan financing liabilities.
Income Tax Expense (Benefit) - Income tax expense (benefit) for the three and nine months ended September 30, 2024 was $(0.6) million and $0.5 million, respectively, resulting in an effective tax rate of 3.4% and (0.9)%. Income tax expense for the three and nine months ended September 30, 2023 was $0.4 million and $2.7 million, respectively, at an effective tax rate of 4.5% and 7.2%. The changes in the effective tax rates were primarily due to state and local income tax updates enacted during the current periods.
Net Income (loss) - The change in net income to a net loss for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was primarily the result of decreased gross profit and higher interest expense on variable-rate debt and variable-rate floor plan liabilities.
Operating Metrics
We principally evaluate operational performance based on the following metrics: ending OEC, average OEC on rent, fleet utilization, and OEC on rent yield. We also report sales order backlog related to our customers’ orders for new vocational heavy duty trucks as an indicator of the demand environment for our products. The table below presents these key measures.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | Change | % Change | June 30, 2024 | % Change | |||||||||||||||||||||||||||||
| Ending OEC | $ | 1,493,799 | $ | 1,465,989 | $ | 27,810 | 1.9 | % | $ | 1,457,955 | 2.5 | % | |||||||||||||||||||||||
| Average OEC on rent | $ | 1,082,679 | $ | 1,155,598 | $ | (72,919) | (6.3) | % | $ | 1,044,683 | 3.6 | % | |||||||||||||||||||||||
| Fleet utilization | 73.2 | % | 78.9 | % | (5.7) | % | (7.2) | % | 71.7 | % | 2.1 | % | |||||||||||||||||||||||
| OEC on rent yield | 38.4 | % | 40.8 | % | (2.4) | % | (5.9) | % | 40.0 | % | (4.0) | % | |||||||||||||||||||||||
| Sales order backlog | $ | 395,603 | $ | 779,295 | $ | (383,692) | (49.2) | % | $ | 478,244 | (17.3) | % | |||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | Change | % Change | |||||||||||||||||||
| Ending OEC | $ | 1,493,799 | $ | 1,465,989 | $ | 27,810 | 1.9 | % | |||||||||||||||
| Average OEC on rent | $ | 1,064,188 | $ | 1,191,293 | $ | (127,105) | (10.7) | % | |||||||||||||||
| Fleet utilization | 72.7 | % | 81.3 | % | (8.6) | % | (10.6) | % | |||||||||||||||
| OEC on rent yield | 39.2 | % | 39.8 | % | (0.6) | % | (1.5) | % | |||||||||||||||
| Sales order backlog | $ | 395,603 | $ | 779,295 | $ | (383,692) | (49.2) | % | |||||||||||||||
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Operating Results by Segment
Equipment Rental Solutions (ERS) Segment
| Three Months Ended | ||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | $ Change | % Change | June 30, 2024 | % Change | ||||||||||||||||||||||||||
| Rental revenue | $ | 105,317 | $ | 114,929 | $ | (9,612) | (8.4) | % | $ | 100,699 | 4.6 | % | ||||||||||||||||||||
| Equipment sales | 45,574 | 52,175 | (6,601) | (12.7) | % | 37,712 | 20.8 | % | ||||||||||||||||||||||||
| Total revenue | 150,891 | 167,104 | (16,213) | (9.7) | % | 138,411 | 9.0 | % | ||||||||||||||||||||||||
| Cost of rental revenue | 29,415 | 29,613 | (198) | (0.7) | % | 29,281 | 0.5 | % | ||||||||||||||||||||||||
| Cost of equipment sales | 33,975 | 37,828 | (3,853) | (10.2) | % | 25,792 | 31.7 | % | ||||||||||||||||||||||||
| Depreciation of rental equipment | 44,964 | 41,652 | 3,312 | 8.0 | % | 43,581 | 3.2 | % | ||||||||||||||||||||||||
| Total cost of revenue | 108,354 | 109,093 | (739) | (0.7) | % | 98,654 | 9.8 | % | ||||||||||||||||||||||||
