# Custom Truck One Source, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Custom Truck One Source, Inc.](/companies/ctos.md) (CIK 1709682)
- Form: 10-Q
- Filed: 2024-05-02
- Accepted by EDGAR: May 2, 2024, 16:40 ET
- Period: 2024-03-31
- Accession: 0001709682-24-000037
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1709682/000170968224000037/ctos-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1709682/000170968224000037/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $303.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $320.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $90.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $58.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $18.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | −$1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$14.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 240,364,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$14.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $6.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $8.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $1.33bn | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $3.45bn | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $993.1m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2024-03-31 | $1.49bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-03-31 | $6.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-03-31 | $896.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,623 characters.

### 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 service 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.

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 our redeemable warrants.

*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 March 31, 2024, this equipment (the “rental fleet”) is comprised of approximately 10,300 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 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 months ended March 31, 2024, compared to the same period in 2023

#### Consolidated Results of Operations

| (in $000s) | Three Months Ended March 31, 2024 | % of revenue | March 31, 2023 | % of revenue | $ Change | % change | December 31, 2023 | % of revenue |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenue | $106,171 | 25.8% | $118,288 | 26.2% | $(12,117) | (10.2)% | $120,244 | 23.0% |
| Equipment sales | 272,602 | 66.3% | 301,290 | 66.6% | (28,688) | (9.5)% | 366,967 | 70.3% |
| Parts sales and services | 32,534 | 7.9% | 32,585 | 7.2% | (51) | (0.2)% | 34,543 | 6.6% |
| Total revenue | 411,307 | 100.0% | 452,163 | 100.0% | (40,856) | (9.0)% | 521,754 | 100.0% |
| Cost of revenue, excluding rental equipment depreciation | 276,854 | 67.3% | 302,172 | 66.8% | (25,318) | (8.4)% | 350,681 | 67.2% |
| Depreciation of rental equipment | 43,744 | 10.6% | 40,330 | 8.9% | 3,414 | 8.5% | 44,249 | 8.5% |
| Gross profit | 90,709 | 22.1% | 109,661 | 24.3% | (18,952) | (17.3)% | 126,824 | 24.3% |
| Operating expenses | 72,339 |  | 69,773 |  | 2,566 | 3.7% | 73,350 |  |
| Operating income | 18,370 |  | 39,888 |  | (21,518) | (53.9)% | 53,474 |  |
| Total other expense | 34,653 |  | 25,225 |  | 9,428 | 37.4% | 32,671 |  |
| Income (loss) before income taxes | (16,283) |  | 14,663 |  | (30,946) | (211.0)% | 20,803 |  |
| Income tax expense (benefit) | (1,948) |  | 863 |  | (2,811) | (325.7)% | 4,681 |  |
| Net income (loss) | $(14,335) |  | $13,800 |  | $(28,135) | (203.9)% | $16,122 |  |

**Total Revenue -** Total revenue was $411.3 million for the three months ended March 31, 2024, compared to $452.2 million in the same period of 2023. Rental revenue decreased 10.2% to $106.2 million, compared to $118.3 million in the first quarter of 2023, due to lower utilization and a decline in average OEC on rent. Equipment sales decreased 9.5% in the first quarter of 2024 to $272.6 million, compared to $301.3 million in the first quarter of 2023, primarily driven by lower sales of used equipment due to excess supply of equipment available in the market.

**Cost of Revenue, Excluding Rental Equipment Depreciation -** The decrease in cost of revenue, excluding rental equipment depreciation for the three months ended March 31, 2024, compared to the same period in 2023, was driven primarily by the decrease in rental equipment sales volume.

**Depreciation of Rental Equipment -** Depreciation of our rental fleet increased in the three months ended March 31, 2024, compared to the same period in 2023, as a result of higher rental equipment levels.

**Operating Expenses -** Operating expenses increased in the three months ended March 31, 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 months ended March 31, 2024, compared to the same period 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 benefit for the three months ended March 31, 2024 was $1.9 million, resulting in an effective tax rate of (12.0)%, compared to income tax expense for the three months ended March 31, 2023 of $0.9 million, respectively, at an effective tax rate of 5.9%. The decrease in the effective tax rate was primarily due to a pretax loss in the current period.

