hees-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to        

Commission file number: 000-51759

 

H&E Equipment Services, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

81-0553291

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

7500 Pecue Lane,

 

70809

Baton Rouge, Louisiana

 

(ZIP Code)

(Address of Principal Executive Offices)

 

 

(225) 298‑5200

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer

                         Accelerated Filer                  

Non-Accelerated Filer

 

 

 

 

 

Smaller Reporting Company  

                         Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July 19, 2018, there were 35,685,152 shares of H&E Equipment Services, Inc. common stock, $0.01 par value, outstanding.

 

 

 

 


H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

June 30, 2018

 

 

 

Page

PART I.  FINANCIAL INFORMATION

 

4

 

 

 

Item 1. Financial Statements:

 

4

Condensed Consolidated Balance Sheets as of June 30, 2018 (Unaudited) and December 31, 2017

 

4

Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017

 

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017

 

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

47

Item 4. Controls and Procedures

 

48

 

 

 

PART II.  OTHER INFORMATION

 

49

 

 

 

Item 1. Legal Proceedings

 

49

Item 1A. Risk Factors

 

49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

49

Item 3. Defaults upon Senior Securities

 

49

Item 4. Mine Safety Disclosures

 

49

Item 5. Other Information

 

49

Item 6. Exhibits

 

49

 

 

 

Signatures

 

50

 

 

2


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may”, “could”, “would”, “should”, “believe”, “expect”, “anticipate”, “plan”, “estimate”, “target”, “project”, “intend”, “foresee” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new marketing applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. In addition, even if our actual results are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative of results or developments in subsequent periods. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

 

general economic conditions and construction and industrial activity in the markets where we operate in North America;

 

our ability to forecast trends in our business accurately, and the impact of economic downturns and economic uncertainty on the markets we serve;

 

the impact of conditions in the global credit and commodity markets and their effect on construction spending and the economy in general;

 

relationships with equipment suppliers;

 

increased maintenance and repair costs as we age our fleet and decreases in our equipment’s residual value;

 

our indebtedness;

 

risks associated with the expansion of our business and any potential acquisitions we may make, including any related capital expenditures, or our ability to consummate such acquisitions;

 

our possible inability to integrate any businesses we acquire;

 

competitive pressures;

 

security breaches and other disruptions in our information technology systems;

 

adverse weather events or natural disasters;

 

compliance with laws and regulations, including those relating to environmental matters and corporate governance matters; and

 

other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements after we file this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise. Investors, potential investors and other readers are urged to consider the above mentioned factors carefully in evaluating the forward‑looking statements and are cautioned not to place undue reliance on such forward‑looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.

For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, as well as other reports and registration statements filed by us with the SEC. These factors should not be construed as exhaustive and should be read with other cautionary statements in this Quarterly Report on Form 10-Q and our other public filings. All of our annual, quarterly and current reports, and any amendments thereto, filed with or furnished to the SEC are available on our Internet website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our Internet website at www.he-equipment.com.

 

 

3


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

 

 

Balances at

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

9,579

 

 

$

165,878

 

Receivables, net of allowance for doubtful accounts of $3,392

   and $3,774, respectively

 

 

175,736

 

 

 

176,081

 

Inventories, net of reserves for obsolescence of $718 and $947, respectively

 

 

162,773

 

 

 

75,004

 

Prepaid expenses and other assets

 

 

9,671

 

 

 

9,172

 

Rental equipment, net of accumulated depreciation of

    $538,133 and $495,940, respectively

 

 

1,090,380

 

 

 

904,824

 

Property and equipment, net of accumulated depreciation and

   amortization of $139,784 and $131,500, respectively

 

 

112,076

 

 

 

101,789

 

Deferred financing costs, net of accumulated amortization

   of $13,342 and $12,946, respectively

 

 

3,375

 

 

 

3,772

 

Intangible assets, net

 

 

30,215

 

 

 

Goodwill

 

 

105,843

 

 

 

31,197

 

Total assets

 

$

1,699,648

 

 

$

1,467,717

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Amounts due on senior secured credit facility

 

$

132,663

 

 

$                      —

 

Accounts payable

 

 

154,551

 

 

 

89,781

 

Manufacturer flooring plans payable

 

 

28,760

 

 

 

22,002

 

Accrued expenses payable and other liabilities

 

 

69,917

 

 

 

65,095

 

Dividends payable

 

 

76

 

 

 

150

 

Senior unsecured notes, net of unaccreted discount of $3,406 and $3,644 and

   deferred financing costs of $2,206 and $2,267, respectively

 

 

944,388

 

 

 

944,088

 

Capital leases payable

 

 

829

 

 

 

1,486

 

Deferred income taxes

 

 

137,162

 

 

 

126,419

 

Deferred compensation payable

 

 

1,946

 

 

 

1,903

 

Total liabilities

 

 

1,470,292

 

 

 

1,250,924

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued

 

 

 

 

 

 

Common stock, $0.01 par value, 175,000,000 shares authorized; 39,662,340 and

   39,623,773 shares issued at June 30, 2018 and December 31, 2017, respectively,

   and 35,685,152 and 35,646,585 shares outstanding at June 30, 2018

   and December 31, 2017, respectively

 

 

396

 

 

 

395

 

Additional paid-in capital

 

 

229,041

 

 

 

227,070

 

Treasury stock at cost, 3,977,188 shares of common stock

   held at June 30, 2018 and December 31, 2017

 

 

(61,749

)

 

 

(61,749

)

Retained earnings

 

 

61,668

 

 

 

51,077

 

Total stockholders’ equity

 

 

229,356

 

 

 

216,793

 

Total liabilities and stockholders’ equity

 

$

1,699,648

 

 

$

1,467,717

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands, except per share amounts)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

143,829

 

 

$

118,370

 

 

$

273,190

 

 

$

225,687

 

New equipment sales

 

 

68,539

 

 

 

45,669

 

 

 

115,032

 

 

 

79,943

 

Used equipment sales

 

 

32,140

 

 

 

24,106

 

 

 

56,993

 

 

 

52,969

 

Parts sales

 

 

30,281

 

 

 

29,725

 

 

 

58,432

 

 

 

56,725

 

Services revenues

 

 

16,788

 

 

 

15,944

 

 

 

31,824

 

 

 

31,024

 

Other

 

 

18,787

 

 

 

15,549

 

 

 

35,375

 

 

 

29,843

 

Total revenues

 

 

310,364

 

 

 

249,363

 

 

 

570,846

 

 

 

476,191

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

51,171

 

 

 

41,838

 

 

 

97,640

 

 

 

82,741

 

Rental expense

 

 

22,073

 

 

 

20,162

 

 

 

43,345

 

 

 

38,536

 

New equipment sales

 

 

61,226

 

 

 

40,450

 

 

 

102,071

 

 

 

70,831

 

Used equipment sales

 

 

21,772

 

 

 

17,002

 

 

 

38,709

 

 

 

36,863

 

Parts sales

 

 

21,931

 

 

 

21,722

 

 

 

42,548

 

 

 

41,158

 

Services revenues

 

 

5,752

 

 

 

5,332

 

 

 

10,802

 

 

 

10,331

 

Other

 

 

18,336

 

 

 

15,517

 

 

 

35,043

 

 

 

30,719

 

Total cost of revenues

 

 

202,261

 

 

 

162,023

 

 

 

370,158

 

 

 

311,179

 

Gross profit

 

 

108,103

 

 

 

87,340

 

 

 

200,688

 

 

 

165,012

 

Selling, general and administrative expenses

 

 

69,046

 

 

 

59,807

 

 

 

134,926

 

 

 

117,125

 

Merger costs

 

 

68

 

 

 

 

 

 

220

 

 

 

 

Gain on sales of property and equipment, net

 

 

4,114

 

 

 

1,135

 

 

 

4,887

 

 

 

2,106

 

Income from operations

 

 

43,103

 

 

 

28,668

 

 

 

70,429

 

 

 

49,993

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(15,693

)

 

 

(13,373

)

 

 

(30,346

)

 

 

(26,605

)

Other, net

 

 

459

 

 

 

373

 

 

 

854

 

 

 

810

 

Total other expense, net

 

 

(15,234

)

 

 

(13,000

)

 

 

(29,492

)

 

 

(25,795

)

Income before provision for income taxes

 

 

27,869

 

 

 

15,668

 

 

 

40,937

 

 

 

24,198

 

Provision for income taxes

 

 

7,098

 

 

 

5,790

 

 

 

10,688

 

 

 

8,930

 

Net income

 

$

20,771

 

 

$

9,878

 

 

$

30,249

 

 

$

15,268

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.28

 

 

$

0.85

 

 

$

0.43

 

Diluted

 

$

0.58

 

 

$

0.28

 

 

$

0.84

 

 

$

0.43

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,634

 

 

 

35,473

 

 

 

35,613

 

 

 

35,469

 

Diluted

 

 

35,906

 

 

 

35,631

 

 

 

35,893

 

 

 

35,626

 

Dividends declared per common share outstanding

 

$

0.275

 

 

$

0.275

 

 

$

0.55

 

 

$

0.55

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


`H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

30,249

 

 

$

15,268

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

 

12,085

 

 

 

12,115

 

Depreciation of rental equipment

 

 

97,640

 

 

 

82,741

 

Amortization of intangible assets

 

 

1,485

 

 

 

 

Amortization of deferred financing costs

 

 

557

 

 

 

526

 

Accretion of note discount, net of premium amortization

 

 

239

 

 

 

84

 

Provision for losses on accounts receivable

 

 

1,679

 

 

 

1,858

 

Provision for inventory obsolescence

 

 

71

 

 

 

71

 

Change in deferred income taxes

 

 

10,743

 

 

 

9,968

 

Stock-based compensation expense

 

 

2,081

 

 

 

1,894

 

Gain from sales of property and equipment, net

 

 

(4,887

)

 

 

(2,106

)

Gain from sales of rental equipment, net

 

 

(18,006

)

 

 

(15,349

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Receivables

 

 

9,121

 

 

 

(3,274

)

Inventories

 

 

(103,631

)

 

 

(49,585

)

Prepaid expenses and other assets

 

 

(128

)

 

 

(1,911

)

Accounts payable

 

 

59,705

 

 

 

41,621

 

Manufacturer flooring plans payable

 

 

6,758

 

 

 

(4,956

)

Accrued expenses payable and other liabilities

 

 

(389

)

 

 

3,715

 

Deferred compensation payable

 

 

43

 

 

 

27

 

Net cash provided by operating activities

 

 

105,415

 

 

 

92,707

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

      Acquisition of businesses, net of cash acquired

 

 

(196,027

)

 

 

 

Purchases of property and equipment

 

 

(19,561

)

 

 

(12,137

)

Purchases of rental equipment

 

 

(217,828

)

 

 

(112,946

)

Proceeds from sales of property and equipment

 

 

6,687

 

 

 

3,137

 

Proceeds from sales of rental equipment

 

 

52,177

 

 

 

46,013

 

    Net cash used in investing activities

 

 

(374,552

)

 

 

(75,933

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on senior secured credit facility

 

 

735,775

 

 

 

484,252

 

Payments on senior secured credit facility

 

 

(603,112

)

 

 

(482,042

)

Payments of deferred financing costs

 

 

(97

)

 

 

 

Dividends paid

 

 

(19,619

)

 

 

(19,565

)

Payments of capital lease obligations

 

 

(109

)

 

 

(107

)

    Net cash provided by (used in) financing activities

 

 

112,838

 

 

 

(17,462

)

Net decrease in cash

 

 

(156,299

)

 

 

(688

)

Cash, beginning of period

 

 

165,878

 

 

 

7,683

 

Cash, end of period

 

$

9,579

 

 

$

6,995

 

 

6


H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Amounts in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

      Accrued acquisition purchase price consideration

 

$

3,432

 

 

$

 

Noncash asset purchases:

 

 

 

 

 

 

 

 

Assets transferred from new and used inventory to rental fleet

 

$

21,618

 

 

$

9,021

 

Purchases of property and equipment included in accrued expenses

   payable and other liabilities

 

$

24

 

 

$

(173

)

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

30,040

 

 

$

25,992

 

Income taxes paid, net of refunds received

 

$

1,254

 

 

$

446

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

7


H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Organization and Nature of Operations

Basis of Presentation

Our condensed consolidated financial statements include the financial position and results of operations of H&E Equipment Services, Inc. and its wholly-owned subsidiaries H&E Finance Corp., GNE Investments, Inc., Great Northern Equipment, Inc., H&E California Holding, Inc., H&E Equipment Services (California), LLC and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we” or “us” or “our” or the “Company.”

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, and therefore, the results and trends in these interim condensed consolidated financial statements may not be the same for the entire year. These interim condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2017, from which the consolidated balance sheet amounts as of December 31, 2017 were derived.

All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements. Business combinations accounted for as purchases are included in the condensed consolidated financial statements from their respective dates of acquisition.

The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, and consistent with industry practice, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.

Nature of Operations

As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross‑selling opportunities among our new and used equipment sales, rental, parts sales and services operations.

 

 

(2) Significant Accounting Policies

We describe our significant accounting policies in note 2 of the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.  During the three and six month periods ended June 30, 2018, there were no significant changes to those accounting policies, other than those policies impacted by the new revenue recognition guidance and further described below in “Recent Accounting Pronouncements Adopted in the First Quarter of 2018”.

Use of Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, which requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. These assumptions and estimates could have a material effect on our condensed consolidated financial statements. Actual results may differ materially from those estimates. We review our estimates on an ongoing basis based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.

8


Recent Accounting Pronouncements

Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.  At inception, lessees must classify leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the classification of cash flows within the statement of cash flows, differs depending on the lease classification. Also, certain qualitative and quantitative disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We will adopt ASU 2016-02 as of January 1, 2019. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients.

 

Our operating leases under current guidance (Topic 840) include the real estate where all but 12 of our 89 branch locations are located as of June 30, 2018. Additionally, the Company leases numerous types of non-rental equipment. Given the size of our lease portfolio, we expect that the new standard will have a material effect on our consolidated balance sheets as a result of recognizing new right-of-use assets and lease liabilities for our existing operating leases. We have begun accumulating the information related to these leases but have not completed our comprehensive analysis of those leases and are unable to quantify the impact to our consolidated financial statements at this time. We are concurrently evaluating our internal processes and controls over financial reporting with respect to the impact that the new lease standard will have on our lease administration and financial reporting activities. We are also in the process of implementing a new software tool to help facilitate compliance with the new guidance.

As mentioned in the Topic 606 discussion below, our equipment rental business involves rental agreements with customers whereby we are the lessor in the transaction and therefore, we believe that such transactions are subject to the pending lessor accounting guidance of Topic 842. While our evaluation of Topic 842 is ongoing with respect to our equipment rental activities, we have tentatively concluded that no significant changes are expected to the accounting for our rental equipment revenues, as substantially all of our rental agreements with customers will continue to be treated as operating leases under the new standard. Accordingly, we do not expect material changes to our related rental agreement accounting processes or internal controls upon adoption of ASU 2016-02. 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This standard adds to U.S. GAAP an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption. ASU 2016-13 will be effective for us as of January 1, 2020. While our review is ongoing, we believe ASU 2016-13 will only have applicability to our receivables from revenue transactions, or trade receivables. Under Topic 606, revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. While we believe that our current methodology for estimating the allowance for doubtful accounts on our trade accounts receivables is reasonable, we have not concluded whether the application of the CECL model, when compared to our current methodology, will have a material impact to our allowance for doubtful accounts.

