Company Overview

Custom Truck One Source, Inc. (NYSE:CTOS) is a leading provider of specialty equipment, parts, tools, accessories, and services to the electric utility transmission and distribution, telecommunications, rail, forestry, waste management, and other infrastructure-related end markets in North America. The company's diverse product portfolio and extensive service capabilities have positioned it as a trusted partner for customers seeking tailored solutions to meet their unique operational needs.

Historical Background

Custom Truck One Source, Inc. was founded in 2019 through the merger of Custom Truck LP and NESCO Holdings, Inc. The combined company became a leading provider of specialty equipment, parts, tools, accessories and services to the electric utility transmission and distribution, telecommunications, rail, forestry, waste management and other infrastructure-related industries in North America. In 2020, the company faced significant challenges due to the COVID-19 pandemic, which impacted demand across its key end markets. The company took actions to reduce costs and manage its liquidity during this period. Despite the headwinds, Custom Truck continued to serve its critical infrastructure customers throughout the pandemic.

In 2021, the company completed the acquisition of Custom Truck LP, which expanded its equipment rental and sales capabilities. This acquisition resulted in a significant change to Custom Truck's internal control over financial reporting, and the company identified a material weakness related to its business process controls. The company devoted substantial resources to remediate this issue over the following year. Over the course of 2022 and 2023, Custom Truck navigated supply chain disruptions and softness in its utility transmission end market. The company leveraged its diversified business model and strong customer relationships to maintain growth, while also investing in its rental fleet and production capabilities to meet evolving customer needs.

Financials

Custom Truck's financial performance has exhibited a mix of growth and challenges in recent years. In 2023, the company reported revenue of $1.87 billion, a 19.1% increase from the prior year, driven by strong demand in its Truck and Equipment Sales (TES) and Aftermarket Parts and Services (APS) segments. However, the Equipment Rental Solutions (ERS) segment faced headwinds, with revenue declining 5.9% year-over-year due to softness in the utility end market. Net income for 2023 was $50.71 million, while operating cash flow (OCF) was negative $30.88 million and free cash flow (FCF) was negative $395.07 million.

The company's gross profit margin for the full year 2023 stood at 24.2%, a slight improvement from 23.9% in 2022. Adjusted EBITDA, a key metric for the company, reached $422.5 million in 2023, up from $385.3 million in the previous year, reflecting the company's ability to effectively manage its cost structure.

In the most recent quarter (Q3 2024), Custom Truck reported revenue of $447.22 million, representing a 3.0% year-over-year growth. However, net income decreased to a loss of $17.42 million, primarily due to a decline in gross profit and higher interest expense. On a positive note, OCF improved to $54.49 million and FCF increased significantly to $230.21 million.

Business Segments

Custom Truck manages its business through three reporting segments:

1. Equipment Rental Solutions (ERS): This segment focuses on renting and selling specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks, and other machinery. As of September 30, 2024, the rental fleet consisted of approximately 10,200 units, with the majority capable of use across various end-markets. The segment also sells used equipment from its rental fleet and offers rental purchase options (RPOs) to customers.

2. Truck and Equipment Sales (TES): The TES segment produces and sells new and used specialty equipment and vocational trucks, including equipment from leading original equipment manufacturers (OEMs) and Custom Truck's own Load King brand. The company leverages its integrated production capabilities and industry knowledge to provide tailored solutions with short lead times.

3. Aftermarket Parts and Services (APS): This segment includes the sale of specialized aftermarket parts, including captive parts for the Load King brand, as well as specialized tools. The APS segment also provides truck and equipment maintenance and repair services through its nationwide branch network and fleet of mobile technicians, supported by a 24/7 call center.

Liquidity

As of September 30, 2024, Custom Truck's balance sheet showed $8.44 million in cash and cash equivalents. The company's debt-to-equity ratio stood at 2,974.42, indicating a high level of leverage. Custom Truck has a $950 million asset-based revolving credit facility (ABL Facility), of which $627.90 million was outstanding as of September 30, 2024, with $319.00 million available. The company's current ratio was 1.28, and its quick ratio was 0.19, suggesting potential short-term liquidity challenges.

Geographic Markets

Custom Truck primarily operates in the United States, which accounted for 97.5% ($435.92 million) of its Q3 2024 revenue. The remaining 2.5% ($11.30 million) was generated from operations in Canada.

Recent Performance

In the first nine months of 2024, Custom Truck reported revenue of $1.28 billion, a 4.6% decrease compared to the same period in the prior year. This decline was primarily driven by a 21.5% drop in the ERS segment, which was partially offset by 8.1% growth in the TES segment. Gross profit margin during this period was 21.2%, down from 24.4% in the first nine months of 2023, as the company faced pressure from lower rental utilization and pricing.

Despite the near-term challenges, Custom Truck remains optimistic about the long-term outlook for its business. The company has noted improving trends in its ERS segment, with utilization and average OEC on rent recovering in the third quarter of 2024. Additionally, the TES segment has continued to perform well, benefiting from strong demand across the company's end markets, including the utility, infrastructure, rail, and telecom sectors.

Outlook and Guidance

Custom Truck has revised its guidance for the full year 2024, adjusting the top end of its ranges. The company now expects total revenue between $1.8 billion and $1.89 billion (previously $1.8 billion to $1.95 billion) and adjusted EBITDA between $340 million and $350 million (previously $340 million to $360 million). The revisions are primarily due to lower expected revenue in both the ERS and TES segments.

The company anticipates its net leverage ratio to be flat to modestly decreased from current levels by the end of fiscal 2024, with an aim to achieve a net leverage ratio below 3x in fiscal 2025. Looking ahead to 2025, Custom Truck is confident in delivering double-digit adjusted EBITDA growth across its consolidated business.

Industry Trends and Opportunities

The infrastructure investment landscape in the United States has been a key driver for Custom Truck's business in recent years. The passage of the $1 trillion Infrastructure Investment and Jobs Act in 2021 has unlocked significant funding for projects across various sectors, including utility upgrades, telecommunications network expansions, and rail system improvements. As a leading provider of specialized equipment and services, Custom Truck is well-positioned to capitalize on these infrastructure investment trends.

The specialty equipment rental and sales industry is expected to grow at a compound annual growth rate (CAGR) of 5-7% over the next 5 years, driven by increasing demand for infrastructure upgrades and maintenance across Custom Truck's core end markets.

Risks and Challenges

However, the company is not without its risks. The highly competitive nature of the equipment rental and sales markets, as well as the cyclical nature of the end markets it serves, pose ongoing challenges. Additionally, supply chain disruptions, labor shortages, and macroeconomic uncertainties could potentially impact the company's operations and financial performance.

Conclusion

In conclusion, Custom Truck One Source has demonstrated its ability to navigate a dynamic industry landscape by leveraging its comprehensive product and service offerings, deep customer relationships, and strategic acquisitions. While the company has faced near-term headwinds in its ERS segment, the long-term outlook for the infrastructure sectors it serves remains promising. As Custom Truck continues to adapt and innovate, it is well-positioned to capitalize on the growing demand for specialized equipment and services across North America's critical infrastructure network.