| Gross profit | $ | 42,537 | $ | 58,011 | $ | (15,474) | (26.7) | % | $ | 39,757 | 7.0 | % | ||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Rental revenue | $ | 309,304 | $ | 346,545 | $ | (37,241) | (10.7) | % | |||||||||||||||
| Equipment sales | 116,026 | 195,005 | (78,979) | (40.5) | % | ||||||||||||||||||
| Total revenue | 425,330 | 541,550 | (116,220) | (21.5) | % | ||||||||||||||||||
| Cost of rental revenue | 88,496 | 90,014 | (1,518) | (1.7) | % | ||||||||||||||||||
| Cost of equipment sales | 83,865 | 148,711 | (64,846) | (43.6) | % | ||||||||||||||||||
| Depreciation of rental equipment | 131,242 | 123,969 | 7,273 | 5.9 | % | ||||||||||||||||||
| Total cost of revenue | 303,603 | 362,694 | (59,091) | (16.3) | % | ||||||||||||||||||
| Gross profit | $ | 121,727 | $ | 178,856 | $ | (57,129) | (31.9) | % | |||||||||||||||
Total Revenue - The decrease in total revenue for the ERS segment for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was driven by a decrease in equipment sales due to fewer rental asset sales of used equipment, as well as a decrease in rental revenue as a result of a reduction in fleet utilization of 5.7% and 8.6% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. Fleet utilization decreased due to a decline in demand in the utility market as a result of supply chain constraints, environmental, regulatory, and customer financing factors affecting the timing of transmission and distribution job starts. For the three and nine months ended September 30, 2024, average OEC on rent decreased 6.3% and 10.7%, respectively, compared to the same periods in 2023, primarily as a result of the lower utilization in the quarter.
Cost of Revenue - The decrease in total cost of revenue for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was largely due to the decrease in rental equipment sales volume.
Depreciation - Depreciation of our rental equipment increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023, as a result of higher rental equipment levels.
Gross Profit - The decrease in gross profit for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was due to the decrease in rental revenues and equipment sales for the period.
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Truck and Equipment Sales (TES) Segment
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | $ Change | % Change | June 30, 2024 | % Change | |||||||||||||||||||||||||||||
| Equipment sales | $ | 259,902 | $ | 230,904 | $ | 28,998 | 12.6 | % | $ | 247,921 | 4.8 | % | |||||||||||||||||||||||
| Cost of equipment sales | 218,012 | 191,084 | 26,928 | 14.1 | % | 205,526 | 6.1 | % | |||||||||||||||||||||||||||
| Gross profit | $ | 41,890 | $ | 39,820 | $ | 2,070 | 5.2 | % | $ | 42,395 | (1.2) | % | |||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Equipment sales | $ | 747,685 | $ | 691,481 | $ | 56,204 | 8.1 | % | |||||||||||||||
| Cost of equipment sales | 620,240 | 571,592 | 48,648 | 8.5 | % | ||||||||||||||||||
| Gross profit | $ | 127,445 | $ | 119,889 | $ | 7,556 | 6.3 | % | |||||||||||||||
Equipment Sales - Equipment sales increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023. The growth in sales was primarily a result of exiting 2023 with healthy inventory levels (due to the improved supply chain), as well as continued robust demand for our products in the forestry and utility end-markets.
Cost of Equipment Sales - Cost of equipment sales increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023, due to the increase in equipment sales volume.
Gross Profit - The increase in gross profit for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was due to higher volume of equipment sales.