9


In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 of the current goodwill impairment test., which was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the reporting unit’s goodwill.  ASU 2017-04 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019, with early adoption permitted and requires prospective adoption.  Based upon our review of ASU 2017-04, we do not expect the guidance to have a material impact on our consolidated financial statements.

 

Recent Accounting Pronouncements Adopted in Fiscal 2018

 

  In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which aims to eliminate the diversity in the presentation of certain cash receipts and cash payments presented and classified in the statement of cash flows. The guidance addresses the following specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transitions and (8) separately identifiable cash flows and application of predominance principle. We adopted this guidance effective January 1, 2018 and it had no impact to our condensed consolidated statement of cash flows for the periods presented in this Quarterly Report on Form 10-Q.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”).  ASU 2017-01 clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The definition of a business affects several areas of accounting, including acquisitions, disposals, goodwill and consolidation. We adopted this guidance effective January 1, 2018 and it had no impact on our condensed consolidated financial statements for the periods presented in this Quarterly Report on Form 10-Q. The future impact of this guidance will depend on the nature of our future activities.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflect the consideration we expect to be entitled to in exchange for those goods or services. Entities may use a full retrospective approach or report on the cumulative effect as of the date of adoption. We adopted this standard using the full retrospective transition method effective January 1, 2018.

While the adoption of the new standard did not have an impact on our reported net income for the periods presented in this quarterly report on Form 10-Q, approximately $1.8 million and $3.4 million of revenues that were previously classified in Other Revenues have been reclassified to Parts Revenues for the three and six month periods ended June 30, 2018, respectively. These revenues relate to freight income associated with our parts transactions, and such income was not deemed to be a separate performance obligation under the new guidance. Accordingly, we also reclassified $1.4 million and $2.6 million of associated freight costs related to these parts transactions from Other Cost of Revenues to Parts Costs of Revenues for the three and six months ended June 30, 2018, respectively. We have recast our results for the prior year three and six month periods ended June 30, 2017 as shown in the tables below (amounts in thousands).

 

 

 

 

Three Months Ended June 30, 2017

Statement of Income:

 

As Previously Reported

 

Adjustments

 

Current Presentation

Revenues:

 

 

 

   Equipment rentals

 

   $      118,370    

 

$           ─

 

$     118,370  

   New equipment sales

 

45,669

 

 

45,669

   Used equipment sales

 

24,106

 

 

24,106

   Parts sales

 

27,969

 

1,756

 

29,725

   Services revenues

 

15,944

 

 

15,944

   Other

 

17,305

 

(1,756)

 

15,549

10


        Total revenues

 

249,363

 

 

249,363

Cost of revenues:

 

 

 

 

 

 

   Rental depreciation

 

41,838

 

 

41,838

   Rental expense

 

20,162

 

 

20,162

   New equipment sales

 

40,450

 

 

40,450

   Used equipment sales

 

17,002

 

 

17,002

   Parts sales

 

20,358

 

1,364

 

21,722

   Services revenues

 

5,332

 

 

5,332

   Other

 

16,881

 

(1,364)

 

15,517

       Total cost of revenues

 

162,023

 

 

162,023

       Gross profit

 

$      87,340  

 

$          ─

 

$     87,340    

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

Statement of Income:

 

As Previously Reported

 

Adjustments

 

Current Presentation

Revenues:

 

 

 

   Equipment rentals

 

   $     225,687    

 

$           ─

 

$     225,687  

   New equipment sales

 

79,943

 

 

79,943

   Used equipment sales

 

52,969

 

 

52,969

   Parts sales

 

53,300

 

3,425

 

56,725

   Services revenues

 

31,024

 

 

31,024

   Other

 

33,268

 

(3,425)

 

29,843

        Total revenues

 

476,191

 

 

476,191

Cost of revenues:

 

 

 

 

 

 

   Rental depreciation

 

82,741

 

 

82,741

   Rental expense

 

38,536

 

 

38,536

   New equipment sales

 

70,831

 

 

70,831

   Used equipment sales

 

36,863

 

 

36,863

   Parts sales

 

38,571

 

2,587

 

41,158

   Services revenues

 

10,331

 

 

10,331

   Other

 

33,306

 

(2,587)

 

30,719

       Total cost of revenues

 

311,179

 

 

311,179

       Gross profit

 

$   165,012  

 

$          ─

 

$     165,012    

 

 

 

11


Revenue Recognition

As further discussed below, upon the adoption of Topic 606 on January 1, 2018, we recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 840 (which addresses lease accounting). As discussed above in “Pronouncements Not Yet Adopted”, Topic 842 will supersede Topic 840 upon our adoption of Topic 842 on January 1, 2019.

Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.

Nature of goods and services

The tables below summarizes for the three and six months ended June 30, 2018 our revenue by type and by the applicable accounting standard (amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

2018

 

2017

 

Topic 840

 

Topic 606

 

Total

 

Topic 840

 

Topic 605

 

Total

Rental revenues

$  143,435  

 

$       394

 

$  143,829 

 

$  117,850

 

$         520

 

$  118,370

New equipment sales

           ─

 

68,539

 

       68,539

 

 

45,669

 

45,669

Used equipment sales

           ─

 

32,140

 

       32,140

 

 

24,106

 

24,106

Parts sales

           ─

 

30,281

 

       30,281

 

 

29,725

 

29,725

Service revenues

           ─

 

16,788

 

       16,788

 

 

15,944

 

15,944

Other

       5,362

 

13,425

 

       18,787

 

4,313

 

11,236

 

15,549

Total revenues

$  148,797  

 

$ 161,567 

 

$   310,364 

 

$  122,163

 

$  127,200

 

$  249,363

 

 

 

Six Months Ended June 30,

 

2018

 

2017

 

Topic 840

 

Topic 606

 

Total

 

Topic 840

 

Topic 605

 

Total

Rental revenues

$  272,275 

 

$       915 

 

$   273,190 

 

$  224,633

 

$      1,054

 

$  225,687

New equipment sales

              ─

 

115,032

 

     115,032

 

 

79,943

 

79,943

Used equipment sales

              ─

 

56,993

 

       56,993

 

 

52,969

 

52,969

Parts sales

              ─

 

58,432

 

       58,432

 

 

56,725

 

56,725

Service revenues

              ─

 

31,824

 

       31,824

 

 

31,024

 

31,024

Other

       9,942

 

25,433

 

       35,375

 

8,151

 

21,692

 

29,843

Total revenues

$  282,217  

 

$ 288,629 

 

$   570,846 

 

$   232,784

 

$  243,407

 

$  476,191

Revenues by reporting segment are presented in note 10 of our condensed consolidated financial statements, using the revenue captions reflected in our condensed consolidated statements of income. We believe that the disaggregation of our revenues from contracts to customers as reflected above, coupled with further discussion below and the reporting segment in note 10, depicts how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

Lease revenues (Topic 840)

As discussed above in “Pending Accounting Pronouncements Not Yet Adopted”, we expect to adopt Topic 842 on January 1, 2019. While our review of the revenue accounting under Topic 842 is ongoing, we have tentatively concluded that no significant changes are expected to our rental revenue accounting upon adoption of Topic 842.

Rental Revenues: Owned equipment rentals represent revenues from renting equipment. We account for these rentals as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the periods presented.

12


Other: Other rental revenues primarily represent services performed by us in connection with the rental of equipment to a customer, such as fuel consumption charges and damage waiver insurance. Fuel consumption charges are recognized upon return of the rental equipment when fuel consumption by the customer, if any, can be measured. Income from damage waiver insurance policies are recognized over the period the equipment is rented.

Revenues from contracts with customers (Topic 606)

The accounting for the types of revenues accounted for pursuant to Topic 606 are discussed below. Substantially all of our revenues under Topic 606 are recognized at a point-in-time rather than over time.

Rental revenues: These revenues represent revenues for services performed by us in connection with the rental of equipment and are comprised of customer training fees on rented equipment and erection and dismantling services on rental equipment. Revenues for these services are recognized upon completion of such services.

New equipment sales: Revenues from the sales of new equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.

Used equipment sales: Revenues from the sales of used equipment are recognized at the time of delivery to, or pick-up by, the customer, which is when the customer obtains control of the promised good.

Parts sales: Revenues from the sales of equipment parts are recognized at the time of pick-up by the customer for parts counter sales transactions. For parts that are shipped to a customer, we elected to use a practical expedient of Topic 606 and treat such shipping activities as fulfillment costs, thereby recognizing revenues at the time of shipment.

 

Services revenues: We derive our services primarily from maintenance and repair services to customers for their owned equipment. We recognize services revenues at the time such services are completed, which is when the customer obtains control of the promised service.

Other revenues: Other revenues relate primarily to hauling fees for transporting rental equipment to and from the customer and ancillary charges associated with maintenance and repair services. Such revenues are recognized at the time the services are completed.  

 

Receivables and contract assets and liabilities

 

We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically generate the revenues that are accounted for under both Topic 606 and Topic 840, the discussions below on credit risk and our allowances for doubtful accounts address our total revenues from Topic 606 (Topic 605 for 2017) and Topic 840.

 

We believe concentration of credit risk with respect to our receivables is limited because a large number of geographically diverse customers makes up our customer base. Our largest customer accounted for less than one percent of total revenues for the three and six months ended June 30, 2018, and for each of the last three full years. No single customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented in this Quarterly Report on Form 10-Q. We manage credit risk through credit approvals, credit limits and other monitoring procedures.

 

We maintain an allowance for doubtful accounts that reflects our estimate of the amount of our receivables that we will be unable to collect. We develop our estimate of this allowance based on our historical experience with specific customers, our understanding of our current economic circumstances and our own judgment as to the likelihood of ultimate payment. Our largest exposure to doubtful accounts is in our rental operations. We perform credit evaluations of customers and establish credit limits based on reviews of our customers’ current credit information and payment histories. We believe our credit risk is somewhat mitigated by our geographically diverse customer base and our credit evaluation procedures. During the year, we write-off customer account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote. Such write-offs are charged against our allowance for doubtful accounts. Bad debt expense as a percentage of total revenues for the six month periods ended June 30, 2018 and 2017 were approximately 0.3% and 0.4%, respectively. The actual rate of future credit losses, however, may not be similar to past experience. Our estimate of doubtful accounts could change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance for doubtful accounts.

 

We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of

13


recognizable revenue. We did not recognize material revenue during the three and six months ended June 30, 2018 or 2017 that was included in the contract liability balance as of the beginning of such periods.

 

Performance obligations

 

Most of our Topic 606 revenue is recognized at a point-in-time, rather than over time. Accordingly, in any particular period, we do not generally recognize a significant amount of revenue from performance obligations satisfied (or partially satisfied) in previous periods, and the amount of such revenue recognized during the three and six months ended June 30, 2018 and 2017 was not material. We also do not expect to recognize material revenue in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2018.

 

Payment terms

 

Our Topic 606 revenues do not include material amounts of variable consideration. Our payment terms vary by the type and location of our customer and the products or services offered. The time between invoicing and when payment is due is not significant. Our contracts do not generally include a significant financing component. Our contracts with customers do not generally result in significant obligations associated with returns, refunds or warranties. See above for a discussion of how we manage credit risk.

 

Sales tax amounts collected from customers are recorded on a net basis.

 

Contract costs

 

We do not recognize any assets associated with the incremental costs of obtaining a contract with a customer (for example, a sales commission) that we expect to recover. Most of our revenue is recognized at a point-in-time or over a period of one year or less, and we use the practical expedient that allows us to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.

 

Contract estimates and judgments

 

Our revenues accounted for under Topic 606 generally do not require significant estimates or judgments as the transaction price is generally fixed and stated on our contracts. Our contracts generally do not include multiple performance obligations, and accordingly do not generally require estimates of the standalone selling price for each performance obligation. Also, our revenues do not include material amounts of variable consideration. Substantially all of our revenues are recognized at a point-in-time and the timing of the satisfaction of the applicable performance obligations is readily determinable. As noted above, our Topic 606 revenues are generally recognized at the time of delivery to, or pick-up by, the customer.

 

 

 

 

 


14


(3) Acquisitions

 

Contractors Equipment Center (“CEC”)

 

On January 1, 2018, we completed the acquisition of CEC, a non-residential construction focused equipment rental company with three branches located in the greater Denver, Colorado area. CEC had approximately 100 employees and approximately $84 million of rental assets at original equipment cost as of December 31, 2017. CEC also had total revenues of approximately $34 million in the year ended December 31, 2017. The acquisition is expected to significantly expand our presence in the Denver area and surrounding markets.

 

The aggregate consideration paid to the pre-acquisition owners of CEC was approximately $132.4 million. The acquisition and related fees and expenses were funded through available cash. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. We do not expect any further changes to these assigned values.

 

 

 

$’s in thousands

 

 

 

 

 

Cash

 

$      1,244

 

Accounts receivable, net of allowance for doubtful accounts (1)

 

            7,583

 

Inventory

 

             504

 

Prepaid expenses and other assets

 

             324

 

Rental equipment

 

         55,342

 

Property and equipment

 

           2,700

 

Intangible assets (2)

 

         21,500

 

     Total identifiable assets acquired

 

         89,197

 

Accounts payable

 

          (1,023)

 

Accrued expenses payable and other liabilities

 

(876)

 

     Total liabilities assumed

 

(1,899)

 

     Net identifiable assets acquired

 

          87,298

 

Goodwill (3)

 

          45,092

 

     Net assets acquired

 

   $   132,390

 

 

 

 

(1)

The fair value of accounts receivable acquired was approximately $7.6 million and the gross contractual amount was $7.7 million.  

 

 

(2)

The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:

 

 

 

Fair Value (amounts in thousands)

 

Life (years)

Customer relationships

 

$   21,000

 

10

Tradenames

 

300

 

1

Leasehold interests

 

200

 

10

 

 

$   21,500

 

 

 

 

 

 

 

 

 

(3)

The analysis of assigning the $45.1 million goodwill among our six goodwill reporting units has not been finalized. The level of goodwill that resulted from the CEC acquisition is primarily reflective of CEC’s going-concern value, the value of CEC’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.

 

Total CEC acquisition costs were $0.9 million, of which approximately $0.2 million was incurred in the three and six month periods ended June 30, 2018.

 

Total revenues attributable to CEC since the acquisition were $9.8 million and $21.5 million for the three and six month periods ended June 30 2018. Estimated net income attributable to CEC since the acquisition was $1.0 million, or $0.03 per share, for the three month period ended June 30, 2018 and $2.6 million, or $0.07 per share, for the six month period ended June 30, 2018.  

 

15


 

Rental, LLC (dba “Rental Inc.”)

 

On April 1, 2018, we completed the acquisition of Rental Inc., a non-residential equipment rental and distribution company with five branches located in Alabama, Florida and Western Georgia. Rental Inc. had approximately 65 employees and approximately $35 million of rental assets at original equipment costs as of March 31, 2018. The acquisition is expected to expand our presence in the surrounding market.

 

The aggregate consideration paid to the owners of Rental Inc. was approximately $68.6 million. The acquisition and related fees and expenses were funded through available cash and from borrowings under our Senior Secured Credit Facility. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date. The amounts presented here are preliminary and are subject to change. However, we do not expect material changes to these assigned values.

