Custom Truck One Source, Inc. Reports Strong Results for Third Quarter 2023 and Affirms Full-Year 2023 EBITDA Guidance

Custom Truck One Source, Inc. (NYSE: CTOS), a leading provider of specialty equipment to the electric utility, telecom, rail and other infrastructure-related end markets, today reported financial results for its three and nine months ended September 30, 2023.

CTOS Third-Quarter Highlights

• Total revenue of $434.4 million, an increase of $76.6 million, or 21.4%, compared to $357.8 million for the third quarter of 2022 as a result of continued strong demand across our end markets
• Gross profit of $107.2 million, an improvement of $19.0 million, or 21.5%, compared to $88.2 million for the third quarter of 2022
• Adjusted Gross Profit of $149.6 million, an increase of $18.8 million, or 14.4%, compared to $130.8 million for the third quarter of 2022
• Net income of $9.2 million, an increase of $11.6 million, compared to net loss of $2.4 million, in the third quarter of 2022
• Adjusted EBITDA of $100.2 million, an increase of $8.6 million, or 9.3% compared to $91.6 million in the third quarter of 2022
• Maintenance of Net Leverage Ratio of 3.3 at September 30, 2023 and June 30, 2023
• Increasing full year 2023 revenue guidance and affirming Adjusted EBITDA guidance

“As we expected, demand remained strong across our primary end markets, which allowed us to deliver another quarter of excellent financial results and strong year-over-year growth in all three of our business segments. Our TES segment realized 34% revenue growth compared to the third quarter of last year. Our ERS segment realized 12% revenue growth, and while we experienced some short-term slowdown in the utility end market, our team effectively managed through it. Our rental fleet ended the quarter with utilization of approximately 80%,” said Ryan McMonagle, Chief Executive Officer of CTOS. “A third consecutive quarter of record setting vehicle production by our team allowed us to both add to our fleet and post strong year-over-year growth in new vehicle sales. This level of production, together with the demand environment and continued improvement in the supply chain give us the confidence to improve our revenue outlook for 2023. In addition, our purchase of $15.8 million of our stock in the quarter reflects our confidence in the improved outlook, as well as the value that we feel we will create for shareholders from continuing to execute on our growth strategy,” McMonagle added.

Summary Actual Financial Results

Summary Actual Financial Results by Segment

Our results are reported for our three segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”). ERS encompasses our core rental business, inclusive of sales of used rental equipment to our customers. TES encompasses our specialized truck and equipment production and new equipment sales activities. APS encompasses sales and rentals of parts, tools and other supplies to our customers, as well as our aftermarket repair service operations. Segment performance is presented below for the three and nine months ended September 30, 2023 and 2022 and three months ended June 30, 2023.

Summary Combined Operating Metrics

Management Commentary

Total revenue in the third quarter of 2023 was characterized by continued strong customer demand for both rental and new equipment across our end markets. Third quarter 2023 rental revenue increased 2.8% to $118.2 million, compared to $115.0 million in the third quarter of 2022, reflecting the continued expansion of our rental fleet, stable utilization, and pricing gains. Equipment sales increased 34.2% in the third quarter of 2023 to $283.1 million, compared to $210.9 million in the third quarter of 2022, reflecting record levels of production, continuing improvements in the supply chain, and our ability to replenish inventory. Parts sales and service revenue increased 3.8% to $33.1 million, compared to $31.9 million in the third quarter of 2022. On a sequential quarter basis, total third quarter revenue for 2023 decreased $22.5 million, or 4.9%, primarily due to the timing of new sales and a decline in average OEC on rent.

In our ERS segment, rental revenue in the third quarter of 2023 was $114.9 million compared to $112.0 million in the third quarter of 2022, a 2.6% increase. Fleet utilization continued to be strong at 78.9% compared to 83.8% in the third quarter of 2022, and we ended the quarter at 80.5%. Average OEC on rent decreased 2.3% year-over-year, primarily as a result of the lower utilization in the quarter. Total segment gross profit in the third quarter of 2023 was $58.0 million, an increase of 9.2% compared to $53.1 million in the third quarter of 2022. Adjusted Gross Profit in the segment was $99.7 million in the third quarter of 2023, compared to $94.9 million in the third quarter of 2022, representing 5.0% year-over-year growth. Rental Gross Profit improved to $85.3 million in the third quarter of 2023 compared to $84.8 million in the third quarter of 2022, a 0.6% increase. On a sequential quarter basis, total segment third quarter of 2023 revenue decreased $1.4 million, or 0.8%, driven by a 2.5% decrease in rental equipment sales compared to the second quarter. Despite the decline, we experienced favorable pricing, with OEC on rent yield increasing to a record 40.8% in the third quarter of 2023, up from 40.1% in the second quarter of 2023.