**Net Income (loss) -** The change in net income to a net loss for the three months ended March 31, 2024, compared to the same period in 2023, was primarily the result of lower revenues leading to 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.

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | Change | % Change | December 31, 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Ending OEC | $1,452,900 | $1,457,870 | $(4,970) | (0.3)% | $1,455,708 | (0.1)% |
| Average OEC on rent | $1,065,700 | $1,214,300 | $(148,600) | (12.2)% | $1,159,164 | (4.8)% |
| Fleet utilization | 73.3% | 83.6% | (10.3)% | (12.3)% | 77.6% | (7.7)% |
| OEC on rent yield | 40.5% | 39.6% | 0.9% | 2.3% | 41.1% | 3.6% |
| Sales order backlog | $537,292 | $855,049 | $(317,757) | (37.2)% | $688,559 | (24.2)% |

#### Operating Results by Segment

### Equipment Rental Solutions (ERS) Segment

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | $ Change | % Change | December 31, 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenue | $103,288 | $113,784 | $(10,496) | (9.2)% | $116,594 | (11.4)% |
| Equipment sales | 32,740 | 92,136 | (59,396) | (64.5)% | 68,023 | (51.9)% |
| Total revenue | 136,028 | 205,920 | (69,892) | (33.9)% | 184,617 | (26.3)% |
| Cost of rental revenue | 29,800 | 29,060 | 740 | 2.5% | 28,222 | 5.6% |
| Cost of equipment sales | 24,098 | 71,081 | (46,983) | (66.1)% | 49,799 | (51.6)% |
| Depreciation of rental equipment | 42,697 | 39,512 | 3,185 | 8.1% | 43,230 | (1.2)% |
| Total cost of revenue | 96,595 | 139,653 | (43,058) | (30.8)% | 121,251 | (20.3)% |
| Gross profit | $39,433 | $66,267 | $(26,834) | (40.5)% | $63,366 | (37.8)% |

**Total Revenue -** Total revenue for the ERS segment for the three months ended March 31, 2024 was $136.0 million, compared to $205.9 million for the same period in 2023. Equipment sales decreased $59.4 million in the first quarter of 2024 to $32.7 million, compared to $92.1 million in the first quarter of 2023, due to excess supply of used equipment available in the market. Rental revenue in the first quarter of 2024 was $103.3 million compared to $113.8 million in the first quarter of 2023, a 9.2% decrease as a result of a reduction in fleet utilization to 73.3% compared to 83.6% in the first quarter of 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 job starts. Average OEC on rent decreased 12.2% year-over-year, primarily as a result of the lower utilization in the quarter.

**Cost of Revenue -** The decrease in total cost of revenue for the three months ended March 31, 2024, compared to the same period in 2023, was largely due to the decrease in rental equipment sales volume.

**Depreciation -** Depreciation of our rental fleet increased for the three months ended March 31, 2024, compared to the same period in 2023, as a result of higher rental equipment levels.

**Gross Profit -** The decrease in gross profit for the three months ended March 31, 2024, compared to the same period in 2023, was due to the decrease in rental revenues and equipment sales for the period.

### Truck and Equipment Sales (TES) Segment

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | $ Change | % Change | December 31, 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Equipment sales | $239,862 | $209,154 | $30,708 | 14.7% | $298,944 | 19.8% |
| Cost of equipment sales | 196,702 | 175,044 | 21,658 | 12.4% | 246,047 | 20.1% |
| Gross profit | $43,160 | $34,110 | $9,050 | 26.5% | $52,897 | 18.4% |

**Equipment Sales -** Equipment sales increased for the three months ended March 31, 2024, compared to the same period in 2023, primarily as a result of exiting 2023 with healthy inventory levels due to the supply chain improvements experienced in 2023 and historically high backlog levels that improved our ability to produce and deliver more units during the first quarter of 2024.