 

 

 

$’s in thousands

 

 

 

Cash

 

$         260

Accounts receivable, net of allowance for doubtful accounts (1)

 

    2,873    

Inventory

 

    5,324

Prepaid expenses and other assets

 

         47

Rental equipment

 

   22,578

Property and equipment

 

     1,935

Intangible assets (2)

 

     10,200

     Total identifiable assets acquired

 

   43,217

Accounts payable

 

        (439)

Manufacturer flooring plans payable

 

      (3,293)

Accrued expenses payable and other liabilities

 

        (469)

     Total liabilities assumed

 

      (4,201)

     Net identifiable assets acquired

 

     39,016

Goodwill (3)

 

      29,554

     Net assets acquired

 

$    68,570

 

 

 

(1)

The fair value of accounts receivables acquired was approximately $2.9 million and the gross contractual amount was $3.1 million.  

 

 

(2)

The following table reflects the estimated fair values and useful lives of the acquired intangible assets identified based on our purchase accounting assessments:

 

 

 

Fair Value (amounts in thousands)

 

Life (years)

Customer relationships

 

$     10,000  

 

10

Tradenames

 

          200

 

  1

 

 

$     10,200  

 

 

 

 

 

 

 

 

 

(3)

The analysis of assigning the $29.6 million goodwill among our six goodwill reporting units has not been finalized. The level of goodwill that resulted from the CEC acquisition is primarily reflective of Rental Inc.’s going-concern value, the value of Rental Inc.’s assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations. We currently expect the goodwill recognized to be 100% deductible for income tax purposes.

 

Total Rental Inc. acquisition costs were $0.2 million, of which approximately $0.1 million was incurred in the three and six month periods ended June 30, 2018.

 

Total revenues attributable to Rental Inc. since the acquisition were $7.6 million for the three and six month periods ended June 30 2018. Estimated net income attributable to Rental Inc. since the acquisition was $0.1 million, or $0.00 per share, for the three and six month periods ended June 30, 2018.

 

 

16


 

 

 

 

Pro forma financial information

 

We completed the CEC acquisition on January 1, 2018. Therefore, the operating results of CEC are included in our reported condensed consolidated statements of income for the full three and six month periods ended June 30, 2018. We completed the Rental Inc. acquisition on April 1, 2018. Therefore, the operating results of Rental Inc. are only included in our reported condensed consolidated statements of income for the full three month period ended June 30, 2018.

 

The pro forma information below gives effect to the CEC and Rental Inc. acquisitions as if they had been completed on January 1, 2017 (the “pro forma acquisition date”). The pro forma information is not necessarily indicative of our results of operations had the acquisitions been completed on the above date, nor is it necessarily indicative of our future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, nor does it reflect additional revenue opportunities following the acquisition. The pro forma adjustments reflected in the table below are subject to change as additional analysis is performed. The tables below present unaudited pro forma consolidated statements of income information for the three and six month periods ended June 30, 2017 and the six month period ended June 30, 2018 as if CEC and Rental Inc. were included in our consolidated results for the entire periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

(amounts in thousands, except per share data)

 

 

Three Month Period Ended June 30, 2017

 

 

H&E

 

CEC

 

Rental Inc.

 

Total

Total revenues

 

$249,363

 

$8,140

 

$8,979

 

$266,482

 

 

 

 

 

 

 

 

 

Pretax income

 

15,668

 

1,448

 

2,105

 

19,221

Pro forma adjustments to pretax income:

 

 

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

     —

 

(809)

 

(738)

 

(1,547)

Intangible asset amortization (2)

 

     —

 

(705)

 

(275)

 

(980)

Interest expense (3)

 

     —

 

     —

 

(475)

 

(475)

Elimination of historic interest expense (4)

 

     —

 

139

 

   102

 

       241

Pro forma pretax income

 

15,668

 

       73

 

    719

 

   16,460

Income tax expense

 

5,790

 

       27

 

    262

 

     6,079

Net income

 

$   9,878

 

$    46

 

$ 457

 

$10,381

Net income per share – basic

 

$     0.28

 

$   —

 

  $0.01

 

$    0.29

Net income per share - diluted

 

$     0.28

 

$   —

 

  $0.01

 

$    0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

(amounts in thousands, except per share data)

 

 

Six Month Period Ended June 30, 2017

 

 

H&E

 

CEC

 

Rental Inc.

 

Total

Total revenues

 

$476,191

 

$16,529

 

$17,225

 

$509,945

 

 

 

 

 

 

 

 

 

Pretax income

 

24,198

 

2,889

 

4,158

 

31,245

Pro forma adjustments to pretax income:

 

 

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

     —

 

(1,712)

 

(1,381)

 

(3,093)

Intangible asset amortization (2)

 

     —

 

(1,410)

 

(550)

 

(1,960)

Interest expense (3)

 

     —

 

     —

 

(995)

 

(995)

Elimination of historic interest expense (4)

 

     —

 

      263

 

     202

 

       465

Pro forma pretax income

 

24,198

 

       30

 

  1,434

 

   25,662

Income tax expense

 

8,930

 

       11

 

      523

 

     9,464

Net income

 

$ 15,268

 

   $  19

 

   $ 911

 

$16,198

Net income per share – basic

 

$     0.43

 

    $   —

 

    $0.03

 

$    0.46

Net income per share - diluted

 

$     0.43

 

    $   —

 

    $0.03

 

$    0.45

 

 

17


 

 

 

 

(amounts in thousands, except per share data)

 

 

Six Month Period Ended June 30, 2018

 

 

H&E(5)

 

Rental Inc.(6)

 

Total

Total revenues

 

$  570,846

 

$7,408

 

$578,254

 

 

 

 

 

 

 

Pretax income

 

40,937

 

1,020

 

41,957

Pro forma adjustments to pretax income:

 

 

 

 

 

 

Impact of fair value mark-ups/useful life changes on depreciation (1)

 

 

(749)

 

(749)

Intangible asset amortization (2)

 

 

(275)

 

(275)

Interest expense (3)

 

 

(480)

 

(480)

Elimination of historic interest expense (4)

 

 

     82

 

        82

Pro forma pretax income (loss)

 

40,937

 

(402)

 

40,535

Income tax expense (benefit)

 

10,688

 

(105)

 

10,583

Net income (loss)

 

$    30,249  

 

$ (297)

 

$ 29,952

Net income (loss) per share – basic

 

$        0.85    

 

$(0.01)

 

$     0.84

Net income (loss) per share - diluted

 

$        0.84    

 

$(0.01)

 

$     0.83

 

 

 

(1)

Depreciation of rental equipment and non-rental equipment were adjusted for the fair value markups, and the changes in useful lives and salvage values of the equipment acquired in the acquisitions.

 

 

(2)

Represents the amortization of the intangible assets acquired in the acquisitions.

 

 

(3)

A portion of the consideration paid for Rental Inc. was funded with borrowings from our senior secured credit facility. Interest expense was adjusted to reflect the additional debt resulting from the acquisition.

 

 

(4)

Historic debt of CEC and Rental Inc. that is not part of the combined entity was eliminated.

 

 

(5)

H&E represents consolidated operating results as presented in this Quarterly Report on Form 10-Q for the six month period ended June 30, 2018 and includes actual results for CEC for the six months ended June 30, 2018 and actual results for Rental Inc. for the three month period ended June 30, 2018.

 

 

(6)

Represents Rental Inc. pro forma operating results for the three month period ended March 31, 2018. We completed the Rental Inc. acquisition on April 1, 2018.

 

 

(4) Fair Value of Financial Instruments

Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three broad levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly

Level 3 – Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions

18


The carrying value of financial instruments reported in the accompanying condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity of these financial instruments. The fair value of our letter of credit is based on fees currently charged for similar agreements. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures as of June 30, 2018 and December 31, 2017 are presented in the table below (amounts in thousands) and have been calculated based upon market quotes and present value calculations based on market rates.

 

 

 

June 30, 2018

 

 

 

Carrying

Amount

 

 

Fair

Value

 

Manufacturer flooring plans payable with interest computed

   at 4.50% (Level 3)

 

$

28,760

 

 

$

24,492

 

Senior unsecured notes with interest computed

   at 5.625 (Level 1)

 

 

944,388

 

 

 

935,750

 

Capital leases payable with interest computed

   at 5.929% (Level 3)

 

 

829

 

 

 

704

 

Letter of credit (Level 3)

 

 

 

 

 

116

 

 

 

 

December 31, 2017

 

 

 

Carrying

Amount

 

 

Fair

Value

 

Manufacturer flooring plans payable with interest computed

   at 4.50% (Level 3)

 

$

22,002

 

 

$

18,737

 

Senior unsecured notes with interest computed

   at 5.625% (Level 1)

 

 

944,088

 

 

 

619,019

 

Capital leases payable with interest computed

   at 5.929% to 9.55% (Level 3)

 

 

1,486

 

 

 

1,114

 

Letter of credit (Level 3)

 

 

 

 

 

116

 

 

At December 31, 2017, the fair value of our senior unsecured notes due 2025 was based on the present value of the notes based on our incremental borrowing rate as these notes were not available (registered) on a bond trading market as of December 31, 2017.  At June 30, 2018, the fair value of our senior unsecured notes due 2025 were based on quoted bond trading market prices of those notes.

During the three and six month periods ended June 30, 2018 and 2017, there were no transfers of financial assets or liabilities in or out of Level 1, Level 2 or Level 3 of the fair value hierarchy.

 

 

(5) Stockholders’ Equity

The following table summarizes the activity in Stockholders’ Equity for the six month period ended June 30, 2018 (amounts in thousands, except share data):

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Retained

 

 

Total

 

 

 

Shares

Issued

 

 

Amount

 

 

Paid-in

Capital

 

 

Treasury

Stock

 

 

Earnings

(Deficit)

 

 

Stockholders’

Equity

 

Balances at December 31, 2017

 

 

39,623,773

 

 

$

395

 

 

$

227,070

 

 

$

(61,749

)

 

$

51,077

 

 

$

216,793

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,081

 

 

 

 

 

 

 

 

 

2,081

 

Cash dividends declared on common stock ($0.275 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,658

)

 

 

(19,658

)

Issuance of common stock, net of forfeitures

 

 

38,567

 

 

 

1

 

 

 

(110

)

 

 

 

 

 

 

 

 

(109

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,249

 

 

 

30,249

 

Balances at June 30, 2018

 

 

39,662,340

 

 

 

396

 

 

 

229,041

 

 

 

(61,749

)

 

 

61,668

 

 

 

229,356

 

 


19


 

(6) Stock-Based Compensation

We account for our stock-based compensation plans using the fair value recognition provisions of Accounting Standards Codification (“ASC”) 718, Stock Compensation (“ASC 718”). Under the provisions of ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Shares available for future stock-based payment awards under our 2016 Stock-Based Incentive Compensation Plan were 1,857,004 shares as of June 30, 2018.

Non-vested Stock

The following table summarizes our non-vested stock activity for the six months ended June 30, 2018:

 

 

 

Number of

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

Non-vested stock at December 31, 2017

 

 

445,964

 

 

$

19.70

 

Granted

 

 

16,152

 

 

$

39.53

 

Vested

 

 

(56,834

)

 

$

23.46

 

Forfeited

 

 

(23,381

)

 

$

18.03

 

Non-vested stock at June 30, 2018

 

 

381,901

 

 

$

20.08

 

 

As of June 30, 2018, we had unrecognized compensation expense of approximately $3.3 million related to non-vested stock that we expect to be recognized over a weighted-average period of approximately 1.7 years. The following table summarizes compensation expense related to non-vested stock, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2018 and 2017 (amounts in thousands):

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

 

2017

 

Compensation expense

 

$

762

 

 

$

713

 

 

$

2,081

 

 

 

$

1,894

 

    

 

  

 

(7) Income per Share

Income per common share for the three and six months ended June 30, 2018 and 2017 are based on the weighted average number of common shares outstanding during the period. The effects of potentially dilutive securities that are anti-dilutive are not included in the computation of dilutive income per share. We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic and diluted EPS calculations using the two-class method. All of our restricted common shares are currently participating securities.

20


Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period.  The number of restricted common shares outstanding was approximately 0.8% of total outstanding shares for each of the three months ended June 30, 2018 and 2017, and, consequently, was immaterial to the basic and diluted EPS calculations. Therefore, use of the two-class method had no impact on our basic and diluted EPS calculations for the periods presented. The following table sets forth the computation of basic and diluted net income per common share for the three and six months ended June 30, 2018 and 2017 (amounts in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,771

 

 

$

9,878

 

 

$

30,249

 

 

$

15,268

 

Weighted average number of common

   shares outstanding

 

 

35,634

 

 

 

35,473

 

 

 

35,613

 

 

 

35,469

 

Net income per share of common stock – basic

 

$

0.58

 

 

$

0.28

 

 

$

0.85

 

 

$

0.43

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,771

 

 

$

9,878

 

 

$

30,249

 

 

$

15,268

 

Weighted average number of common shares outstanding

 

 

35,634

 

 

 

35,473

 

 

 

35,613

 

 

 

35,469

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive non-vested restricted stock

 

 

272

 

 

 

158

 

 

 

280

 

 

 

157

 

Weighted average number of common shares

   outstanding – diluted

 

 

35,906

 

 

 

35,631

 

 

 

35,893

 

 

 

35,626

 

Net income per share of common stock – diluted

 

$

0.58

 

 

$

0.28

 

 

$

0.84

 

 

$

0.43

 

Common shares excluded from the denominator

   as anti-dilutive:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8) Senior Secured Credit Facility

We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC (as successor to General Electric Capital Corporation) as administrative agent, and the lenders named therein.  

On December 22, 2017, we amended, extended and restated the Credit Facility by entering into the Fifth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.

The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the credit facility from May 21, 2019 to December 22, 2022, (ii) increases the commitments under the senior secured asset based revolver provided for therein from $602.5 million to $750 million, (iii) increases the uncommitted incremental revolving capacity from $150 million to $250 million, (iv) provides that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage (as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowers the interest rate (a) in the case of base rate revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowers the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and (vii) permits, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).                

21


The Amended and Restated Credit Agreement continues to provide for, among other things, a $30 million letter of credit sub-facility, and a guaranty by certain of the Company’s subsidiaries of the obligations under the credit facility. In addition, the credit facility remains secured by substantially all of the assets of the Company and certain of its subsidiaries.   

 As of June 30, 2018, we were in compliance with our financial covenants under the Amended and Restated Credit Agreement. At June 30, 2018, we had $132.7 borrowings outstanding under the Credit Facility and could borrow up to $609.6 million and remain in compliance with the debt covenants under the Company’s credit facility. At July 19, 2018, we had $592.9 million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.