Aftermarket Parts and Services (APS) Segment
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | $ Change | % Change | June 30, 2024 | % Change | |||||||||||||||||||||||||||||
| Rental revenue | $ | 3,007 | $ | 3,280 | $ | (273) | (8.3) | % | $ | 2,298 | 30.9 | % | |||||||||||||||||||||||
| Parts and services revenue | 33,420 | 33,065 | 355 | 1.1 | % | 34,383 | (2.8) | % | |||||||||||||||||||||||||||
| Total revenue | 36,427 | 36,345 | 82 | 0.2 | % | 36,681 | (0.7) | % | |||||||||||||||||||||||||||
| Cost of revenue | 28,033 | 26,203 | 1,830 | 7.0 | % | 28,562 | (1.9) | % | |||||||||||||||||||||||||||
| Depreciation of rental equipment | 992 | 817 | 175 | 21.4 | % | 1,004 | (1.2) | % | |||||||||||||||||||||||||||
| Total cost of revenue | 29,025 | 27,020 | 2,005 | 7.4 | % | 29,566 | (1.8) | % | |||||||||||||||||||||||||||
| Gross profit | $ | 7,402 | $ | 9,325 | $ | (1,923) | (20.6) | % | $ | 7,115 | 4.0 | % | |||||||||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| (in $000s) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Rental revenue | $ | 8,188 | $ | 12,121 | $ | (3,933) | (32.4) | % | |||||||||||||||
| Parts and services revenue | 100,337 | 98,194 | 2,143 | 2.2 | % | ||||||||||||||||||
| Total revenue | 108,525 | 110,315 | (1,790) | (1.6) | % | ||||||||||||||||||
| Cost of revenue | 82,849 | 79,178 | 3,671 | 4.6 | % | ||||||||||||||||||
| Depreciation of rental equipment | 3,043 | 2,446 | 597 | 24.4 | % | ||||||||||||||||||
| Total cost of revenue | 85,892 | 81,624 | 4,268 | 5.2 | % | ||||||||||||||||||
| Gross profit | $ | 22,633 | $ | 28,691 | $ | (6,058) | (21.1) | % | |||||||||||||||
Total Revenue - Total revenue remained flat for the three months ended September 30, 2024, compared to the same period in 2023. Total revenue decreased for the nine months ended September 30, 2024, compared to the same period in 2023, due to the decrease in rentals of tools and accessories tied to the decline in rental revenue in the ERS segment.
Cost of Revenue - Cost of revenue increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023, as a result of higher costs of materials.
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Gross Profit - The decrease in gross profit for the three and nine months ended September 30, 2024, compared to the same periods in 2023, was primarily driven by the decrease in tools and accessories rentals with an increase in costs of materials driving gross profit down.
Liquidity and Capital Resources
Our principal sources of liquidity include cash generated by operating activities and borrowings under revolving credit facilities as described below. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements, including investments in our rental fleet, over the next 12 months. As of September 30, 2024, we had $8.4 million in cash and cash equivalents compared to $10.3 million as of December 31, 2023. As of September 30, 2024 and December 31, 2023, we had $627.9 million and $552.4 million of outstanding borrowings under our ABL Facility, respectively. During August 2024, the ABL Facility was amended to, among other things, provide an additional $200.0 million of borrowing capacity and extend the maturity date to August 9, 2029. Availability under the senior secured credit facility was $319.0 million as of September 30, 2024, and based on our borrowing base, we have an additional $190.9 million of suppressed availability that we can potentially utilize by upsizing our existing facility. For further information on the ABL Facility amendment, see Note 8: Long-Term Debt in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Loan Covenants and Compliance
The ABL Facility contains customary negative covenants for transactions of this type, including covenants that, among other things, limit the Company and its restricted subsidiaries’ ability to: incur additional indebtedness; pay dividends, redeem stock, or make other distributions; repurchase, prepay or redeem subordinated indebtedness; make investments; create restrictions on the ability of Company’s restricted subsidiaries to pay dividends; create liens; transfer or sell assets; consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; enter into certain transactions with the Company’s affiliates; and designate subsidiaries as unrestricted subsidiaries, in each case subject to certain exceptions, as well as a restrictive covenant applicable to each Specified Floor Plan Company (as defined in the ABL Credit Agreement) limiting its ability to own certain assets and engage in certain lines of business. The covenants governing the payment of dividends and making other distributions are based upon a combination of fixed amounts, percentages of Adjusted EBITDA or upon multiple pro forma measures depending on the purpose of any such dividend payments or distributions the Company and its restricted subsidiaries are permitted to make. Unlimited dividends under the ABL Facility may be permitted so long as, on a pro forma basis, “distribution conditions” (as defined in the ABL Credit Agreement governing the ABL Facility) are satisfied. As of September 30, 2024, the Company’s distribution conditions were satisfied and, as a result, the Company determined there were no restrictions on distributions by the ABL Credit Agreement.
