Overview of the Company’s Financial Performance

Custom Truck One Source, Inc. is a specialty equipment provider that rents, sells, and services a range of heavy-duty trucks, cranes, and other equipment used in infrastructure development and maintenance. The company operates in three main business segments: Equipment Rental Solutions (ERS), Truck and Equipment Sales (TES), and Aftermarket Parts and Services (APS).

For the three and six months ended June 30, 2024, the company reported a decrease in total revenue compared to the same periods in 2023. This was primarily due to a decline in rental revenue and equipment sales. The decrease in rental revenue was driven by lower fleet utilization, particularly in the utility market, due to supply chain constraints, environmental and regulatory factors, and customer financing issues affecting the timing of infrastructure projects. Equipment sales also declined, though the company saw an increase in the first half of the year as it was able to improve inventory levels and meet pent-up demand.

The company’s net income turned to a net loss for the three and six-month periods, largely due to the lower revenues leading to decreased gross profit, as well as higher interest expense on the company’s variable-rate debt and floor plan liabilities.

Revenue and Profit Trends

The company’s total revenue decreased by 7.4% and 8.2% for the three and six-month periods ended June 30, 2024, respectively, compared to the same periods in 2023. This was driven by the following:

• Rental revenue decreased by 15.7% and 13.0% for the three and six-month periods, respectively, due to lower fleet utilization, particularly in the utility market. Average OEC (original equipment cost) on rent declined by 13.2% and 12.7% for the three and six-month periods, respectively.

• Equipment sales decreased by 5.5% and 7.5% for the three and six-month periods, respectively. The company saw a decline in the third quarter but an increase in the first half of the year as it was able to improve inventory levels and meet pent-up demand.

• Parts and services revenue increased by 5.7% and 2.7% for the three and six-month periods, respectively, as the company continued to provide maintenance and repair services to its customers.

The company’s gross profit decreased by 19.3% and 18.3% for the three and six-month periods, respectively, due to the decline in rental revenue and equipment sales. Operating expenses increased slightly, while total other expense, primarily interest expense, increased significantly, leading to the net loss for the periods.

Analysis of Strengths and Weaknesses

Strengths:

• Diversified customer base across various infrastructure-related industries, including utilities, telecommunications, rail, and waste management
• Broad range of specialized equipment and services, allowing the company to serve a variety of customer needs
• Integrated production capabilities and extensive industry knowledge, enabling the company to provide tailored equipment solutions
• Nationwide branch network and fleet of mobile technicians to support equipment maintenance and repair services

Weaknesses:

• Exposure to supply chain constraints, environmental and regulatory factors, and customer financing issues affecting the timing of infrastructure projects, particularly in the utility market
• Reliance on variable-rate debt and floor plan financing, leading to increased interest expense and vulnerability to rising interest rates
• Ongoing integration of the Custom Truck LP acquisition, which has resulted in material weaknesses in the company’s internal controls over financial reporting that are still in the process of being remediated

Outlook for the Future

The company’s outlook for the future is cautious, as it continues to navigate the challenges in the utility market and the broader macroeconomic environment. While the company has made progress in improving inventory levels and meeting pent-up demand in the first half of the year, the softness in the utility market and the impact of rising interest rates on its variable-rate debt and floor plan financing are expected to continue to weigh on the company’s financial performance.

The company is focused on remediating the material weaknesses in its internal controls over financial reporting, which is a critical priority to ensure the integrity of its financial reporting and to maintain the confidence of its stakeholders. The company is also exploring ways to diversify its customer base and reduce its exposure to the utility market, as well as strategies to manage its debt and interest rate risk more effectively.

Overall, the company faces a challenging operating environment, but its diversified product and service offerings, nationwide presence, and experienced management team provide a solid foundation for navigating the current challenges and positioning the company for long-term success.