        

 

(9) Senior Unsecured Notes

On August 24, 2017, we completed an offering of $750 million aggregate principal amount of 5.6250% senior notes due 2025 (the “New Notes”) and the settlement of a cash tender offer (the “Tender Offer”) with respect to our 7% senior notes due 2022 (the “Old Notes”). Net proceeds, after deducting $10.3 million of estimated offering expenses, from the sale of the New Notes totaled approximately $739.7 million. We used a portion of the net proceeds from the sale of the New Notes to repurchase $329.7 million of aggregate principal amount of the Old Notes in early settlement of the Tender Offer, which the Company launched on August 17, 2017. Holders who tendered their Old Notes prior to the early tender deadline received $1,038.90 per $1,000 principal amount of Old Notes tendered, plus accrued and unpaid interest up to, but not including, the payment date of August 24, 2017. Effective as of August 24, 2017, we (i) provided notice of the redemption of all remaining Old Notes that were not validly tendered in the Tender Offer at the expiration time and (ii) satisfied and discharged the indenture governing the Old Notes in accordance with its terms. On September 25, 2017, we redeemed the remaining $300.3 million principal amount outstanding of the Old Notes at a redemption price equal to 103.50% of the principal amount thereof, plus accrued and unpaid interest up to, but not including, the date of redemption.

The New Notes were issued at par and require semiannual interest payments on March 1st and September 1st of each year, commencing on March 1, 2018. No principal payments are due until maturity (September 1, 2025).

The New Notes are redeemable, in whole or in part, at any time on or after September 1, 2020 at specified redemption prices plus accrued and unpaid interest to the date of redemption. We may redeem up to 40% of the aggregate principal amount of the New Notes before September 1, 2020 with the net cash proceeds from certain equity offerings. We may also redeem the New Notes prior to September 1, 2020 at a specified “make-whole” redemption price plus accrued and unpaid interest to the date of redemption.

The New Notes rank equally in right of payment to all of our existing and future senior indebtedness and rank senior to any of our subordinated indebtedness. The New Notes are unconditionally guaranteed on a senior unsecured basis by all of our current and future significant domestic restricted subsidiaries. In addition, the New Notes are effectively subordinated to all of our and the guarantors’ existing and future secured indebtedness, including the Credit Facility, to the extent of the assets securing such indebtedness, and are structurally subordinated to all of the liabilities and preferred stock of any of our subsidiaries that do not guarantee the New Notes.

If we experience a change of control, we will be required to offer to purchase the New Notes at a repurchase price equal to 101% of the principal amount, plus accrued and unpaid interest to the date of repurchase.

The indenture governing the New Notes contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (i) incur additional indebtedness, assume a guarantee or issue preferred stock; (ii) pay dividends or make other equity distributions or payments to or affecting our subsidiaries; (iii) purchase or redeem our capital stock; (iv) make certain investments; (v) create liens; (vi) sell or dispose of assets or engage in mergers or consolidations; (vii) engage in certain transactions with subsidiaries or affiliates; (viii) enter into sale-leaseback transactions; and (ix) engage in certain business activities. Each of the covenants is subject to exceptions and qualifications. As of December 31, 2017, we were in compliance with these covenants.

On November 22, 2017, we closed on an offering of $200 million aggregate principal amount of 5.625% senior notes due 2025 (the “Add-on Notes”) in an unregistered offering through a private placement. The Add-on Notes were priced at 104.25% of the principal amount. Net proceeds from the offering of the Add-on Notes, including accrued interest from August 24, 2017 totaled approximately $209.2 million. The net proceeds of the offering, was used to repay indebtedness outstanding under the Company’s existing senior secured credit facility (the “Credit Facility”) and for the payment of fees and expenses related to the offering. The remainder of the net proceeds will be used for general corporate purposes and to fund potential acquisitions in connection with our ongoing strategy of acquiring rental companies to complement our existing business and footprint.

The Add-on Notes were issued as additional notes under an indenture dated as of August 24, 2017, pursuant to which we previously issued the New Notes as described above. The Add-on Notes have identical terms to, rank equally with and form a part of a single class of securities with the New Notes.

22


Pursuant to a registration rights agreement entered into between us, the guarantors of the New Notes and the initial purchasers of the New Notes, we agreed to make an offer to exchange (the “Exchange Offer”) the New Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New Notes (except that the exchange notes will not contain any transfer restrictions) within a certain period of time following the completion of the offering. On January 17, 2018, the Company filed a registration statement on Form S-4 with respect to an offer to exchange the New and Add-on Notes and guarantees for registered, publicly tradable notes and guarantees that have terms identical in all material respects to the New and Add-on Notes (except that the exchange notes do not contain any transfer restrictions). This exchange offer closed on March 27, 2018.

The following table reconciles our Senior Unsecured Notes to our Condensed Consolidated Balance Sheets (amounts in thousands):

 

Balance at December 31, 2016

 

$

627,711

 

Accretion of discount on Old Notes through

     August 24, 2017

 

 

683

 

Amortization of note premium on Old Notes through

     August 24, 2017

 

 

(574

)

Amortization of deferred financing costs through

    August 24, 2017

 

 

153

 

Aggregate principal amount paid on Old Notes

 

 

(630,000

)

Writeoff of unaccreted discount on Old Notes

 

 

5,294

 

Writeoff of unamortized premium on Old Notes

 

 

(4,452

)

Writeoff of deferred financing costs on Old Notes

 

 

1,185

 

Aggregate principal amount issued on New Notes

 

 

950,000

 

Note discount and deferred transaction costs on

     New Notes

 

 

(14,684

)

Note premium on New Notes

 

 

8,500

 

Accretion of discount on New Notes from

    August 24, 2017 through December 31, 2017

 

 

542

 

Amortization of note premium on New Notes from

    August 24, 2017 through December 31, 2017

 

 

(375

)

Amortization of deferred financing costs on New Notes

     August 24, 2017 through December 31, 2017

 

 

105

 

Balance at December 31, 2017

 

$

944,088

 

Accretion of discount through June 30, 2018

 

 

770

 

Amortization of note premium through June 30, 2018

 

 

(531

)

Additional deferred financing costs on New Notes

 

 

(97

)

Amortization of deferred financing costs through

    June 30, 2018

 

 

158

 

Balance at June 30, 2018

 

$

944,388

 

 

 

(10) Segment Information

We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and services revenues. These segments are based upon how management of the Company allocates resources and assesses performance. Non-segmented revenues and non-segmented costs relate to equipment support activities including transportation, hauling, parts freight and damage-waiver charges and are not allocated to the other reportable segments. There were no sales between segments for any of the periods presented. Selling, general and administrative expenses as well as all other income and expense items below gross profit are not generally allocated to reportable segments.

23


We do not compile discrete financial information by segments other than the information presented below. The following table presents information about our reportable segments (amounts in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Segment Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

143,829

 

 

$

118,370

 

 

$

273,190

 

 

$

225,687

 

New equipment sales

 

 

68,539

 

 

 

45,669

 

 

 

115,032

 

 

 

79,943

 

Used equipment sales

 

 

32,140

 

 

 

24,106

 

 

 

56,993

 

 

 

52,969

 

Parts sales

 

 

30,281

 

 

 

29,725

 

 

 

58,432

 

 

 

56,725

 

Services revenues

 

 

16,788

 

 

 

15,944

 

 

 

31,824

 

 

 

31,024

 

Total segmented revenues

 

 

291,577

 

 

 

233,814

 

 

 

535,471

 

 

 

446,348

 

Non-segmented revenues

 

 

18,787

 

 

 

15,549

 

 

 

35,375

 

 

 

29,843

 

Total revenues

 

$

310,364

 

 

$

249,363

 

 

$

570,846

 

 

$

476,191

 

Segment Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

70,585

 

 

$

56,370

 

 

$

132,205

 

 

$

104,410

 

New equipment sales

 

 

7,313

 

 

 

5,219

 

 

 

12,961

 

 

 

9,112

 

Used equipment sales

 

 

10,368

 

 

 

7,104

 

 

 

18,284

 

 

 

16,106

 

Parts sales

 

 

8,350

 

 

 

8,003

 

 

 

15,884

 

 

 

15,567

 

Services revenues

 

 

11,036

 

 

 

10,612

 

 

 

21,022

 

 

 

20,693

 

Total segmented gross profit

 

 

107,652

 

 

 

87,308

 

 

 

200,356

 

 

 

165,888

 

Non-segmented gross profit (loss)

 

 

451

 

 

 

32

 

 

 

332

 

 

 

(876

)

Total gross profit

 

$

108,103

 

 

$

87,340

 

 

$

200,688

 

 

$

165,012

 

 

 

 

Balances at

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Segment identified assets:

 

 

 

 

 

 

 

 

Equipment sales

 

$

143,602

 

 

$

58,125

 

Equipment rentals

 

 

1,090,380

 

 

 

904,824

 

Parts and services

 

 

19,171

 

 

 

16,879

 

Total segment identified assets

 

 

1,253,153

 

 

 

979,828

 

Non-segment identified assets

 

 

446,495

 

 

 

487,889

 

Total assets

 

$

1,699,648

 

 

$

1,467,717

 

 

The Company operates primarily in the United States and our sales to international customers for the three month periods ended June 30, 2018 and 2017 were 0.1% and 0.1%, respectively, of total revenues. Our sales to international customers for the six month periods ended June 30, 2018 and 2017 were 0.2% and 0.4%, respectively.  No one customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented.

 

 

(11) Condensed Consolidating Financial Information of Guarantor Subsidiaries

All of the indebtedness of H&E Equipment Services, Inc. is guaranteed by GNE Investments, Inc. and its wholly‑owned subsidiary Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp. The guarantor subsidiaries are all wholly‑owned and the guarantees, made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s ability to obtain funds from the guarantor subsidiaries by dividend or loan.

The consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial statements for H&E Finance Corp. are not included within the consolidating financial statements because H&E Finance Corp. has no assets or operations.

24


CONDENSED CONSOLIDATING BALANCE SHEET

 

 

 

As of June 30, 2018

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

9,579

 

 

$

 

 

$

 

 

$

9,579

 

Receivables, net

 

 

142,318

 

 

 

33,418

 

 

 

 

 

 

175,736

 

Inventories, net

 

 

141,811

 

 

 

20,962

 

 

 

 

 

 

162,773

 

Prepaid expenses and other assets

 

 

9,496

 

 

 

175

 

 

 

 

 

 

9,671

 

Rental equipment, net

 

 

936,036

 

 

 

154,344

 

 

 

 

 

 

1,090,380

 

Property and equipment, net

 

 

95,147

 

 

 

16,929

 

 

 

 

 

 

112,076

 

Deferred financing costs, net

 

 

3,375

 

 

 

 

 

 

 

 

 

3,375

 

Investment in guarantor subsidiaries

 

 

246,373

 

 

 

 

 

 

(246,373

)

 

 

 

Intangible assets, net

 

 

30,215

 

 

 

 

 

 

 

 

 

 

 

30,215

 

Goodwill

 

 

76,317

 

 

 

29,526

 

 

 

 

 

 

105,843

 

Total assets

 

$

1,690,667

 

 

$

255,354

 

 

$

(246,373

)

 

$

1,699,648

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts due on senior secured credit facility

 

$

132,663

 

 

$

 

 

$

 

 

$

132,663

 

Accounts payable

 

 

143,651

 

 

 

10,900

 

 

 

 

 

 

154,551

 

Manufacturer flooring plans payable

 

 

27,851

 

 

 

909

 

 

 

 

 

 

28,760

 

Accrued expenses payable and other liabilities

 

 

73,524

 

 

 

(3,607

)

 

 

 

 

 

69,917

 

Dividends payable

 

 

126

 

 

 

(50

)

 

 

 

 

 

76

 

Senior unsecured notes

 

 

944,388

 

 

 

 

 

 

 

 

 

944,388

 

Capital leases payable

 

 

 

 

 

829

 

 

 

 

 

 

829

 

Deferred income taxes

 

 

137,162

 

 

 

 

 

 

 

 

 

137,162

 

Deferred compensation payable

 

 

1,946

 

 

 

 

 

 

 

 

 

1,946

 

Total liabilities

 

 

1,461,311

 

 

 

8,981

 

 

 

 

 

 

1,470,292

 

Stockholders’ equity

 

 

229,356

 

 

 

246,373

 

 

 

(246,373

)

 

 

229,356

 

Total liabilities and stockholders’ equity

 

$

1,690,667

 

 

$

255,354

 

 

$

(246,373

)

 

$

1,699,648

 

 

25


CONDENSED CONSOLIDATING BALANCE SHEET

 

 

 

As of December 31, 2017

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

165,878

 

 

$

 

 

$

 

 

$

165,878

 

Receivables, net

 

 

138,657

 

 

 

37,424

 

 

 

 

 

 

176,081

 

Inventories, net

 

 

63,828

 

 

 

11,176

 

 

 

 

 

 

75,004

 

Prepaid expenses and other assets

 

 

9,030

 

 

 

142

 

 

 

 

 

 

9,172

 

Rental equipment, net

 

 

760,972

 

 

 

143,852

 

 

 

 

 

 

904,824

 

Property and equipment, net

 

 

89,952

 

 

 

11,837

 

 

 

 

 

 

101,789

 

Deferred financing costs, net

 

 

3,772

 

 

 

 

 

 

 

 

 

3,772

 

Investment in guarantor subsidiaries

 

 

222,217

 

 

 

 

 

 

(222,217

)

 

 

-

 

Goodwill

 

 

1,671

 

 

 

29,526

 

 

 

 

 

 

31,197

 

Total assets

 

$

1,455,977

 

 

$

233,957

 

 

$

(222,217

)

 

$

1,467,717

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

78,811

 

 

$

10,970

 

 

$

 

 

$

89,781

 

Manufacturer flooring plans payable

 

 

20,300

 

 

 

1,702

 

 

 

 

 

 

22,002

 

Accrued expenses payable and other liabilities

 

 

67,466

 

 

 

(2,371

)

 

 

 

 

 

65,095

 

Dividends payable

 

 

197

 

 

 

(47

)

 

 

 

 

 

150

 

Senior unsecured notes

 

 

944,088

 

 

 

 

 

 

 

 

 

944,088

 

Capital leases payable

 

 

 

 

 

1,486

 

 

 

 

 

 

1,486

 

Deferred income taxes

 

 

126,419

 

 

 

 

 

 

 

 

 

126,419

 

Deferred compensation payable

 

 

1,903

 

 

 

 

 

 

 

 

 

1,903

 

Total liabilities

 

 

1,239,184

 

 

 

11,740

 

 

 

 

 

 

1,250,924

 

Stockholders’ equity

 

 

216,793

 

 

 

222,217

 

 

 

(222,217

)

 

 

216,793

 

Total liabilities and stockholders’ equity

 

$

1,455,977

 

 

$

233,957

 

 

$

(222,217

)

 

$

1,467,717

 

 

26


CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

 

 

Three Months Ended June 30, 2018

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

123,457

 

 

$

20,372

 

 

$

 

 

$

143,829

 

New equipment sales

 

 

55,700

 

 

 

12,839

 

 

 

 

 

 

68,539

 

Used equipment sales

 

 

26,162

 

 

 

5,978

 

 

 

 

 

 

32,140

 

Parts sales

 

 

26,087

 

 

 

4,194

 

 

 

 

 

 

30,281

 

Services revenues

 

 

13,979

 

 

 

2,809

 

 

 

 

 

 

16,788

 

Other

 

 

15,777

 

 

 

3,010

 

 

 

 

 

 

18,787

 

Total revenues

 

 

261,162

 

 

 

49,202

 

 

 

 

 

 

310,364

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

43,950

 

 

 

7,221

 

 

 

 

 

 

51,171

 

Rental expense

 

 

18,866

 

 

 

3,207

 

 

 

 

 

 

22,073

 

New equipment sales

 

 

49,712

 

 

 

11,514

 

 

 

 

 

 

61,226

 