Revenue in our TES segment increased 32.9% to $230.9 million in the third quarter of 2023, from $173.8 million in the third quarter of 2022, primarily as a result of continued supply chain improvements, which allowed us to acquire more inventory, record production levels that led to greater order fulfillments and sustained strong customer demand. Gross profit improved by 46.3% to $39.8 million in the third quarter of 2023 compared to $27.2 million in the third quarter of 2022. Gross profit margin for the quarter was 17.2%, up from 15.7% in the third quarter of 2022. On a sequential quarter basis, total revenue in the third quarter of 2023 decreased $20.5 million, or 8.2%.

APS segment revenue increased 4.2% in the third quarter of 2023 to $36.3 million, compared to $34.9 million in the third quarter of 2022. Growth in demand for parts, tools and accessories sales was augmented by increased tools and accessories rentals in the Parts, Tools and Accessories (“PTA”) division. Gross profit margin increased to 25.7% in the third quarter of 2023 from 22.5% in the third quarter of 2022. On a sequential quarter basis, total segment gross profit margin in the third quarter of 2023 decreased 160 bps from 27.3%.

Net income was $9.2 million in the third quarter of 2023, compared to net loss of $2.4 million for the third quarter of 2022. The $11.6 million increase in net income is primarily the result of gross profit expansion, partially offset by higher interest costs. On a sequential quarter basis, total third quarter of 2023 net income declined $2.4 million primarily due to lower gross profit and higher interest expense.

Adjusted EBITDA for the third quarter of 2023 was $100.2 million, an increase of 9.3%, compared to $91.6 million for the third quarter of 2022. The increase in Adjusted EBITDA was largely driven by growth in rental revenue and new and used equipment sales, all of which contributed to margin expansion. On a sequential quarter basis, Adjusted EBITDA declined by $3.0 million.

As of September 30, 2023, cash and cash equivalents was $8.8 million, Total Debt outstanding was $1,451.2 million, Net Debt was $1,442.4 million and Net Leverage Ratio was 3.3x. Availability under the senior secured credit facility was $254.5 million as of September 30, 2023, and based on our borrowing base calculation, we have an additional $287.4 million of availability that we can potentially utilize by upsizing our existing facility. For the three months ended September 30, 2023, Ending OEC increased by $37.2 million as our fleet additions were only partially offset by our continued focus on selling older equipment from our rental fleet at current advantageous residual values. During the three months ended September 30, 2023, CTOS purchased $15.8 million of its common stock.

OUTLOOK

We are updating our full-year revenue guidance for 2023 at this time, as well as affirming our full-year 2023 EBITDA guidance. We believe our ERS segment will continue to benefit from strong demand from our rental customers, sustained levels of average OEC on rent and for resilient demand for purchases of rental fleet units, particularly older equipment for the remainder of the year. While we continue to expect to make gross investments in our rental fleet of more than $400 million this year, higher-than-anticipated levels of rental asset sales year-to-date likely will result in the net growth in our rental fleet (based on Ending OEC) being more modest than expected earlier this year. Regarding our TES segment, supply chain improvements, improved inventory levels, record production and strong backlog levels continue to enhance our ability to produce and deliver an even greater number of units in 2023 than we did previously. Commenting on the improvement outlook, McMonagle added, “Overall, we expect a seasonally strong fourth quarter and hope that the performance will exceed that of the fourth quarter of 2022, which benefited from the highest level of utilization in the Company’s history, as well as noted supply chain improvements, which allowed for record levels of new equipment sales. Despite the confidence implied by our improved outlook, given the level of share repurchase activity this year, as well as the continued investment in working capital to meet expected revenue growth, our ability to achieve our 3.0x leverage target by year end will be delayed until later in 2024.”

CONFERENCE CALL INFORMATION

The Company has scheduled a conference call at 5:00 P.M. Eastern Time on November 7, 2023, to discuss its third quarter 2023 financial results. A webcast and a presentation of financial information will be publicly available at: investors.customtruck.com. To listen by phone, please dial 1-855-327-6837 or 1-631-891-4304. A replay of the call will be available until midnight ET, Tuesday, November 14, 2023, by dialing 1-844-512-2921 or 1-412-317-6671 and entering passcode 10022473.

ABOUT CTOS

CTOS is one of the largest providers of specialty equipment, parts, tools, accessories and services to the electric utility transmission and distribution, telecommunications and rail markets in North America, with a differentiated “one-stop-shop” business model. CTOS offers its specialized equipment to a diverse customer base for the maintenance, repair, upgrade and installation of critical infrastructure assets, including electric lines, telecommunications networks and rail systems. The Company's coast-to-coast rental fleet of more than 10,200 units includes aerial devices, boom trucks, cranes, digger derricks, pressure drills, stringing gear, Hi-rail equipment, repair parts, tools and accessories. For more information, please visit customtruck.com.

