Custom Truck One Source (CTOS) Q2 2026 earnings review
Record Top-Line Meets Deleveraging Milestone, But Backlog Cracks
Custom Truck One Source delivered a blowout second quarter, with revenue up 10.2% to a record $563.4 million and Net Income swinging into the black ($10.4 million vs -$28.4 million a year ago). The Specialty Equipment Rentals (SER) segment carried the load, driven by massive utility and data center tailwinds that pushed fleet utilization to a scorching 81.6%. Management confidently raised full-year guidance for both revenue and Adjusted EBITDA. However, under the hood, two glaring issues emerged: the STEM equipment sales backlog collapsed 21% sequentially, and inventory levels spiked despite management's repeated promises to unwind working capital.
🐂 Bull Case
The SER segment is firing on all cylinders. Average OEC on rent grew 13.1% YoY to $1.36 billion, and utilization expanded 400 basis points to 81.6%. Secular tailwinds from T&D upgrades are providing structural demand.
Net leverage finally broke below the 4.0x threshold, ending Q2 at 3.85x (down from 4.31x at year-end 2025). The combination of EBITDA growth and disciplined CapEx is repairing the balance sheet.
🐻 Bear Case
Equipment sales backlog fell 21% sequentially from $411.3M in Q1 to $322.4M in Q2. It now represents just 3.5 months of LTM sales, falling below management's historical target range of 4 to 6 months.
Management's narrative of shrinking inventory to drive free cash flow contradicts the balance sheet. Inventory grew $111 million YTD to $1.04 billion, threatening the >$50M FCF target.
⚖️ Verdict: 🟢
Bullish, but with asterisks. The operational leverage in the rental business is undeniably strong, and clearing the 4.0x leverage hurdle is a massive win for the equity story. But the falling backlog and rising inventory demand strict monitoring in the second half.
Key Themes
T&D Megatrend Driving Rental Utilization
Secular demand from utility grid upgrades, data center investments, and electrification is supercharging the Specialty Equipment Rentals (SER) segment. Fleet utilization hit 81.6%, up from 77.6% a year ago. This volume leverage drove a 26.2% YoY increase in SER Adjusted EBITDA, proving the asset base can generate exceptional returns in tight markets.
STEM Backlog Dropping Below Target Metrics
Reversing trend. After a strong sequential jump in Q1 to $411 million, the STEM new sales order backlog plunged to $322.4 million in Q2. Management attributed this to 'record equipment deliveries' in the quarter. However, the backlog now represents roughly 3.5 months of LTM third-party sales—modestly below the company's stated 4 to 6 month target range. This raises questions about sequential sales sustainability in the second half.
Inventory Build Contradicts Working Capital Narrative
For multiple quarters, management has guided that aggressive inventory reductions (targeting below 6 months on hand) would drive working capital unlocks and support a >$50M levered free cash flow target. The data shows the opposite: total inventory has grown from $930.9 million at year-end 2025, to $1.02 billion in 26Q1, to $1.04 billion in 26Q2. Floor plan payables grew concurrently. This buildup is tying up cash and delaying structural FCF generation.
Steady March Down the Leverage Ladder
Accelerating improvement. Net leverage dropped to 3.85x, effectively crossing the critical 4.0x psychological barrier for the first time in recent history (down from 4.02x in Q1 and 4.31x in Q4 25). The reduction is primarily being driven by the denominator—LTM Adjusted EBITDA expanded to $431.4 million. The company reiterated its target to drive this below 3.0x in 2027.
Vocational Fleet Penetration and EPA 2027 Positioning
The company cited 'further penetration of the vocational rental market' as a key driver for incremental growth. With an average fleet age of just three years, CTOS maintains a highly modern, emission-compliant equipment base. This technological and fleet-age advantage positions them uniquely against smaller competitors as upcoming EPA 2027 emission standards threaten to disrupt chassis supply chains and force pre-buying behavior in the industry.
Other KPIs
Accelerating. Up 25.0% YoY, severely outpacing the 10.2% top-line growth. This implies excellent operating leverage, mostly driven by the SER segment where fixed depreciation costs were absorbed by higher utilization rates. Adjusted Gross Profit margin expanded 15.6% YoY to $180.9 million.
Decelerating significantly compared to the $181.4 million generated in the first six months of 2025. This contraction was directly caused by working capital headwinds, specifically a $112.6 million cash drain from expanding inventories, further highlighting the disconnect between the stated inventory reduction strategy and actual balance sheet mechanics.
Guidance
Accelerating. Upgraded from prior guidance of $2.005 - $2.12 billion. The midpoint ($2.15B) implies robust 10.6% YoY growth versus FY25, validating the strong H1 execution and sustained transmission & distribution end-market tailwinds.
Accelerating. Increased from the previous range of $415 - $440 million. The new midpoint ($446M) implies a powerful 16% YoY growth over FY25. This flows directly from the margin expansion witnessed in Q2 and structural rate/yield improvements in the rental portfolio.
Accelerating CapEx. The company revised its fleet investment target upward from the prior $150 - $170 million range. While still a meaningful reduction from the >$250 million spent in 2025, management is clearly pulling the trigger on capital deployment to chase high-yielding rental demand. This puts more pressure on operating cash flow to hit the $50M FCF target.
Key Questions
Inventory Strategy Disconnect
Total inventory has climbed by over $110 million year-to-date, directly dragging down operating cash flow. If the stated goal is to drive inventory below 6 months on hand to unlock working capital, why are we seeing a continuous buildup, and when will the actual balance sheet liquidation occur?
STEM Backlog Breakdown
The STEM backlog just fell roughly 21% sequentially to $322 million, pushing it below your target metric of 4 to 6 months of LTM sales. If Q2 sales benefited from pull-forward or record deliveries, how exposed is the second half to top-line deceleration in the sales segment?
Free Cash Flow Math
You increased Net Rental Fleet Investment guidance by $20-30 million to support demand, while simultaneously building inventory YTD. Given these cash outflows, how steep of a working capital reversal is required in the second half to still hit the >$50 million levered free cash flow target?