Used equipment sales

 

 

17,559

 

 

 

4,213

 

 

 

 

 

 

21,772

 

Parts sales

 

 

18,987

 

 

 

2,944

 

 

 

 

 

 

21,931

 

Services revenues

 

 

4,755

 

 

 

997

 

 

 

 

 

 

5,752

 

Other

 

 

15,329

 

 

 

3,007

 

 

 

 

 

 

18,336

 

Total cost of revenues

 

 

169,158

 

 

 

33,103

 

 

 

 

 

 

202,261

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

 

60,641

 

 

 

9,944

 

 

 

 

 

 

70,585

 

New equipment sales

 

 

5,988

 

 

 

1,325

 

 

 

 

 

 

7,313

 

Used equipment sales

 

 

8,603

 

 

 

1,765

 

 

 

 

 

 

10,368

 

Parts sales

 

 

7,100

 

 

 

1,250

 

 

 

 

 

 

8,350

 

Services revenues

 

 

9,224

 

 

 

1,812

 

 

 

 

 

 

11,036

 

Other

 

 

448

 

 

 

3

 

 

 

 

 

 

451

 

Gross profit

 

 

92,004

 

 

 

16,099

 

 

 

 

 

 

108,103

 

Selling, general and administrative expenses

 

 

57,738

 

 

 

11,308

 

 

 

 

 

 

69,046

 

Merger costs

 

 

68

 

 

 

 

 

 

 

 

 

68

 

Equity in earnings of guarantor subsidiaries

 

 

2,490

 

 

 

 

 

 

(2,490

)

 

 

 

Gain on sales of property and equipment, net

 

 

4,023

 

 

 

91

 

 

 

 

 

 

4,114

 

Income from operations

 

 

40,711

 

 

 

4,882

 

 

 

(2,490

)

 

 

43,103

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(13,247

)

 

 

(2,446

)

 

 

 

 

 

(15,693

)

Other, net

 

 

405

 

 

 

54

 

 

 

 

 

 

459

 

Total other expense, net

 

 

(12,842

)

 

 

(2,392

)

 

 

 

 

 

(15,234

)

Income before income taxes

 

 

27,869

 

 

 

2,490

 

 

 

(2,490

)

 

 

27,869

 

Income tax expense

 

 

7,098

 

 

 

 

 

 

 

 

 

7,098

 

Net income

 

$

20,771

 

 

$

2,490

 

 

$

(2,490

)

 

$

20,771

 

 

27


CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

 

 

Three Months Ended June 30, 2017

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

96,709

 

 

$

21,661

 

 

$

 

 

$

118,370

 

New equipment sales

 

 

38,819

 

 

 

6,850

 

 

 

 

 

 

45,669

 

Used equipment sales

 

 

19,333

 

 

 

4,773

 

 

 

 

 

 

24,106

 

Parts sales

 

 

25,458

 

 

 

4,267

 

 

 

 

 

 

29,725

 

Services revenues

 

 

13,395

 

 

 

2,549

 

 

 

 

 

 

15,944

 

Other

 

 

12,590

 

 

 

2,959

 

 

 

 

 

 

15,549

 

Total revenues

 

 

206,304

 

 

 

43,059

 

 

 

 

 

 

249,363

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

34,542

 

 

 

7,296

 

 

 

 

 

 

41,838

 

Rental expense

 

 

16,740

 

 

 

3,422

 

 

 

 

 

 

20,162

 

New equipment sales

 

 

34,315

 

 

 

6,135

 

 

 

 

 

 

40,450

 

Used equipment sales

 

 

14,056

 

 

 

2,946

 

 

 

 

 

 

17,002

 

Parts sales

 

 

18,712

 

 

 

3,010

 

 

 

 

 

 

21,722

 

Services revenues

 

 

4,479

 

 

 

853

 

 

 

 

 

 

5,332

 

Other

 

 

12,567

 

 

 

2,950

 

 

 

 

 

 

15,517

 

Total cost of revenues

 

 

135,411

 

 

 

26,612

 

 

 

 

 

 

162,023

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

 

45,427

 

 

 

10,943

 

 

 

 

 

 

56,370

 

New equipment sales

 

 

4,504

 

 

 

715

 

 

 

 

 

 

5,219

 

Used equipment sales

 

 

5,277

 

 

 

1,827

 

 

 

 

 

 

7,104

 

Parts sales

 

 

6,746

 

 

 

1,257

 

 

 

 

 

 

8,003

 

Services revenues

 

 

8,916

 

 

 

1,696

 

 

 

 

 

 

10,612

 

Other

 

 

23

 

 

 

9

 

 

 

 

 

 

32

 

Gross profit

 

 

70,893

 

 

 

16,447

 

 

 

 

 

 

87,340

 

Selling, general and administrative expenses

 

 

52,766

 

 

 

7,041

 

 

 

 

 

 

59,807

 

Equity in earnings of guarantor subsidiaries

 

 

1,212

 

 

 

 

 

 

(1,212

)

 

 

 

Gain on sales of property and equipment, net

 

 

905

 

 

 

230

 

 

 

 

 

 

1,135

 

Income from operations

 

 

20,244

 

 

 

9,636

 

 

 

(1,212

)

 

 

28,668

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(7,407

)

 

 

(5,966

)

 

 

 

 

 

(13,373

)

Other, net

 

 

274

 

 

 

99

 

 

 

 

 

 

373

 

Total other expense, net

 

 

(7,133

)

 

 

(5,867

)

 

 

 

 

 

(13,000

)

Income before income taxes

 

 

13,111

 

 

 

3,769

 

 

 

(1,212

)

 

 

15,668

 

Income tax expense

 

 

5,790

 

 

 

 

 

 

 

 

 

5,790

 

Net income

 

$

7,321

 

 

$

3,769

 

 

$

(1,212

)

 

$

9,878

 

 

28


CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

 

 

Six Months Ended June 30, 2018

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

234,291

 

 

$

38,899

 

 

$

 

 

$

273,190

 

New equipment sales

 

 

95,601

 

 

 

19,431

 

 

 

 

 

 

115,032

 

Used equipment sales

 

 

46,388

 

 

 

10,605

 

 

 

 

 

 

56,993

 

Parts sales

 

 

50,434

 

 

 

7,998

 

 

 

 

 

 

58,432

 

Services revenues

 

 

26,761

 

 

 

5,063

 

 

 

 

 

 

31,824

 

Other

 

 

29,719

 

 

 

5,656

 

 

 

 

 

 

35,375

 

Total revenues

 

 

483,194

 

 

 

87,652

 

 

 

 

 

 

570,846

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

83,509

 

 

 

14,131

 

 

 

 

 

 

97,640

 

Rental expense

 

 

37,126

 

 

 

6,219

 

 

 

 

 

 

43,345

 

New equipment sales

 

 

84,795

 

 

 

17,276

 

 

 

 

 

 

102,071

 

Used equipment sales

 

 

31,391

 

 

 

7,318

 

 

 

 

 

 

38,709

 

Parts sales

 

 

36,943

 

 

 

5,605

 

 

 

 

 

 

42,548

 

Services revenues

 

 

9,117

 

 

 

1,685

 

 

 

 

 

 

10,802

 

Other

 

 

29,245

 

 

 

5,798

 

 

 

 

 

 

35,043

 

Total cost of revenues

 

 

312,126

 

 

 

58,032

 

 

 

 

 

 

370,158

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

 

113,656

 

 

 

18,549

 

 

 

 

 

 

132,205

 

New equipment sales

 

 

10,806

 

 

 

2,155

 

 

 

 

 

 

12,961

 

Used equipment sales

 

 

14,997

 

 

 

3,287

 

 

 

 

 

 

18,284

 

Parts sales

 

 

13,491

 

 

 

2,393

 

 

 

 

 

 

15,884

 

Services revenues

 

 

17,644

 

 

 

3,378

 

 

 

 

 

 

21,022

 

Other

 

 

474

 

 

 

(142

)

 

 

 

 

 

332

 

Gross profit

 

 

171,068

 

 

 

29,620

 

 

 

 

 

 

200,688

 

Selling, general and administrative expenses

 

 

112,746

 

 

 

22,180

 

 

 

 

 

 

134,926

 

Merger costs

 

 

220

 

 

 

 

 

 

 

 

 

220

 

Equity in earnings of guarantor subsidiaries

 

 

2,948

 

 

 

 

 

 

(2,948

)

 

 

 

Gain on sales of property and equipment, net

 

 

4,737

 

 

 

150

 

 

 

 

 

 

4,887

 

Income from operations

 

 

65,787

 

 

 

7,590

 

 

 

(2,948

)

 

 

70,429

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(25,596

)

 

 

(4,750

)

 

 

 

 

 

(30,346

)

Other, net

 

 

746

 

 

 

108

 

 

 

 

 

 

854

 

Total other expense, net

 

 

(24,850

)

 

 

(4,642

)

 

 

 

 

 

(29,492

)

Income before income taxes

 

 

40,937

 

 

 

2,948

 

 

 

(2,948

)

 

 

40,937

 

Income tax expense

 

 

10,688

 

 

 

 

 

 

 

 

 

10,688

 

Net income

 

$

30,249

 

 

$

2,948

 

 

$

(2,948

)

 

$

30,249

 

 

29


CONDENSED CONSOLIDATING STATEMENT OF INCOME

 

 

 

Six Months Ended June 30, 2017

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

184,992

 

 

$

40,695

 

 

$

 

 

$

225,687

 

New equipment sales

 

 

68,494

 

 

 

11,449

 

 

 

 

 

 

79,943

 

Used equipment sales

 

 

42,474

 

 

 

10,495

 

 

 

 

 

 

52,969

 

Parts sales

 

 

48,599

 

 

 

8,126

 

 

 

 

 

 

56,725

 

Services revenues

 

 

26,090

 

 

 

4,934

 

 

 

 

 

 

31,024

 

Other

 

 

24,342

 

 

 

5,501

 

 

 

 

 

 

29,843

 

Total revenues

 

 

394,991

 

 

 

81,200

 

 

 

 

 

 

476,191

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental depreciation

 

 

68,290

 

 

 

14,451

 

 

 

 

 

 

82,741

 

Rental expense

 

 

31,976

 

 

 

6,560

 

 

 

 

 

 

38,536

 

New equipment sales

 

 

60,685

 

 

 

10,146

 

 

 

 

 

 

70,831

 

Used equipment sales

 

 

30,155

 

 

 

6,708

 

 

 

 

 

 

36,863

 

Parts sales

 

 

35,437

 

 

 

5,721

 

 

 

 

 

 

41,158

 

Services revenues

 

 

8,690

 

 

 

1,641

 

 

 

 

 

 

10,331

 

Other

 

 

24,820

 

 

 

5,899

 

 

 

 

 

 

30,719

 

Total cost of revenues

 

 

260,053

 

 

 

51,126

 

 

 

 

 

 

311,179

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

 

84,726

 

 

 

19,684

 

 

 

 

 

 

104,410

 

New equipment sales

 

 

7,809

 

 

 

1,303

 

 

 

 

 

 

9,112

 

Used equipment sales

 

 

12,319

 

 

 

3,787

 

 

 

 

 

 

16,106

 

Parts sales

 

 

13,162

 

 

 

2,405

 

 

 

 

 

 

15,567

 

Services revenues

 

 

17,400

 

 

 

3,293

 

 

 

 

 

 

20,693

 

Other

 

 

(478

)

 

 

(398

)

 

 

 

 

 

(876

)

Gross profit

 

 

134,938

 

 

 

30,074

 

 

 

 

 

 

165,012

 

Selling, general and administrative expenses

 

 

103,001

 

 

 

14,124

 

 

 

 

 

 

117,125

 

Equity in earnings of guarantor subsidiaries

 

 

4,981

 

 

 

 

 

 

(4,981

)

 

 

 

Gain on sales of property and equipment, net

 

 

1,629

 

 

 

477

 

 

 

 

 

 

2,106

 

Income from operations

 

 

38,547

 

 

 

16,427

 

 

 

(4,981

)

 

 

49,993

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(14,970

)

 

 

(11,635

)

 

 

 

 

 

(26,605

)

Other, net

 

 

621

 

 

 

189

 

 

 

 

 

 

810

 

Total other expense, net

 

 

(14,349

)

 

 

(11,446

)

 

 

 

 

 

(25,795

)

Income before income taxes

 

 

24,198

 

 

 

4,981

 

 

 

(4,981

)

 

 

24,198

 

Income tax expense

 

 

8,930

 

 

 

 

 

 

 

 

 

8,930

 

Net income

 

$

15,268

 

 

$

4,981

 

 

$

(4,981

)

 

$

15,268

 

 

30


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

 

 

Six Months Ended June 30, 2018

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

30,249

 

 

$

2,948

 

 

$

(2,948

)

 

$

30,249

 

Adjustments to reconcile net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization on property and equipment

 

 

10,606

 

 

 

1,479

 

 

 

 

 

 

12,085

 

Depreciation of rental equipment

 

 

83,509

 

 

 

14,131

 

 

 

 

 

 

97,640

 

Amortization of intangible assets

 

 

1,485

 

 

 

 

 

 

 

 

 

1,485

 

Amortization of deferred financing costs

 

 

557

 

 

 

 

 

 

 

 

 

557

 

Accretion of note discount, net of premium amortization

 

 

239

 

 

 

 

 

 

 

 

 

239

 

Provision for losses on accounts receivable

 

 

1,195

 

 

 

484

 

 

 

 

 

 

1,679

 

Provision for inventory obsolescence

 

 

71

 

 

 

 

 

 

 

 

 

71

 

Change in deferred income taxes

 

 

10,743

 

 

 

 

 

 

 

 

 

10,743

 

Stock-based compensation expense

 

 

2,081

 

 

 

 

 

 

 

 

 

2,081

 

Gain from sales of property and equipment, net

 

 

(4,737

)

 

 

(150

)

 

 

 

 

 

(4,887

)

Gain from sales of rental equipment, net

 

 

(14,717

)

 

 

(3,289

)

 

 

 

 

 

(18,006

)

Equity in earnings of guarantor subsidiaries

 

 

(2,948

)

 

 

 

 

 

2,948

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

5,599

 

 

 

3,522

 

 

 

 

 

 

9,121

 

Inventories

 

 

(90,519

)

 

 

(13,112

)

 

 

 

 

 

(103,631

)

Prepaid expenses and other assets

 

 

(95

)

 

 

(33

)

 

 

 

 

 

(128

)

Accounts payable

 

 

59,775

 

 

 

(70

)

 

 

 

 

 

59,705

 

Manufacturer flooring plans payable

 

 

7,551

 

 

 

(793

)

 

 

 

 

 

6,758

 

Accrued expenses payable and other liabilities

 

 

1,395

 

 

 

(1,784

)

 

 

 

 

 

(389

)

Deferred compensation payable

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Net cash provided by operating activities

 

 

102,082

 

 

 

3,333

 

 

 

 

 

 

105,415

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Acquisition of business, net of cash acquired

 

 

(196,027

)

 

 

 

 

 

 

 

 

 

(196,027

)

Purchases of property and equipment

 

 

(12,990

)

 

 

(6,571

)

 

 

 

 

 

(19,561

)

Purchases of rental equipment

 

 

(189,589

)

 

 

(28,239

)

 

 

 

 

 

(217,828

)

Proceeds from sales of property and equipment

 

 

6,537

 

 

 

150

 

 

 

 

 

 

6,687

 

Proceeds from sales of rental equipment

 

 

41,946

 

 

 

10,231

 

 

 

 

 

 

52,177

 

Investment in subsidiaries

 

 

(21,208

)

 

 

 

 

 

21,208

 

 

 

 

Net cash used in investing activities.