The 5.50% senior secured second lien notes due 2029 (the “2029 Secured Notes”) were issued pursuant to an indenture (the “Indenture”) which contains covenants that limit the Company’s (and certain of its subsidiaries’) ability to, among other things: (i) incur additional debt or issue certain preferred stock; (ii) pay dividends, redeem stock, or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Company to its restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Company’s subsidiaries as unrestricted subsidiaries. The covenants governing the payment of dividends and making other distributions are based upon a combination of fixed amounts, percentages of Adjusted EBITDA or upon multiple pro forma measures depending on the purpose of any such dividend payments or distributions the Company and its restricted subsidiaries are permitted to make. Unlimited dividends, under the Indenture, may be made so long as after giving effect to making the dividends, the Consolidated Total Debt Ratio would be no greater than 5.00 to 1.00 on a pro forma basis. As of September 30, 2024, the Company’s Consolidated Total Debt Ratio was not greater than 5.00 to 1.00 and, as a result, the Company determined there were no restrictions on distributions by the Indenture. For further information on the ABL Facility and Indenture, see Note 9: Long-Term Debt in the Notes to the Consolidated Financial Statements under Part II, Item 8 in the Company’s annual report on Form 10-K for the year ended December 31, 2023, filed on March 7, 2024.
The Company presents Adjusted EBITDA calculated in accordance with “Consolidated EBITDA” as that term is used in the ABL Credit Agreement and the Indenture. Adjusted EBITDA is defined as net income, as adjusted for provision for income taxes, interest expense, net, depreciation of rental equipment and non-rental depreciation and amortization, and further adjusted for the impact of the fair value mark-up of acquired rental fleet (the “non-cash purchase accounting impact”), business acquisition and merger-related costs, including integration, the impact of accounting for certain of our rental contracts with customers that are accounted for under GAAP as a sales-type lease and stock compensation expense.
The Company presents Net Leverage Ratio, which is equivalent to Consolidated Total Net Leverage Ratio in our ABL Credit Agreement and Consolidated Total Debt Ratio in the Indenture, is defined as Net Debt over Adjusted EBITDA for the previous twelve-month period (“last twelve months,” or “LTM”). Net debt is defined as total debt (calculated as current and long-term debt, excluding deferred financing fees, plus current and long-term finance lease obligations) minus cash and cash equivalents.
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Our creditors utilize Adjusted EBITDA and Net Leverage Ratio to assess our compliance with the restrictive covenants in the ABL Credit Agreement and the Indenture. Neither Adjusted EBITDA or Net Leverage Ratio is calculated in accordance with GAAP and may not conform to the calculation of Adjusted EBITDA or Net Leverage Ratio used by other companies. Neither Adjusted EBITDA or Net leverage Ratio should be considered as a substitute for a measure of our financial performance or liquidity prepared in accordance with GAAP.
The following table provides the calculation of Adjusted EBITDA pursuant to the ABL Credit Agreement and the Indenture.
| Three Months Ended | Nine Months Ended | Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||||||||||||||
Net income (loss) | $ | (17,416) | $ | 9,180 | $ | (56,229) | $ | 34,590 | $ | (24,478) | |||||||||||||||||||
| Interest expense | 27,156 | 24,044 | 79,174 | 69,982 | 27,003 | ||||||||||||||||||||||||
Income tax expense (benefit) | (604) | 432 | 518 | 2,683 | 3,070 | ||||||||||||||||||||||||
| Depreciation and amortization | 59,295 | 54,552 | 173,253 | 162,083 | 57,797 | ||||||||||||||||||||||||
| EBITDA | 68,431 | 88,208 | 196,716 | 269,338 | 63,392 | ||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||
Non-cash purchase accounting impact (1) | 4,066 | 5,884 | 12,286 | 13,552 | 5,260 | ||||||||||||||||||||||||
Transaction and integration costs (2) | 3,994 | 2,890 | 14,684 | 10,039 | 5,844 | ||||||||||||||||||||||||
Sales-type lease adjustment (3) | 1,295 | 1,640 | 5,730 | 7,736 | 1,961 | ||||||||||||||||||||||||
Share-based payments (4) | 2,419 | 2,843 | 8,748 | 10,312 | 3,599 | ||||||||||||||||||||||||
Change in fair value of warrants (5) | — | (1,280) | (527) | (2,409) | — | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 80,205 | $ | 100,185 | $ | 237,637 | $ | 308,568 | $ | 80,056 | |||||||||||||||||||
(1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our ABL Credit Agreement and Indenture.