**Cost of Equipment Sales -** Cost of equipment sales increased for the three months ended March 31, 2024, compared to the same period in 2023, due to the increase in equipment sales volume.

**Gross Profit -** The increase in gross profit for the three months ended March 31, 2024, compared to the same period in 2023, is reflective of the positive demand and pricing environment for new products.

### Aftermarket Parts and Services (APS) Segment

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | $ Change | % Change | December 31, 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenue | $2,883 | $4,504 | $(1,621) | (36.0)% | $3,650 | 21.0% |
| Parts and services revenue | 32,534 | 32,585 | (51) | (0.2)% | 34,543 | 5.8% |
| Total revenue | 35,417 | 37,089 | (1,672) | (4.5)% | 38,193 | 7.3% |
| Cost of revenue | 26,254 | 26,987 | (733) | (2.7)% | 26,613 | 1.3% |
| Depreciation of rental equipment | 1,047 | 818 | 229 | 28.0% | 1,019 | (2.7)% |
| Total cost of revenue | 27,301 | 27,805 | (504) | (1.8)% | 27,632 | 1.2% |
| Gross profit | $8,116 | $9,284 | $(1,168) | (12.6)% | $10,561 | 23.2% |

**Total Revenue -** Total revenue decreased for the three months ended March 31, 2024, compared to the same period in 2023 due to the decrease in rentals of tools and accessories affected by the utility end-market softness.

**Cost of Revenue -** Cost of revenue decreased for the three months ended March 31, 2024, compared to the same period in 2023, commensurate with the decrease in volume of parts sales and rental activity.

**Gross Profit -** The decrease in gross profit for the three months ended March 31, 2024, compared to the same period in 2023, was primarily driven by the decrease in rentals as discussed above.

### 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 March 31, 2024, we had $8.0 million in cash and cash equivalents compared to $10.3 million as of December 31, 2023. As of both March 31, 2024 and December 31, 2023, we had $552.4 million of outstanding borrowings under our ABL Facility. Availability under the senior secured credit facility was $194.5 million as of March 31, 2024, and based on our borrowing base, we have an additional $331.9 million of suppressed availability that we can potentially utilize by upsizing our existing facility.

### 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 March 31, 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 March 31, 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. 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.

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 for the three months ended March 31, 2024 and March 31, 2023, as well as December 31, 2023.

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | $ Change | % Change | Three Months Ended December 31, 2023 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income (loss) | $(14,335) | $13,800 | $(28,135) | (203.9)% | $16,122 |
| Interest expense | 25,015 | 22,363 | 2,652 | 11.9% | 24,712 |
| Income tax expense (benefit) | (1,948) | 863 | (2,811) | (325.7)% | 4,681 |
| Depreciation and amortization | 56,161 | 52,090 | 4,071 | 7.8% | 56,909 |
| EBITDA | 64,893 | 89,116 | (24,223) | (27.2)% | 102,424 |
| Adjustments: |  |  |  |  |  |
| Non-cash purchase accounting impact (1) | 2,960 | 7,199 | (4,239) | (58.9)% | 6,190 |
| Transaction and integration costs (2) | 4,846 | 3,460 | 1,386 | 40.1% | 4,104 |
| Sales-type lease adjustment (3) | 2,474 | 2,803 | (329) | (11.7)% | 2,722 |
| Share-based payments (4) | 2,730 | 3,147 | (417) | (13.3)% | 2,997 |
| Change in fair value of warrants (5) | (527) | (525) | (2) | 0.4% | (76) |
| Adjusted EBITDA | $77,376 | $105,200 | $(27,824) | (26.4)% | $118,361 |

(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.

| (in $000s) | Three Months Ended March 31, 2024 | March 31, 2023 | December 31, 2023 |
| --- | ---: | ---: | ---: |
| Equipment sales | $(3,018) | $(24,172) | $(1,529) |
| Cost of equipment sales | 2,822 | 23,225 | 1,362 |
| Gross profit | (196) | (947) | (167) |
| Interest income | (2,742) | (3,428) | (3,770) |
| Rental invoiced | 5,412 | 7,178 | 6,659 |
| Sales-type lease adjustment | $2,474 | $2,803 | $2,722 |

(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.