 

 

(371,331

)

 

 

(24,429

)

 

 

21,208

 

 

 

(374,552

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings on senior secured credit facility

 

 

735,775

 

 

 

 

 

 

 

 

 

735,775

 

Payments on senior secured credit facility

 

 

(603,112

)

 

 

 

 

 

 

 

 

(603,112

)

Dividends paid

 

 

(19,616

)

 

 

(3

)

 

 

 

 

 

(19,619

)

Payment of deferred financing costs

 

 

(97

)

 

 

 

 

 

 

 

 

(97

)

Payments on capital lease obligations

 

 

 

 

 

(109

)

 

 

 

 

 

(109

)

Capital contributions

 

 

 

 

 

21,208

 

 

 

(21,208

)

 

 

 

Net cash provided by financing activities

 

 

112,950

 

 

 

21,096

 

 

 

(21,208

)

 

 

112,838

 

Net decrease in cash

 

 

(156,299

)

 

 

 

 

 

 

 

 

(156,299

)

Cash, beginning of period

 

 

165,878

 

 

 

 

 

 

 

 

 

165,878

 

Cash, end of period

 

$

9,579

 

 

$

 

 

$

 

 

$

9,579

 

31


CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

 

 

 

Six Months Ended June 30, 2017

 

 

 

H&E Equipment

Services

 

 

Guarantor

Subsidiaries

 

 

Elimination

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,268

 

 

$

4,981

 

 

$

(4,981

)

 

$

15,268

 

Adjustments to reconcile net income to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization on property and equipment

 

 

10,535

 

 

 

1,580

 

 

 

 

 

 

12,115

 

Depreciation of rental equipment

 

 

68,290

 

 

 

14,451

 

 

 

 

 

 

82,741

 

Amortization of deferred financing costs

 

 

526

 

 

 

 

 

 

 

 

 

526

 

Accretion of note discount, net of premium amortization

 

 

84

 

 

 

 

 

 

 

 

 

84

 

Provision for losses on accounts receivable

 

 

1,484

 

 

 

374

 

 

 

 

 

 

1,858

 

Provision for inventory obsolescence

 

 

71

 

 

 

 

 

 

 

 

 

71

 

Change in deferred income taxes

 

 

9,968

 

 

 

 

 

 

 

 

 

9,968

 

Stock-based compensation expense

 

 

1,894

 

 

 

 

 

 

 

 

 

1,894

 

Gain from sales of property and equipment, net

 

 

(1,629

)

 

 

(477

)

 

 

 

 

 

(2,106

)

Gain from sales of rental equipment, net

 

 

(11,595

)

 

 

(3,754

)

 

 

 

 

 

(15,349

)

Equity in earnings of guarantor subsidiaries

 

 

(4,981

)

 

 

 

 

 

4,981

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

(2,027

)

 

 

(1,247

)

 

 

 

 

 

(3,274

)

Inventories

 

 

(36,815

)

 

 

(12,770

)

 

 

 

 

 

(49,585

)

Prepaid expenses and other assets

 

 

(1,860

)

 

 

(51

)

 

 

 

 

 

(1,911

)

Accounts payable

 

 

37,724

 

 

 

3,897

 

 

 

 

 

 

41,621

 

Manufacturer flooring plans payable

 

 

(6,666

)

 

 

1,710

 

 

 

 

 

 

(4,956

)

Accrued expenses payable and other liabilities

 

 

2,855

 

 

 

860

 

 

 

 

 

 

3,715

 

Deferred compensation payable

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Net cash provided by operating activities

 

 

83,153

 

 

 

9,554

 

 

 

 

 

 

92,707

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10,915

)

 

 

(1,222

)

 

 

 

 

 

(12,137

)

Purchases of rental equipment

 

 

(87,518

)

 

 

(25,428

)

 

 

 

 

 

(112,946

)

Proceeds from sales of property and equipment

 

 

2,548

 

 

 

589

 

 

 

 

 

 

3,137

 

Proceeds from sales of rental equipment

 

 

35,760

 

 

 

10,253

 

 

 

 

 

 

46,013

 

Investment in subsidiaries

 

 

(6,365

)

 

 

 

 

 

6,365

 

 

 

 

          Net cash used in investing activities

 

 

(66,490

)

 

 

(15,808

)

 

 

6,365

 

 

 

(75,933

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings on senior secured credit facility

 

 

484,252

 

 

 

 

 

 

 

 

 

484,252

 

Payments on senior secured credit facility

 

 

(482,042

)

 

 

 

 

 

 

 

 

(482,042

)

Dividends paid

 

 

(19,561

)

 

 

(4

)

 

 

 

 

 

(19,565

)

Payments on capital lease obligations

 

 

 

 

 

(107

)

 

 

 

 

 

(107

)

Capital contributions

 

 

 

 

 

6,365

 

 

 

(6,365

)

 

 

 

          Net cash provided by (used in) financing activities

 

 

(17,351

)

 

 

6,254

 

 

 

(6,365

)

 

 

(17,462

)

Net decrease in cash

 

 

(688

)

 

 

 

 

 

 

 

 

(688

)

Cash, beginning of period

 

 

7,683

 

 

 

 

 

 

 

 

 

7,683

 

Cash, end of period

 

$

6,995

 

 

$

 

 

$

 

 

$

6,995

 

 

 

 

32


ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the financial position of H&E Equipment Services, Inc. and its subsidiaries as of June 30, 2018, and its results of operations for the three and six month periods ended June 30, 2018, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the audited consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the year ended December 31, 2017. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties (see discussion of “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017.

Overview

Background

As one of the largest integrated equipment services companies in the United States focused on heavy construction and industrial equipment, we rent, sell and provide parts and services support for four core categories of specialized equipment: (1) hi-lift or aerial work platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment rental, sales, on-site parts, repair and maintenance functions under one roof, we are a one-stop provider for our customers’ varied equipment needs. This full service approach provides us with multiple points of customer contact, enables us to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal and provides cross-selling opportunities among our new and used equipment sales, rental, parts sales and services operations.

As of July 19, 2018, we operated 89 full-service facilities throughout the Intermountain, Southwest, Gulf Coast, West Coast, Southeast and Mid-Atlantic regions of the United States. Our work force includes distinct, focused sales forces for our new and used equipment sales and rental operations, highly skilled service technicians, product specialists and regional managers. We focus our sales and rental activities on, and organize our personnel principally by, our four core equipment categories. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our rental and sales force and strengthen our customer relationships. In addition, we have branch managers for each location who are responsible for managing their assets and financial results. We believe this fosters accountability in our business and strengthens our local and regional relationships.

Through our predecessor companies, we have been in the equipment services business for approximately 57 years. H&E Equipment Services L.L.C. (“H&E LLC”) was formed in June 2002 through the business combination of Head & Engquist Equipment, LLC (“Head & Engquist”), a wholly-owned subsidiary of Gulf Wide Industries, L.L.C. (“Gulf Wide”), and ICM Equipment Company L.L.C. (“ICM”). Head & Engquist, founded in 1961, and ICM, founded in 1971, were two leading regional, integrated equipment service companies operating in contiguous geographic markets. In the June 2002 transaction, Head & Engquist and ICM were merged with and into Gulf Wide, which was renamed H&E LLC. Prior to the combination, Head & Engquist operated 25 facilities in the Gulf Coast region, and ICM operated 16 facilities in the Intermountain region of the United States.

Prior to our initial public offering in February 2006, our business was conducted through H&E LLC. In connection with our initial public offering, we converted H&E LLC into H&E Equipment Services, Inc. In order to have an operating Delaware corporation as the issuer for our initial public offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and wholly-owned subsidiary of H&E Holdings L.L.C. (“H&E Holdings”), and immediately prior to the closing of our initial public offering, on February 3, 2006, H&E LLC and H&E Holdings merged with and into H&E Equipment Services, Inc., which survived the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and H&E Holdings no longer existed under operation of law pursuant to the reincorporation merger.

On January 1, 2018, we completed the acquisition of Contractors Equipment Center, an equipment rental company serving the greater Denver, Colorado area with three branches. On April 1. 2018, we completed the acquisition of Rental, LLC (dba “Rental Inc.”), a non-residential equipment rental and distribution company with five branches located in Alabama, Florida and Western Georgia.

Critical Accounting Policies

Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2017, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no significant changes to these critical accounting policies and estimates during the three and six months ended June 30, 2018, except as disclosed in note 2 related to new revenue recognition guidance adopted on January 1, 2018.

33


These policies include, among others, revenue recognition, the adequacy of the allowance for doubtful accounts, the propriety of our estimated useful life of rental equipment and property and equipment, the potential impairment of long-lived assets including goodwill and intangible assets, obsolescence reserves on inventory, the allocation of purchase price related to business combinations, reserves for claims, including self-insurance reserves, and deferred income taxes, including the valuation of any related deferred tax assets.

Information regarding our other significant accounting policies is included in note 2 to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2017 and in note 2 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Business Segments

We have five reportable segments because we derive our revenues from five principal business activities: (1) equipment rentals; (2) new equipment sales; (3) used equipment sales; (4) parts sales; and (5) repair and maintenance services. These segments are based upon how we allocate resources and assess performance. In addition, we also have non-segmented revenues and costs that relate to equipment support activities.

 

Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as equipment usage based on: (1) a percentage of original equipment cost, and (2) the number of rental equipment units available for rent), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.

 

New Equipment Sales. Our new equipment sales operation sells new equipment in all of our four core product categories. We have a retail sales force focused by equipment type that is separate from our rental sales force. Manufacturer purchase terms and pricing are managed by our product specialists.

 

Used Equipment Sales. Our used equipment sales are generated primarily from sales of used equipment from our rental fleet, as well as from sales of inventoried equipment that we acquire through trade-ins from our equipment customers and through selective purchases of high quality used equipment. Used equipment is sold by our dedicated retail sales force. Our used equipment sales are an effective way for us to manage the size and composition of our rental fleet and provide a profitable distribution channel for disposal of rental equipment.

 

Parts Sales. Our parts business sells new and used parts for the equipment we sell and also provides parts to our own rental fleet. To a lesser degree, we also sell parts for equipment produced by manufacturers whose products we neither rent nor sell. In order to provide timely parts and services support to our customers as well as our own rental fleet, we maintain an extensive parts inventory.

 

Services. Our services operation provides maintenance and repair services for our customers’ equipment and to our own rental fleet at our facilities as well as at our customers’ locations. As the authorized distributor for numerous equipment manufacturers, we are able to provide service to that equipment that will be covered under the manufacturer’s warranty.

Our non-segmented revenues and costs relate to equipment support activities that we provide, such as transportation, hauling, parts freight and damage waivers, and are not generally allocated to reportable segments.

For additional information about our business segments, see note 10 to the condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

Revenue Sources

We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals and new equipment sales account for more than half of our total revenues. For the six month period ended June 30, 2018, approximately 47.9% of our total revenues were attributable to equipment rentals, 20.1% of our total revenues were attributable to new equipment sales, 10.0% were attributable to used equipment sales, 10.2% were attributable to parts sales, 5.6% were attributable to our services revenues and 6.2% were attributable to non-segmented other revenues.

34


The equipment that we sell, rent and service is principally used in the construction industry, as well as by companies for commercial and industrial uses such as plant maintenance and turnarounds, as well as in the petrochemical and energy sectors. As a result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for new and used equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions and general economic conditions. For a discussion of the impact of seasonality on our revenues, see “Seasonality” below.

Equipment Rentals. Our rental operation primarily rents our four core types of construction and industrial equipment. We have a well-maintained rental fleet and our own dedicated sales force, focused by equipment type. We actively manage the size, quality, age and composition of our rental fleet based on our analysis of key measures such as time utilization (which we analyze as equipment usage based on: (1) a percentage of original equipment cost, and (2) the number of rental equipment units available for rent), rental rate trends and targets, rental equipment dollar utilization and maintenance and repair costs, which we closely monitor. We maintain fleet quality through regional quality control managers and our parts and services operations.

New Equipment Sales. We seek to optimize revenues from new equipment sales by selling equipment through a professional in-house retail sales force focused by product type. While sales of new equipment are impacted by the availability of equipment from the manufacturer, we believe our status as a leading distributor for some of our key suppliers improves our ability to obtain equipment. New equipment sales are an important component of our integrated model due to customer interaction and service contact and new equipment sales also lead to future parts and services revenues.

Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet. The remainder of our used equipment sales revenues comes from the sale of inventoried equipment that we acquire through trade-ins from our equipment customers and selective purchases of high‑quality used equipment. Our policy is not to offer specified price trade‑in arrangements on equipment for sale. Sales of our rental fleet equipment allow us to manage the size, quality, composition and age of our rental fleet, and provide us with a profitable distribution channel for the disposal of rental equipment.

Parts Sales. We generate revenues from the sale of new and used parts for equipment that we rent or sell, as well as for other makes of equipment. Our product support sales representatives are instrumental in generating our parts revenues. They are product specialists and receive performance incentives for achieving certain sales levels. Most of our parts sales come from our extensive in-house parts inventory. Our parts sales provide us with a relatively stable revenue stream that is generally less sensitive to the economic cycles that tend to affect our rental and equipment sales operations.

Services. We derive our services revenues from maintenance and repair services to customers for their owned equipment. In addition to repair and maintenance on an as-needed or scheduled basis, we also provide ongoing preventative maintenance services to industrial customers.  Our after‑market service provides a high-margin, relatively stable source of revenue through changing economic cycles.

Our non-segmented other revenues relate to equipment support activities that we provide, such as transportation, hauling, and damage waivers, and are not generally allocated to reportable segments.

Principal Costs and Expenses

Our largest expenses are the costs to purchase the new equipment we sell, the costs associated with the used equipment we sell, rental expenses, rental depreciation and costs associated with parts sales and services, all of which are included in cost of revenues. For the six month period ended June 30, 2018, our total cost of revenues was $370.2 million. Our operating expenses consist principally of selling, general and administrative expenses. For the six month period ended June 30, 2018, our selling, general and administrative expenses were $134.9 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable segments.

We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result in additional income tax expense based on probable outcomes of such matters.

Cost of Revenues:

Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate cranes and aerial work platforms over a ten year estimated useful life, earthmoving over a five year estimated useful life with a 25% salvage value, and industrial lift trucks over a seven year estimated useful life. Attachments and other smaller type equipment are depreciated over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment.

Rental Expense. Rental expense represents the costs associated with rental equipment, including, among other things, the cost of servicing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of rental equipment.

35


New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold, net of any amount of credit given to the customer towards the equipment for trade-ins.

Used Equipment Sales. Cost of used equipment sold consists of the net book value of rental equipment for used equipment sold from our rental fleet, the equipment costs for used equipment we purchase for sale or the trade-in value of used equipment that we obtain from customers in equipment sales transactions.

Parts Sales. Cost of parts sales represents costs attributable to the sale of parts directly to customers.

Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of customer-owned equipment and equipment then on-rent by customers.

Non-Segmented Other. These expenses include costs associated with providing transportation, hauling and damage waiver including, among other items, drivers’ wages, fuel costs, and our costs related to damage waiver policies.