(2) Represents transaction and process improvement costs related to acquisitions of businesses, including post-acquisition integration costs, which are recognized within operating expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are expenses associated with the integration of acquired businesses. These expenses are presented as adjustments to net income (loss) pursuant to our ABL Credit Agreement and Indenture.
(3) Represents the impact of sales-type lease accounting for certain leases containing RPOs, as the application of sales-type lease accounting is not deemed to be representative of the ongoing cash flows of the underlying rental contracts. The adjustments are made pursuant to our ABL Credit Agreement and Indenture. The components of this adjustment are presented in the table below.
| Three Months Ended | Nine Months Ended | Three Months Ended June 30, 2024 | |||||||||||||||||||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||||||||||||||
| Equipment sales | $ | (3,701) | $ | (12,760) | $ | (8,273) | $ | (56,535) | $ | (1,554) | |||||||||||||||||||
| Cost of equipment sales | 4,111 | 11,714 | 8,162 | 54,354 | 1,229 | ||||||||||||||||||||||||
| Gross margin | 410 | (1,046) | (111) | (2,181) | (325) | ||||||||||||||||||||||||
| Interest income | (2,766) | (4,461) | (8,791) | (12,295) | (3,283) | ||||||||||||||||||||||||
| Rental invoiced | 3,651 | 7,147 | 14,632 | 22,212 | 5,569 | ||||||||||||||||||||||||
| Sales-type lease adjustment | $ | 1,295 | $ | 1,640 | $ | 5,730 | $ | 7,736 | $ | 1,961 | |||||||||||||||||||
(4) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.
(5) Represents the charge to earnings for the change in fair value of the liability for warrants.
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The following table presents the calculation of Net Debt and Net Leverage Ratio:
| (in $000s) | September 30, 2024 | June 30, 2024 | |||||||||
| Current maturities of long-term debt | $ | 1,458 | $ | 3,779 | |||||||
| Long-term debt, net | 1,567,103 | 1,528,433 | |||||||||
| Deferred financing fees | 20,992 | 19,527 | |||||||||
| Less: cash and cash equivalents | (8,438) | (8,059) | |||||||||
| Net Debt | $ | 1,581,115 | $ | 1,543,680 | |||||||
Divided by: LTM Adjusted EBITDA (1) | 355,999 | 375,979 | |||||||||
| Net Leverage Ratio | 4.44 | 4.11 | |||||||||
(1) The following tables present the calculation of LTM Adjusted EBITDA for the periods ended September 30, 2024 and June 30, 2024:
| Current Year To Date Period | Less: Prior Year To Date Period | Add: Prior Fiscal Year | LTM Adjusted EBITDA | |||||||||||
| (in $000s) | September 30, 2024 | September 30, 2023 | December 31, 2023 | September 30, 2024 | ||||||||||
| Net income (loss) | $ | (56,229) | $ | 34,590 | $ | 50,712 | $ | (40,107) | ||||||
| Interest expense | 79,174 | 69,982 | 94,694 | 103,886 | ||||||||||
| Income tax expense (benefit) | 518 | 2,683 | 7,364 | 5,199 | ||||||||||
| Depreciation and amortization | 173,253 | 162,083 | 218,993 | 230,163 | ||||||||||
| EBITDA | 196,716 | 269,338 | 371,763 | 299,141 | ||||||||||
| Adjustments: | ||||||||||||||
| Non-cash purchase accounting impact | 12,286 | 13,552 | 19,742 | 18,476 | ||||||||||
| Transaction and integration costs | 14,684 | 10,039 | 14,143 | 18,788 | ||||||||||
| Sales-type lease adjustment | 5,730 | 7,736 | 10,458 | 8,452 | ||||||||||
| Share-based payments | 8,748 | 10,312 | 13,309 | 11,745 | ||||||||||
| Change in fair value of warrants | (527) | (2,409) | (2,485) | (603) | ||||||||||
| Adjusted EBITDA | $ | 237,637 | $ | 308,568 | $ | 426,930 | $ | 355,999 | ||||||
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| Current Year To Date Period | Less: Prior Year To Date Period | Add: Prior Fiscal Year | LTM Adjusted EBITDA | |||||||||||