FORWARD-LOOKING STATEMENTS

This press release includes “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this press release, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “should,” “future,” “propose” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside the Company's management’s control, that could cause actual results or outcomes to differ materially from those discussed in this press release. This press release is based on certain assumptions that the Company's management has made in light of its experience in the industry, as well as the Company’s perceptions of historical trends, current conditions, expected future developments and other factors the Company believes are appropriate in these circumstances. As you read and consider this press release, you should understand that these statements are not guarantees of performance or results. Many factors could affect the Company’s actual performance and results and could cause actual results to differ materially from those expressed in this press release. Important factors, among others, that may affect actual results or outcomes include: 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; 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 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; 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; material weakness in our internal control over financial reporting which, if not remediated, could result in material misstatements in our financial statements; 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 in our information technology systems or a compromise of our system security, limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, and 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; 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. For a more complete description of these and other possible risks and uncertainties, please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and its subsequent reports filed with the Securities and Exchange Commission. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements.

CUSTOM TRUCK ONE SOURCE, INC.

NON-GAAP FINANCIAL AND PERFORMANCE MEASURES

In our press release and schedules, and on the related conference call, we report certain financial measures that are not required by, or presented in accordance with, United States generally accepted accounting principles (“GAAP”). We utilize these financial measures to manage our business on a day-to-day basis and some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide investors expanded insight to assess performance, in addition to the standard GAAP-based financial measures. The press release schedules reconcile the most directly comparable GAAP measure to each non-GAAP measure that we refer to. Although management evaluates and presents these non-GAAP measures for the reasons described herein, please be aware that these non-GAAP measures have limitations and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present these non-GAAP financial measures differently than measures with the same or similar names that other companies report, and as a result, the non-GAAP measures we report may not be comparable to those reported by others.

Adjusted EBITDA. Adjusted EBITDA is a non-GAAP financial performance measure that we use to monitor our results of operations, to measure performance against debt covenants and performance relative to competitors. We believe Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of operating performance, without regard to financing methods or capital structures. We exclude the items identified in the reconciliations of net income (loss) to Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, including the method by which the assets were acquired, and capital structures. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. Our computation of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.

We define Adjusted EBITDA as net income or loss before interest expense, income taxes, depreciation and amortization, share-based compensation, and other items that we do not view as indicative of ongoing performance. Our Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used rental equipment sold. When inventory or rental equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. We also includes an adjustment to remove the impact of accounting for certain of our rental contracts that are accounted for under GAAP as a sales-type lease, however, in actuality, the rental contract remains in place and we continue to invoice the rentals to the customers. Sales-type lease accounting results in an accelerated revenue recognition profile compared to the period of service (that is, time of use by the rental customer) that is provided evenly over the duration of our time-based rental contracts, and compared to the cash payment profile, which is typically received evenly over the duration of our rental contracts. We include this adjustment because we believe continuing to reflect the transactions as an operating lease more closely measures the period of service provided and rental payments received better reflects the economics of the transactions given our large portfolio of rental contracts. These, and other, adjustments to GAAP net income or loss that are applied to derive Adjusted EBITDA conform to the definitions in our senior secured credit agreements.

Adjusted Gross Profit. We present total gross profit excluding rental equipment depreciation (“Adjusted Gross Profit”) as a non-GAAP financial performance measure. This measure differs from the GAAP definition of gross profit, as we do not include the impact of depreciation expense, which represents non-cash expense. We use these measures to evaluate operating margins and the effectiveness of the cost of our rental fleet.

Net Debt. We present the non-GAAP financial measure “Net Debt,” which is total debt (the most comparable GAAP measure, calculated as current and long-term debt, excluding deferred financing fees, plus current and long-term finance lease obligations) minus cash and cash equivalents. We believe this non-GAAP measure is useful to investors to evaluate our financial position.

Net Leverage Ratio. Net Leverage Ratio is a non-GAAP financial performance measure used by management and we believe it provides useful information to investors because it is an important measure that reflects our ability to service debt. We define net leverage ratio as net debt divided by Adjusted EBITDA.

Adjusted EBITDA is defined as net income plus interest expense, provision for income taxes, depreciation and amortization, and further adjusted for non-cash purchase accounting impact, transaction and process improvement costs, including business integration expenses, share-based payments, the change in fair value of derivative instruments, sales-type lease adjustment, and other special charges that are not expected to recur. This non-GAAP measure is subject to certain limitations.

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