The following table presents the calculation of Net Debt and Net Leverage Ratio:

| (in $000s) | March 31, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Current maturities of long-term debt | $6,066 | $8,257 |
| Long-term debt, net | 1,492,346 | 1,487,136 |
| Deferred financing fees | 20,975 | 22,406 |
| Less: cash and cash equivalents | (7,990) | (10,309) |
| Net Debt | $1,511,397 | $1,507,490 |
| Divided by: Adjusted EBITDA | 399,105 | 426,930 |
| Net Leverage Ratio | 3.79 | 3.53 |

24

### Historical Cash Flows

The following table summarizes our sources and uses of cash:

| (in $000s) | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash flow from operating activities | $(14,375) | $3,906 |
| Net cash flow for investing activities | (33,411) | (39,948) |
| Net cash flow from financing activities | 45,495 | 53,849 |
| Effect of exchange rate changes on cash and cash equivalents | (28) | 51 |
| Net change in cash and cash equivalents | $(2,319) | $17,858 |

As of March 31, 2024, we had cash and cash equivalents of $8.0 million, a decrease of $2.3 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 used in operating activities was $14.4 million for the three months ended March 31, 2024, as compared to net cash provided by operating activities of $3.9 million in the same period in 2023. The use of cash in the current period is the result of our increased levels of inventory purchases and production.

#### Cash Flows for Investing Activities

Net cash used in investing activities was $33.4 million for the three months ended March 31, 2024, as compared to $39.9 million in the same period of 2023. The decrease in cash used in investing activities was primarily due to a decrease in purchases of rental equipment of $33.6 million, partially offset by a decrease in proceeds from sales and disposals of rental equipment of $18.5 million and an increase in purchases for non-rental equipment and cloud computing arrangements of $7.1 million.

#### Cash Flows from Financing Activities

Net cash provided by financing activities was $45.5 million for the three months ended March 31, 2024, as compared to $53.8 million in 2023. The decrease in cash provided by financing activities was primarily due to an increase in repurchases of common stock of $5.6 million and a decrease in proceeds, net of repayments, from floor plan financing and long-term debt arrangements of $2.5 million.

## Market risk

As filed, 1,655 characters.

### 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 March 31, 2024, we had $1,319.8 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 $1.6 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.

### Foreign currency exchange rate risk

During the three months ended March 31, 2024, we generated $13.6 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 $0.5 million on an annual basis. We do not currently hedge our exchange rate exposure.

## Controls and procedures

As filed, 4,101 characters.

(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 March 31, 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 General Information Technology Controls and 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 overall information technology general controls (“ITGCs”) for both user access and program change-management for systems supporting all of the Company’s internal control processes and controls, controls over the completeness and accuracy of information used in business process controls and management review controls. Our business process controls (automated and manual) and management review controls were also deemed ineffective because they are adversely impacted by ineffective ITGCs. 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. While we continue to enhance our overall internal control over financial reporting environment to ensure that it is comprehensive, management concluded that a portion of the pervasive material weakness that related to ITGCs identified in fiscal year 2021 and reported in our annual report on Form 10-K for the year ended December 31, 2022 filed on March 14, 2023, was remediated in fiscal year 2023. We implemented changes associated with the design, implementation, and monitoring ITGCs in the areas of user access and program change-management for systems supporting all of the Company’s primary internal control processes to ensure that ITGCs are designed and operating effectively. We also established controls to ensure appropriate authorization of new user access requests, including performance of routine reviews of user access, and controls over program-change management.

Additionally, management is in the process of designing, implementing and monitoring business process level 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 143 characters.

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.

Filed May 2, 2024.
Source: SEC EDGAR, the filing index for accession 0001709682-24-000037. Last ingested by Listed: Oct 26, 2026, 16:16 ET. No prices; not investment advice.