| (in $000s) | June 30, 2024 | June 30, 2023 | December 31, 2023 | June 30, 2024 | ||||||||||
| Net income (loss) | $ | (38,813) | $ | 25,410 | $ | 50,712 | $ | (13,511) | ||||||
| Interest expense | 52,018 | 45,938 | 94,694 | 100,774 | ||||||||||
| Income tax expense (benefit) | 1,122 | 2,251 | 7,364 | 6,235 | ||||||||||
| Depreciation and amortization | 113,958 | 107,531 | 218,993 | 225,420 | ||||||||||
| EBITDA | 128,285 | 181,130 | 371,763 | 318,918 | ||||||||||
| Adjustments: | ||||||||||||||
| Non-cash purchase accounting impact | 8,220 | 7,668 | 19,742 | 20,294 | ||||||||||
| Transaction and integration costs | 10,690 | 7,149 | 14,143 | 17,684 | ||||||||||
| Sales-type lease adjustment | 4,435 | 6,096 | 10,458 | 8,797 | ||||||||||
| Share-based payments | 6,329 | 7,469 | 13,309 | 12,169 | ||||||||||
| Change in fair value of warrants | (527) | (1,129) | (2,485) | (1,883) | ||||||||||
| Adjusted EBITDA | $ | 157,432 | $ | 208,383 | $ | 426,930 | $ | 375,979 | ||||||
Historical Cash Flows
The following table summarizes our sources and uses of cash:
| Nine Months Ended September 30, | |||||||||||
| (in $000s) | 2024 | 2023 | |||||||||
| Net cash flow from operating activities | $ | 39,934 | $ | (2,706) | |||||||
| Net cash flow for investing activities | (164,883) | (145,612) | |||||||||
| Net cash flow from financing activities | 122,779 | 142,557 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net change in cash and cash equivalents | $ | (1,871) | $ | (5,567) | |||||||
As of September 30, 2024, we had cash and cash equivalents of $8.4 million, a decrease of $1.9 million from December 31, 2023. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, including paying down the outstanding balance under our ABL Facility, and availability under our credit facilities.
Cash Flows from Operating Activities
Net cash from operating activities was $39.9 million for the nine months ended September 30, 2024, as compared to net cash used in operating activities of $2.7 million in the same period of 2023. The cash provided by operating activities in the current period is the result of the increase in floorplan trade financing for inventory purchases.
Cash Flows for Investing Activities
Net cash used in investing activities was $164.9 million for the nine months ended September 30, 2024, as compared to $145.6 million in the same period of 2023. The increase in cash used in investing activities was primarily due to lower proceeds from sales and disposals of rental equipment of $21.8 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $122.8 million for the nine months ended September 30, 2024, as compared to $142.6 million in the same period of 2023. The decrease in cash provided by financing activities was primarily due to an increase in repurchases of common stock of $9.0 million and a decrease in proceeds, net of repayments, from floor plan financing and long-term debt arrangements of $5.8 million.
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Critical Accounting Estimates
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. GAAP requires that we make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosure of contingent assets and liabilities. We base these estimates on historical experience and on various other assumptions that we consider reasonable under the circumstances and reevaluate our estimates and judgments as appropriate. The actual results experienced by us may differ materially and adversely from our estimates. For a complete discussion of our significant critical accounting estimates, see the “Critical Accounting Estimates” section in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. Except as discussed below, there were no significant changes to our critical accounting estimates during the nine months ended September 30, 2024.
