Custom Truck One Source (NYSE: CTOS) reported Q3 2026 revenue of $495.2 million, up 2.7% from $482.1 million a year earlier, while GAAP net income improved to $2.3 million from a $5.8 million loss. Adjusted EBITDA rose 15.6% to $110.9 million as rental revenue increased 20.1%, partially offset by more than $20 million of third-party STEM deliveries shifting into the fourth quarter.
Core Financial Results
Revenue growth was modest, but gross profit increased 12.4%, lifting the calculated GAAP gross margin to approximately 22.9% from 20.9%. Management attributed the return to net profitability primarily to higher operating income from rental growth and lower interest expense.
Adjusted EBITDA grew faster than revenue, and its margin expanded by approximately 250 basis points to 22.4%. All dollar amounts below are in U.S. dollars.
| Metric | Q3 2026 | Q3 2025 | Year-over-Year Change |
|---|---|---|---|
| Revenue | $495.2 million | $482.1 million | +2.7% |
| GAAP gross profit | $113.3 million | $100.8 million | +12.4% |
| Adjusted gross profit | $170.2 million | $155.5 million | +9.4% |
| GAAP net income (loss) | $2.3 million | $(5.8) million | Improved by $8.1 million |
| Adjusted EBITDA | $110.9 million | $96.0 million | +15.6% |
| Adjusted EBITDA margin | 22.4% | Approximately 19.9% | Approximately +250 bps |
Adjusted gross profit and adjusted EBITDA are non-GAAP measures. CTOS did not provide quarterly EPS in the supplied results.
Business and Segment Performance
CTOS began reporting through two segments in 2026: Specialty Equipment Rentals, or SER, and Specialty Truck Equipment and Manufacturing, or STEM. Prior-period segment figures were recast, although management noted that STEM adjusted EBITDA remains affected by differences in how intersegment margins were recorded in 2025.
SER drove the quarter’s operating growth. Average OEC on rent increased 10.5% to $1.39 billion, utilization improved to 81.5% from 79.3%, and annualized OEC on rent yield rose to 39.4% from 38.2%. Those gains supported a 20.1% increase in rental revenue and a SER adjusted EBITDA margin of 54.6%, up from 52.4%.
| Segment Metric | Q3 2026 | Q3 2025 | Year-over-Year Change |
|---|---|---|---|
| SER external revenue | $212.0 million | $182.9 million | Approximately +15.9% |
| Rental revenue | $152.7 million | $127.1 million | +20.1% |
| SER adjusted EBITDA | $121.9 million | $99.5 million | +22.5% |
| STEM external revenue | $283.2 million | $299.2 million | Approximately -5.3% |
| STEM adjusted EBITDA | $36.6 million | $17.7 million | Not directly comparable |
| Sales order backlog | $341.9 million | $279.8 million | Approximately +22% |
STEM’s total segment revenue, which includes intercompany activity, increased 8% as CTOS directed more production to its rental fleet. External STEM revenue declined because third-party new equipment sales were lower. A vendor recall and hail damage at the Kansas City facility delayed more than $20 million of deliveries, while CTOS also prioritized production for its own rental fleet. The delayed units remained in backlog and were expected to ship in the fourth quarter.
Higher Fleet Spending Supports 2027 Growth but Lowers 2026 Cash Flow
The quarter’s central trade-off was CTOS’s decision to invest more heavily in rental equipment while demand from utility transmission and distribution customers remained elevated. The company increased its expected 2026 gross rental fleet investment to $400 million–$430 million and net rental fleet investment to $210 million–$230 million.
Management expects only a modest 2026 earnings contribution from the additional equipment because of delivery timing, with a larger benefit anticipated in 2027. The higher capital spending and growth-related working capital reduced the 2026 levered free cash flow outlook from more than $50 million to slightly positive, even as the adjusted EBITDA forecast increased.
This means stronger operating earnings are not expected to translate into comparable near-term cash generation. Investors will need to monitor whether the added fleet maintains high utilization and yield as it enters service.
Profitability and Balance Sheet
Adjusted EBITDA margin expanded to 22.4%, reflecting higher gross profit and lower floor-plan interest expense associated with reduced inventory. Inventory ended the quarter at $1.016 billion, down $26 million sequentially, although CTOS expects additional chassis inventory under its pre-buy program ahead of 2027 emissions regulations.
CTOS ended September with $14.6 million of cash, $1.666 billion of total debt, and $1.652 billion of net debt. The net leverage ratio declined to 3.70x from 4.53x a year earlier and 4.31x at the end of 2025, even as ending fleet OEC increased by $143.0 million year over year to a record $1.76 billion. Availability under the senior secured credit facility was $234.3 million.
2026 Guidance
CTOS raised its full-year adjusted EBITDA and SER revenue forecasts for the third time during 2026, supported by rental demand. At the same time, it lowered expected levered free cash flow because more capital is being allocated to fleet growth and working capital.
| Metric | Latest 2026 Guidance | Previous Guidance | Change |
|---|---|---|---|
| Adjusted EBITDA | $447.5 million–$460 million | $437.5 million–$455 million | Range raised |
| SER revenue | $870 million–$890 million | $850 million–$875 million | Range raised |
| Net rental fleet investment | $210 million–$230 million | $170 million–$200 million | Range raised |
| Levered free cash flow | Slightly positive | More than $50 million | Outlook lowered |
Consolidated revenue is expected to reach $2.1 billion–$2.2 billion, representing 8%–13% growth, while total STEM revenue is forecast at $1.63 billion–$1.70 billion. Segment revenue includes intersegment transactions, so the segment ranges do not directly add to consolidated revenue.
CTOS expects its year-end net leverage ratio to remain meaningfully below 4x, with a longer-term target of less than 3x in 2027. For STEM, third-party new sales revenue is projected to grow 3%–10% for the year, including mid-to-high-teens growth in the fourth quarter as delayed deliveries are completed.
Risks Investors Need to Watch
- Delayed STEM deliveries: More than $20 million of sales shifted into the fourth quarter because of a vendor recall and hail damage. The full-year outlook depends partly on completing those deliveries as scheduled.
- Lower near-term cash generation: Higher fleet investment and growth-related working capital reduced expected levered free cash flow to slightly positive despite the higher earnings forecast.
- Debt and leverage: Net leverage improved to 3.70x, but net debt remained approximately $1.65 billion. Continued deleveraging depends on earnings growth and eventual cash generation from the expanded fleet.
- Timing of fleet returns: Most of the earnings benefit from incremental 2026 fleet investment is expected in 2027, creating a delay between cash deployment and financial returns.
- Backlog conversion: Backlog rose 22% to $342 million but represented approximately 3.8 months of trailing third-party new sales, below management’s targeted range of four to six months. The company also cautions that backlog is not a precise measure of future revenue.
Summary
CTOS’s Q3 2026 performance was led by rental demand, with higher fleet utilization and yield driving faster growth in gross profit and adjusted EBITDA than in consolidated revenue. STEM external sales were held back by delayed deliveries and the decision to prioritize rental fleet production. The company raised its earnings and SER revenue outlook, but the accompanying increase in fleet investment reduced near-term free cash flow expectations, making fourth-quarter delivery execution, rental returns, and leverage reduction the principal issues to monitor.
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