Goodwill and the Evaluation of Goodwill Impairment
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired and goodwill is assigned to each of our reporting units, which are ERS, TES and APS. The following presents the amount of goodwill by reporting unit as of June 30, September 30, 2024 and December 31, 2023:
(in $000s) | September 30, 2024 | June 30, 2024 | December 31, 2023 | ||||||||||||||
| ERS | $ | 498,611 | $ | 498,549 | $ | 498,808 | |||||||||||
| TES | 167,307 | 167,307 | 167,307 | ||||||||||||||
| APS | 39,364 | 39,364 | 37,896 | ||||||||||||||
| Total | $ | 705,282 | $ | 705,220 | $ | 704,011 | |||||||||||
We perform our assessment of goodwill impairment utilizing either a qualitative or quantitative impairment test, and we perform our test at least annually. Our annual assessment date is October 1 and we perform impairment tests in interim periods (e.g., other than October 1) when factors are identified that could indicate goodwill of any of our reporting units may be impaired. Examples of such factors may include a significant adverse change in business climate, weakness in an industry in which our reporting units operate or recent significant cash or operating losses with expectations that those losses will continue. The qualitative and quantitative impairment tests are described further below.
Qualitative Impairment Test – The qualitative impairment test assesses company-specific, industry, market and general economic factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or we elect not to use the qualitative impairment test, a quantitative impairment test is performed.
Quantitative Impairment Test – The quantitative impairment test involves a comparison of the estimated fair value of a reporting unit to its carrying amount with the fair value of a reporting being unit being estimated by using a discounted cash flow model (the “income approach”) that calculates fair value as the present value of expected cash flows of the reporting unit. Additionally, a market analysis is performed that encompasses an analysis of comparable publicly-traded companies (the “market approach”).
Determining the fair value of a reporting unit requires judgment and the use of significant estimates that include assumptions about the reporting unit’s future revenue (considering expectations about rental and sales volumes and prices as well as capital spending related to the end-markets we serve), profitability and cash flows, long-term growth rates, amount and timing of estimated capital expenditures, inflation rates, risk adjusted cost of capital, operational plans, and current and future economic conditions, among other assumptions. The fair value of each reporting unit is determined using a weighted combination of the income and market approaches. We believe that the estimates and assumptions used in our impairment assessments are reasonable and based on available market information. We use a discounted cash flow methodology for the income approach. Under the income approach, the discounted cash flow model determines fair value based on the present value of projected cash flows over a specified period and a residual value related to future cash flows beyond the projection period. Both values are discounted using a rate that reflects the best estimate of the risk adjusted cost of capital at each reporting unit.
During the quarterly period ended June 30, 2024, we identified factors indicating goodwill may be impaired related to two of our reporting units, ERS and APS. The following is a discussion of the estimates and assumptions from our June 30, 2024 interim impairment test for the ERS and APS reporting units:
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•The risk adjusted cost of capital varies by reporting unit and was in the range of 10.0% to 10.5% and represents our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
•Our projections were based on our assessment of macroeconomic variables, industry trends and market opportunities, as well as our strategic objectives and future growth plans. Revenue growth rates assumed ranged from approximately 5% to 7% for 2025 and from approximately 3% to 8% for 2026 and beyond.
As a result of completing our June 30, 2024, interim quantitative impairment test, we determined that the fair value of the ERS and APS reporting units exceeded their carrying values by 23% and 17%, respectively. While there is no “bright line” to determine whether or not a reporting unit’s fair value is substantially in excess of its carrying amount (“cushion”), significant adverse changes in business climate, weakness in an industry in which our reporting units operate (for example, electric utility T&D, telecom, rail and general infrastructure) or significant cash or operating losses and changes in expectations of profitability could reduce the amounts of cushion applicable to our reporting units and result in impairment of one or more of our reporting units’ goodwill. During the quarter ended September 30, 2024, we continued to evaluate whether factors indicate goodwill of any of our reporting units may be impaired and we did not identify any triggering factors that could indicate goodwill impairment. As a result, we concluded another interim test was not necessary.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk
We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under the ABL Credit Facility and our floor plan financing arrangements. Interest rate changes generally impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. As of September 30, 2024, we had $1,550.4 million aggregate principal amount of variable rate debt, consisting of the balance outstanding under floor plan financing and the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense under floor plan financing and the ABL Facility by approximately $1.9 million on an annual basis.
We, from time to time, may manage a portion of our risks from exposures to fluctuations in interest rates as part of our risk management program through the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings and cash flows caused by fluctuations in the interest rates of our variable-rate debt. We do not currently hedge our interest rate exposure.
Foreign currency exchange rate risk
During the nine months ended September 30, 2024, we generated $33.9 million of revenues denominated in Canadian dollars. Each 100-basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate for the year would have correspondingly changed our revenues by approximately $0.4 million on an annual basis. We do not currently hedge our exchange rate exposure.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer. Based on that assessment, the Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2024, the Company’s disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting described below.
Inadequate Business Process Controls
On April 1, 2021, we completed the acquisition of Custom Truck LP, which resulted in a significant change in the Company’s internal control over financial reporting. We are in the process of completing the integration of policies, processes, people, technology and operations for the combined company. As part of this integration, we identified deficiencies in the design and operating effectiveness of internal controls associated with the control activities component of the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework.
During the fourth quarter ended December 31, 2021, we identified control deficiencies related to all of our business process controls (automated and manual), including management review controls. These control deficiencies could result in misstatements potentially impacting all financial statement accounts and disclosures that may not be prevented or detected.
Accordingly, these deficiencies constituted a pervasive material weakness. The pervasive material weakness did not result in any identified misstatements to our consolidated financial statements, and there were no changes to previously released financial results.
(b) Status of Remediation of the Pervasive Material Weakness in Internal Control Over Financial Reporting
We have devoted and continue to devote substantial resources and effort to remediating the pervasive material weakness identified in fiscal year 2021.
Additionally, management is in the process of designing, implementing and monitoring all business process controls (automated and manual), including management review controls, that are relevant to all financial statement accounts and disclosures. This pervasive material weakness cannot be considered remediated until the applicable controls are designed and operating effectively for a sufficient period of time, as supported by management’s testing results.
(c) Changes to Internal Control Over Financial Reporting
Other than the ongoing remediation efforts described above, there were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We may, at any given time, be named as a defendant in certain lawsuits, investigations and claims arising in the ordinary course of business. While the outcome of these potential lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. In the opinion of management, there are no pending litigation, disputes or claims against the Company that, if decided adversely, would have a material adverse effect on its consolidated financial condition, cash flows or results of operations.
Item 1A. Risk Factors
No material changes occurred to the indicated risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On August 2, 2022, our Board of Directors authorized a stock repurchase program for up to $30 million of the Company’s shares of common stock, which authorization was further increased by $25 million of shares on September 14, 2023, and increased again increased by $25 million on March 11, 2024, upon exhaustion of prior authorization. The authorization does not have an expiration date. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate needs.
The following table contains information regarding our purchases of our common stock during the three months ended September 30, 2024:
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||||||||||||
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in $000s) | |||||||||||||||||||||||
| July 1, 2024 - July 31, 2024 | 1,260,827 | $ | 4.35 | 1,260,827 | $ | 1,892 | ||||||||||||||||||||
| August 1, 2024 - August 31, 2024 | — | $ | — | — | $ | 1,892 | ||||||||||||||||||||
| September 1, 2024 - September 30, 2024 | — | $ | — | — | $ | 1,892 | ||||||||||||||||||||
| Total | 1,260,827 | $ | 4.35 | 1,260,827 | ||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 10.1 | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32** | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
* Filed herewith.
**Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CUSTOM TRUCK ONE SOURCE, INC. (Registrant) | ||||||||
| Date: | October 30, 2024 | /s/ Ryan McMonagle | ||||||
| Ryan McMonagle, Chief Executive Officer | ||||||||
| Date: | October 30, 2024 | /s/ Christopher J. Eperjesy | ||||||
| Christopher J. Eperjesy, Chief Financial Officer | ||||||||