Selling, General and Administrative Expenses:

Our selling, general and administrative (“SG&A”) expenses include sales and marketing expenses, payroll and related benefit costs, insurance expenses, legal and professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with capital leases and software. These expenses are not generally allocated to our reportable segments.

Interest Expense:

Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate amounts outstanding under our revolving senior secured credit facility (the “Credit Facility”), senior unsecured notes due 2025 and our capital lease obligations, as well as our extinguished senior unsecured notes due 2022 (the “Old Notes”) for the periods during which such Old Notes were outstanding. Interest expense also includes interest on our outstanding manufacturer flooring plans payable which are used to finance inventory and rental equipment purchases. Non-cash interest expense related to the amortization cost of deferred financing costs and the accretion/amortization of note discount/premium are also included in interest expense.

Principal Cash Flows

We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities, manufacturer floor plan financings and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital Resources” below). Our management of our working capital is closely tied to operating cash flows, as working capital can be significantly impacted by, among other things, our accounts receivable activities, the level of new and used equipment inventories, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.

Rental Fleet

A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at June 30, 2018 was $1.1 billion million, or approximately 64.2% of our total assets. Our rental fleet as of June 30, 2018 consisted of 38,800 units having an original acquisition cost (which we define as the cost originally paid to manufacturers or the original amount financed under operating leases) of approximately $1.7 billion. As of June 30, 2018, our rental fleet composition was as follows (dollars in millions):

 

 

 

Units

 

 

% of

Total

Units

 

 

Original

Acquisition

Cost

 

 

% of

Original

Acquisition

Cost

 

 

Average

Age in

Months

 

Hi-Lift or Aerial Work Platforms

 

 

26,213

 

 

 

67.5

%

 

$

1,112.8

 

 

 

66.6

%

 

 

37.1

 

Cranes

 

 

257

 

 

 

0.7

%

 

 

90.8

 

 

 

5.4

%

 

 

56.7

 

Earthmoving

 

 

4,063

 

 

 

10.5

%

 

 

332.2

 

 

 

19.9

%

 

 

25.3

 

Industrial Lift Trucks

 

 

1,195

 

 

 

3.1

%

 

 

36.1

 

 

 

2.2

%

 

 

26.9

 

Other

 

 

7,072

 

 

 

18.2

%

 

 

98.7

 

 

 

5.9

%

 

 

29.1

 

Total

 

 

38,800

 

 

 

100.0

%

 

$

1,670.6

 

 

 

100.0

%

 

 

34.2

 

 

Determining the optimal age and mix for our rental fleet equipment is subjective and requires considerable estimates and judgments by management. We constantly evaluate the mix, age and quality of the equipment in our rental fleet in response to current economic

36


and market conditions, competition and customer demand. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary auction market levels, and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions, we evaluate current economic and market conditions, competition, manufacturers’ availability, pricing and return on investment over the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive maintenance program, we believe our rental fleet is well-maintained.

The original acquisition cost of our gross rental fleet increased by approximately $268.1 million, or 19.1%, for the six month period ended June 30, 2018, largely reflective of the CEC and Rental Inc. acquired fleets, combined with growth in rental capital expenditures to meet strong customer demand. The average age of our rental fleet equipment decreased by approximately 0.4 months for the six months ended June 30, 2018.

Our average rental rates for the six month period ended June 30, 2018 were 2.2% higher than in the six month period ended June 30, 2017 and approximately 0.2% higher than the three month period ended March 31, 2018 (see further discussion on rental rates in “Results of Operations” below). Our average rental rates for the six month period ended June 30, 2018 do not include rental rate data for (1) legacy Rental Inc. operations for the second quarter of 2018 and (2) legacy CEC operations for the first quarter of 2018.

The rental equipment mix among our four core product lines for the six months ended June 30, 2018 was largely consistent with that of the prior year comparable period as a percentage of original acquisition cost.

Principal External Factors that Affect our Businesses

We are subject to a number of external factors that may adversely affect our businesses. These factors, and other factors, are discussed below and under the heading “Forward‑Looking Statements,” and in Item 1A—Risk Factors in this Annual Report on Form 10‑K for the year ended December 31, 2017.

 

Economic downturns. The demand for our products is dependent on the general economy, the stability of the global credit markets, the industries in which our customers operate or serve and other factors. Downturns in the general economy or in the construction and manufacturing industries, as well as adverse credit market conditions, can cause demand for our products to materially decrease.

 

Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies constitute a significant portion of our total revenues. As a result, we depend upon customers in these businesses and their ability and willingness to make capital expenditures to rent or buy specialized equipment. Accordingly, our business is impacted by fluctuations in customers’ spending levels on capital expenditures and by the availability of credit to those customers.

 

Adverse weather. Adverse weather in a geographic region in which we operate may depress demand for equipment in that region. Our equipment is primarily used outdoors and, as a result, prolonged adverse weather conditions may prohibit our customers from continuing their work projects. Adverse weather also has a seasonal impact in parts of our Intermountain region, particularly in the winter months.

 

Regional and Industry-Specific Activity and Trends. Expenditures by our customers may be impacted by the overall level of construction activity in the markets and regions in which they operate, the price of oil and other commodities and other general economic trends impacting the industries in which our customers and end users operate. As our customers adjust their activity and spending levels in response to these external factors, our rentals and sales of equipment to those customers will be impacted. For example, high levels of industrial activity in our Gulf Coast and Intermountain regions have been a meaningful driver of recent growth in our revenues. However, the decline in oil and natural gas prices and the related downturn in oil industry activities during fiscal years 2014, 2015 and 2016 resulted in a significant decrease in our new equipment sales, primarily the sale of new cranes, due to lower demand. Although oil prices have subsequently stabilized and improved in 2017 and into 2018, we believe the uncertainty regarding future oil prices continues to impact customer capital expenditure decisions.

We believe that our integrated business tempers the effects of downturns in a particular segment. For a discussion of seasonality, see “Seasonality” on page 47 of this Quarterly Report on Form 10-Q.

Results of Operations

The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for our business segments and non-segmented revenues for the three and six months ended June 30, 2018 and 2017. The period-to-period comparisons of our financial results are not necessarily indicative of future results.

37


Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

Revenues.

 

 

 

Three Months Ended

 

 

Total

 

 

Total

 

 

 

June 30,

 

 

Dollar

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Increase

 

 

Increase

 

 

 

(in thousands, except percentages)

 

Segment Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

143,829

 

 

$

118,370

 

 

$

25,459

 

 

 

21.5

%

New equipment sales

 

 

68,539

 

 

 

45,669

 

 

 

22,870

 

 

 

50.1

%

Used equipment sales

 

 

32,140

 

 

 

24,106

 

 

 

8,034

 

 

 

33.3

%

Parts sales

 

 

30,281

 

 

 

29,725

 

 

 

556

 

 

 

1.9

%

Services revenues

 

 

16,788

 

 

 

15,944

 

 

 

844

 

 

 

5.3

%

Non-Segmented revenues

 

 

18,787

 

 

 

15,549

 

 

 

3,238

 

 

 

20.8

%

Total revenues

 

$

310,364

 

 

$

249,363

 

 

$

61,001

 

 

 

24.5

%

 

Total Revenues. Our total revenues were $310.4 million for the three month period ended June 30, 2018 compared to $249.4 million for the three month period ended June 30, 2017, an increase of $61.0 million, or 24.5%. Of the $61.0 million increase in total revenues in 2018, approximately $9.8 million and $7.6 million were attributable to the branches acquired in the CEC and Rental Inc. acquisitions, respectively. Revenues for all reportable segments and non-segmented other revenues are further discussed below.

Equipment Rental Revenues. Our revenues from equipment rentals for the three month period ended June 30, 2018 increased approximately $25.5 million, or 21.5%, to $143.8 million from $118.4 million in the three month period ended June 30, 2017. Equipment rental revenues attributable to the branches acquired in the CEC and Rental Inc. acquisitions totaled $8.7 million and $3.4 million for such period, respectively.

Rental revenues from aerial work platform equipment increased $12.4 million while earthmoving equipment rental revenues and other equipment rental revenues increased $7.5 million and $2.0 million, respectively. Lift truck rental revenues increased approximately $0.5 million. Partially offsetting these rental revenue increases was a $0.4 million decrease in crane rental revenues. The product line equipment rental revenue fluctuations above do not include the impact of legacy Rental Inc. equipment rental revenues by product line during the three month period ended June 30, 2018. Rental Inc. rental revenue data by product line is expected to be available beginning in the beginning in the third quarter of 2018.  

Our average rental rates for the three month period ended June 30, 2018 increased 2.4% compared to the same three month period last year and increased approximately 0.7% from the three month period ended March 31, 2018. Our average rental rates for the three month period ended June 30, 2018 do not include rental rate data for legacy Rental Inc. operations.

Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three month period ended June 30, 2018 was 35.4% compared to 34.9% in the three month period ended June 30, 2017, an increase of 0.5%. The increase in comparative rental equipment dollar utilization was primarily the result of the increase in equipment rental rates, which was partially offset by a slight decrease in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was approximately 72.0% for the three month period ended June 30, 2018 compared to 72.2% in the three month period ended June 30, 2017, a decrease of 0.2%.

38


New Equipment Sales Revenues. Our new equipment sales for the three month period ended June 30, 2018 increased approximately $22.9 million, or 50.1%, to $68.5 million from $45.7 million for the three month period ended June 30, 2017. New equipment sales attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $0.1 million and $2.4 million, respectively.

Sales of new cranes increased $13.6 million, resulting from improved crane demand. Sales of new earthmoving equipment and new aerial work platform equipment increased $4.2 million and $1.9 million, respectively, while sales of new lift trucks increased $0.7 million. Sales of new other equipment decreased $0.1 million. The product line new equipment sales revenue fluctuations above do not include the impact of legacy Rental Inc. new equipment sales revenues by product line. Rental Inc. new equipment sales data by product line is expected to be available beginning in the third quarter of 2018.

Used Equipment Sales Revenues. Our used equipment sales increased $8.0 million, or 33.3%, to $32.1 million for the three month period ended June 30, 2018, from $24.1 million for the same three month period in 2017. Used equipment sales attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $0.2 million and $0.4 million, respectively.

Sales of used cranes increased $4.2 million and sales of used aerial work platform equipment increased $3.3 million. Sales of used earthmoving equipment and used other equipment increased $0.8 million and $0.1 million, respectively. Partially offsetting these increases was a $0.7 million decrease in used lift truck sales. The product line used equipment sales revenue fluctuations above do not include the impact of legacy Rental Inc. used equipment sales revenues by product line. Rental Inc. used equipment sales data by product line is expected to be available beginning in the third quarter of 2018.

Parts Sales Revenues. Our parts sales revenues for the three month period ended June 30, 2018 increased $0.6 million, or 1.9%, to $30.3 million from $29.7 million for the same three month period last year. The increase in parts sales was substantially due to $0.6 million of parts sales from the branches acquired in the CEC and Rental Inc. acquisitions.

Services Revenues. Our services revenues for the three month period ended June 30, 2018 increased $0.8 million, or 5.3%, to $16.8 million from approximately $15.9 million for the same three month period last year. The increase in services revenues is primarily due to $0.3 million of services revenues from the branches acquired in the CEC and Rental Inc. acquisitions and a $0.4 million increase in crane services revenues.

Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including fuel charges on rented equipment, transportation and hauling charges related to our equipment rental and maintenance and repair services, and damage waiver fees on rental equipment. For the three month period ended June 30, 2018, our other revenues were approximately $18.8 million, an increase of $3.2 million, or 20.8%, from approximately $15.5 million in the same three month period in 2017. This increase was primarily driven by higher hauling revenues associated with our equipment rental activities, combined with non-segmented other revenues of $0.7 million and $0.6 million from the branches acquired in the CEC and Rental Inc. acquisitions, respectively.

Gross Profit.

 

 

 

Three Months Ended

 

 

Total

 

 

Total

 

 

 

June 30,

 

 

Dollar

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Increase

 

 

Increase

 

 

 

(in thousands, except percentages)

 

Segment Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

70,585

 

 

$

56,370

 

 

$

14,215

 

 

 

25.2

%

New equipment sales

 

 

7,313

 

 

 

5,219

 

 

 

2,094

 

 

 

40.1

%

Used equipment sales

 

 

10,368

 

 

 

7,104

 

 

 

3,264

 

 

 

45.9

%

Parts sales

 

 

8,350

 

 

 

8,003

 

 

 

347

 

 

 

4.3

%

Services revenues

 

 

11,036

 

 

 

10,612

 

 

 

424

 

 

 

4.0

%

Non-Segmented revenues gross profit

 

 

451

 

 

 

32

 

 

 

419

 

 

 

1309.4

%

Total gross profit

 

$

108,103

 

 

$

87,340

 

 

$

20,763

 

 

 

23.8

%

 

Total Gross Profit. Our total gross profit was $108.1 million for the three month period ended June 30, 2018 compared to $87.3 million for the same three month period in 2017, an increase of $20.8 million, or 23.8%. Of the total $20.8 million gross profit increase, approximately $4.0 million and $2.0 million was attributable to the branches acquired in the CEC and Rental Inc. acquisitions, respectively. Total gross profit margin for the three month period ended June 30, 2018 was 34.8%, a decrease of 0.2% from the 35.0% gross profit margin for the same three month period in 2017. The decrease in total gross profit margin is primarily due to revenue mix. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below:

39


Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the three month period ended June 30, 2018 increased $14.2 million, or 25.2%, to approximately $70.6 million from $56.4 million in the same three month period in 2017. Equipment rentals gross profit attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $4.2 million and $1.3 million, respectively.

The increase in equipment rentals gross profit was the result of a $25.5 million increase in equipment rental revenues for the three month period ended June 30, 2018 compared to the same period last year, which was partially offset by a $9.3 million increase in rental equipment depreciation expense and a $1.9 million increase in rental expenses. The increases in both depreciation expense and rental expenses are primarily due to a larger fleet size in 2018 compared to 2017.

Gross profit margin on equipment rentals for the three month period ended June 30, 2018 was approximately 49.1% compared to 47.6% for the same period in 2017, an increase of 1.5%. As a percentage of equipment rental revenues, rental expenses were 15.3% for the three month period ended June 30, 2018 compared to 17.0% for the same period last year, a decrease of 1.7%, resulting primarily from the increase in equipment rental revenues. Depreciation expense was 35.6% of equipment rental revenues for the three month period ended June 30, 2018 compared to 35.3% for the same period in 2017, an increase of 0.3%, primarily as a result of the increase in depreciation expense resulting from the purchase accounting fair value step up adjustments on the CEC and Rental Inc. acquired rental fleets.

New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three month period ended June 30, 2018 increased $2.1 million, or 40.1%, to $7.3 million compared to $5.2 million for the same three month period in 2017 on a total new equipment sales increase of $22.9 million. Gross profit on new equipment sales attributable to the acquired branches of the CEC and Rental Inc. acquisitions totaled $0.3 million in the aggregate. Gross profit margin on new equipment sales was 10.7% for the three month period ended June 30, 2018, compared to 11.4% for the same period last year, a decrease of 0.7%. The decrease in gross profit margin is primarily due to lower gross margins on sales of new cranes.

Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three month period ended June 30, 2018 increased $3.3 million, or 45.9%, to $10.4 million from $7.1 million in the same period in 2017 on a used equipment sales increase of $8.0 million. Gross profit on used equipment sales attributable to the acquired branches of the CEC and Rental Inc. acquisitions totaled $0.3 million in the aggregate.

Gross profit margin on used equipment sales for the three month period ended June 30, 2017 was approximately 32.3%, up 2.8% from 29.5% for the same three month period in 2017, primarily as a result of the mix of used equipment sold and higher used cranes and used aerial work platform equipment sales gross margins. Our used equipment sales from the rental fleet, which comprised approximately 89.4% and 88.0% of our used equipment sales for the three month periods ended June 30, 2018 and 2017, respectively, were approximately 155.5%  and 146.7% of net book value for the three month periods ended June 30, 2018 and 2017, respectively.

Parts Sales Gross Profit. Our parts sales gross profit for the three month period ended June 30, 2018 was approximately $8.3 million, an increase of $0.3 million, from gross profit of $8.0 million for the same period last year on a parts sales increase of $0.6 million. Gross profit margin for the three month period ended June 30, 2018 was 27.6%, an increase of 0.7% from 26.9% in the same three month period in 2017, as a result of the mix of parts sold.

Services Revenues Gross Profit. For the three month period ended June 30, 2018, our services revenues gross profit increased $0.4 million, or 4.0%, to $11.0 million from $10.6 million for the same three month period in 2017 on a $0.8 million increase in services revenues. Gross profit margin for the three month period ended June 30, 2018 was 65.7%, a decrease of 0.9% from approximately 66.6% in the same three month period in 2017, as a result of services revenues mix.

Non-Segmented Other Revenues Gross Profit (Loss). Our non-segmented other revenues gross profit increased approximately $0.4 million, from gross profit of $32,000 for the three month period ended June 30, 2017 to a gross profit of approximately $0.5 million in the three month period ended June 30, 2018. Gross margin for the three month period ended June 30, 2018 was 2.4% compared to a gross margin of 0.2% in the same three month period last year, an increase of 2.2%%, primarily reflective of improved gross margins on hauling and transportation related charges in the current period.

Selling, General and Administrative Expenses (“SG&A”). SG&A expenses increased approximately $9.2 million, or approximately 15.4%, to $69.0 million for the three month period ended June 30, 2018 compared to $59.8 million for the three month period ended June 30, 2017. The net increase in SG&A expenses was attributable to several factors. SG&A expenses related to the branches acquired in the CEC and Rental Inc. acquisitions totaled $1.8 million and $1.5 million, respectively. Excluding the CEC and Rental Inc. impacts, employee salaries, wages, payroll taxes and related employee benefit and other employee expenses increased $4.9 million, primarily as a result of a larger workforce and higher compensation related to our revenue growth. Our results for the three month period ended June 30, 2018 also include $0.8 million of amortization expense associated with the recognition of intangible assets resulting from the CEC and Rental Inc. purchase price allocations. Supplies expense and utilities costs increased $0.8 million

40


and $0.6 million, respectively. Liability insurance costs increased $0.6 million, while legal and professional fees decreased $1.4 million. Included in last year’s legal and professional fees is $2.2 million of merger costs associated with the proposed Neff acquisition, which we did not ultimately consummate. Approximately $1.0 million of the total increase in SG&A expenses was attributable to branches opened since April 1, 2017 with less than three months of comparable operations in either or both of the three month periods ended June 30, 2018 and 2017. As a percentage of total revenues, SG&A expenses were 22.3% for the three month period ended June 30, 2018 compared to 24.0% for the same three month period last year, a decrease of 1.7%, and is largely reflective of the increase in total revenues combined with the decrease in legal and professional fees noted above.

Gain on Sales of Property and Equipment, Net. During the three month period ended June 30, 2018, we sold a parcel of company-owned land and realized a gain of approximately $3.7 million, resulting in total net gains on sales of property and equipment of $4.1 million for the period, compared to $1.1 million for the three month period ended June 30, 2017, an increase of $3.0 million.

Other Income (Expense). For the three month period ended June 30, 2018, our net other expenses increased $2.2 million to $15.2 million compared to $13.0 million for the same three month period in 2017, substantially all as a result of a $2.3 million increase in interest expense to $15.7 million for the three month period ended June 30, 2018 compared to $13.4 million for the three month period ended June 30, 2017. The increase in interest expense is due to additional interest costs of $2.4 million associated with the upsize of our $950 million 5.625% senior unsecured notes that were issued in the third and fourth quarters of 2017 compared to our $630 million 7% senior unsecured notes, which were retired in the third quarter of 2017, and which was partially offset by a $0.1 million decrease in interest costs related to our senior secured credit facility.

Income Taxes. We recorded income tax expense of $7.1 million for the three month period ended June 30, 2018 compared to income tax expense of approximately $5.8 million for the three month period ended June 30, 2017. Our effective income tax rate was approximately 25.5% for the three month period ended June 30, 2018 compared to 37.0% for the same three month period last year, a decrease of 11.2%. The decrease in our effective tax rate is primarily due to the decrease in the federal statutory tax rate from 35% to 21%, resulting from the Tax Cuts and Jobs Act of 2017 (“the Act”), enacted in the fourth quarter of 2017. Our accounting for the income tax effects of the Act has been completed.

Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2018 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.


41


Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

Revenues.

 

 

 

 

Six Months Ended

 

 

Total

 

 

Total

 

 

 

June 30,

 

 

Dollar

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Increase

 

 

Increase

 

 

 

(in thousands, except percentages)

 

Segment Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

273,190

 

 

$

225,687

 

 

$

47,503

 

 

 

21.0

%

New equipment sales

 

 

115,032

 

 

 

79,943

 

 

 

35,089

 

 

 

43.9

%

Used equipment sales

 

 

56,993

 

 

 

52,969

 

 

 

4,024

 

 

 

7.6

%

Parts sales

 

 

58,432

 

 

 

56,725

 

 

 

1,707

 

 

 

3.0

%

Services revenues

 

 

31,824

 

 

 

31,024

 

 

 

800

 

 

 

2.6

%

Non-Segmented revenues

 

 

35,375

 

 

 

29,843

 

 

 

5,532

 

 

 

18.5

%

Total revenues

 

$

570,846

 

 

$

476,191

 

 

$

94,655

 

 

 

19.9

%

 

Total Revenues. Our total revenues were approximately $570.8 million for the six month period ended June 30, 2018 compared to $476.2 million for the six month period ended June 30, 2017, an increase of $94.7 million, or 19.9%. Of the $94.7 increase in total revenues in 2018, approximately $21.5 million and $7.6 million were attributable to the branches acquired in the CEC and Rental Inc. acquisitions, respectively. Revenues for all reportable segments and non-segmented other revenues are further discussed below.

Equipment Rental Revenues. Our revenues from equipment rentals for the six month period ended June 30, 2018 increased approximately $47.5 million, or 21.0%, to $273.2 million from $225.7 million in the six month period ended June 30, 2017. Equipment rental revenues attributable to the branches acquired in the CEC and Rental Inc. acquisitions totaled $19.5 million and $3.4 million, respectively.

Rental revenues from aerial work platform equipment increased $22.3 million while other equipment rental revenues increased $12.5 million. Earthmoving equipment rental revenues increased $9.2 million and lift truck rental revenues increased approximately $0.9 million. Partially offsetting these rental revenue increases was a $0.9 million decrease in crane rental revenues. The product line equipment rental revenue fluctuations above do not include the impact of legacy Rental Inc. equipment rental revenues by product line. Rental Inc. rental revenue data by product line is expected to be available beginning in the beginning in the third quarter of 2018.

Our average rental rates for the six month period ended June 30, 2018 increased 2.2% compared to the same six month period last year. Our average rental rates for the six month period ended June 30, 2018 do not include rental rate data for legacy Rental Inc. operations for the second quarter of 2018 and CEC rental data for the first quarter of 2018.

Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the six month period ended June 30, 2018 was 35.1% compared to 33.7% in the six month period ended June 30, 2017, an increase of 1.4%. The increase in comparative rental equipment dollar utilization was primarily the result of the increase in equipment rental rates combined with an increase in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was approximately 71.2% for the six month period ended June 30, 2018 compared to 70.4% in the six month period ended June 30, 2017, an increase of 0.8%. The increase in equipment rental time utilization based on original equipment cost is largely reflective increased demand for rental equipment during the current year six month period.

42


New Equipment Sales Revenues. Our new equipment sales for the six month period ended June 30, 2018 increased $35.1 million, or 43.9%, to $115.0 million from $79.9 million for the six month period ended June 30, 2017. New equipment sales attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $0.1 million and $2.4 million, respectively.

Sales of new cranes increased $29.6 million, resulting from improved crane demand. Sales of new aerial work platform equipment and new lift trucks increased $3.1 million and $0.9 million, respectively. Partially offsetting these increases was a $0.7 million decrease in new other equipment sales and a $0.1 million decrease in new earthmoving equipment sales. The product line new equipment sales revenue fluctuations above do not include the impact of legacy Rental Inc. new equipment sales revenues by product line. Rental Inc. new equipment sales data by product line is expected to be available beginning in the third quarter of 2018.

Used Equipment Sales Revenues. Our used equipment sales increased $4.0 million, or 7.6%, to $57.0 million for the six month period ended June 30, 2018, from $53.0 million for the same six month period in 2017. Used equipment sales attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $0.3 million and $0.4 million, respectively.

Sales of used aerial work platform equipment increased $8.7 million, while sales of used cranes and used other equipment increased $0.7 million and $0.5 million, respectively. Partially offsetting these increases were decreases in sales of used earthmoving equipment and used lift trucks of $5.5 million and $0.9 million, respectively. The product line used equipment sales revenue fluctuations above do not include the impact of legacy Rental Inc. used equipment sales revenues by product line. Rental Inc. used equipment sales data by product line is expected to be available beginning in the third quarter of 2018.

Parts Sales Revenues. Our parts sales for the six month period ended June 30, 2018 increased $1.7 million, or 3.0%, to approximately $58.4 million from $56.7 million for the same six month period last year. The increase in parts sales is largely attributable to a $0.5 million increase in aerial work platform equipment parts and a $0.4 million increase in crane and aerial work platform parts, combined with parts sales from the branches acquired in the CEC and Rental Inc. acquisitions totaling $0.2 million and $0.5 million, respectively.

Services Revenues. Our services revenues for the six month period ended June 30, 2018 increased $0.8 million, or 2.6%, to $31.8 million from approximately $31.0 million for the same six month period last year. The increase in services revenues is primarily due to $0.3 million of services revenues from the branches acquired in the CEC and Rental Inc. acquisitions in the aggregate and a $0.3 million increase in crane services revenues.

Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of equipment support activities including fuel charges on rented equipment, transportation and hauling charges related to our equipment rental and maintenance and repair services, and damage waiver fees on rental equipment. For the six month period ended June 30, 2018, our other revenues were approximately $35.4 million, an increase of $5.5 million, or 18.5%, from approximately $29.8 million in the same six month period in 2017. This increase was primarily driven by higher hauling revenues associated with our equipment rental activities, combined with non-segmented other revenues of $1.3 million and $0.6 million from the branches acquired in the CEC and Rental Inc. acquisitions, respectively.

Gross Profit (Loss).

 

 

 

 

Six Months Ended

 

 

Total

 

 

Total

 

 

 

June 30,

 

 

Dollar

 

 

Percentage

 

 

 

2018

 

 

2017

 

 

Increase

 

 

Increase

 

 

 

(in thousands, except percentages)

 

Segment Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment rentals

 

$

132,205

 

 

$

104,410

 

 

$

27,795

 

 

 

26.6

%

New equipment sales

 

 

12,961

 

 

 

9,112

 

 

 

3,849

 

 

 

42.2

%

Used equipment sales

 

 

18,284

 

 

 

16,106

 

 

 

2,178

 

 

 

13.5

%

Parts sales

 

 

15,884

 

 

 

15,567

 

 

 

317

 

 

 

2.0

%

Services revenues

 

 

21,022

 

 

 

20,693

 

 

 

329

 

 

 

1.6

%

Non-Segmented revenues gross profit (loss)

 

 

332

 

 

 

(876

)

 

 

1,208

 

 

 

137.9

%

Total gross profit

 

$

200,688

 

 

$

165,012

 

 

$

35,676

 

 

 

21.6

%

 

Total Gross Profit. Our total gross profit was $200.7 million for the six month period ended June 30, 2018 compared to $165.0 million for the same six month period in 2018, an increase of $35.7 million, or 21.6%. Of the total $35.7 million gross profit increase, approximately $10.0 million and $2.0 million was attributable to the branches acquired in the CEC and Rental Inc. acquisitions, respectively. Total gross profit margin for the six month period ended June 30, 2018 was 35.2%, an increase of 0.5% from the 34.7%

43


gross profit margin for the same six month period in 2017. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below:

Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the six month period ended June 30, 2018 increased approximately $27.8 million, or 26.6%, to approximately $132.2 million from $104.4 million in the same six month period in 2017. Equipment rentals gross profit attributable to the branches acquired in the CEC and Rental Inc. acquisitions were $10.2 million and $1.3 million, respectively.

The increase in equipment rentals gross profit was the result of a $47.5 million increase in equipment rental revenues for the six month period ended June 30, 2018 compared to the same period last year, which was partially offset by a $14.9 million increase in rental equipment depreciation expense and a $4.8 million increase in rental expenses. The increases in both depreciation expense and rental expenses are primarily due to a larger fleet size in 2018 compared to 2017.

Gross profit margin on equipment rentals for the six month period ended June 30, 2018 was approximately 48.4% compared to 46.3% for the same period in 2017, an increase of 2.1%. As a percentage of equipment rental revenues, rental expenses were 15.9% for the three month period ended June 30, 2018 compared to 17.1% for the same period last year, a decrease of 1.2%, resulting primarily from the increase in equipment rental revenues. Depreciation expense was 35.7% of equipment rental revenues for the six month period ended June 30, 2018 compared to 36.7% for the same period in 2017, a decrease of 1.0%, primarily as a result of the increase in equipment rental revenues, which was partially offset by the increase in depreciation expense resulting from the purchase accounting fair value step up adjustments on the CEC and Rental Inc. acquired rental fleets.

New Equipment Sales Gross Profit. Our new equipment sales gross profit for the six month period ended June 30, 2018 increased approximately $3.8 million, or 42.2%, to $13.0 million compared to $9.1 million for the same six month period in 2017 on a total new equipment sales increase of $35.1 million. Gross profit margin on new equipment sales was 11.3% for the six month period ended June 30, 2018, compared to 11.4% for the same period last year, a decrease of 0.1%. The slight decrease in gross profit margin is primarily due to the mix of new equipment sold and lower new crane sales gross margins.

Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the six month period ended June 30, 2018 increased $2.2 million, or 13.5%, to $18.3 million from $16.1 million in the same period in 2017 on a used equipment sales increase of $4.0 million. Gross profit margin on used equipment sales for the six month period ended June 30, 2018 was approximately 32.1%, up 1.7% from 30.4% for the same six month period in 2017, primarily as a result of the mix of used equipment sold and higher used aerial work platform equipment and used earthmoving equipment sales gross margins. Our used equipment sales from the rental fleet, which comprised approximately 91.6% and 86.9% of our used equipment sales for the six month periods ended June 30, 2018 and 2017, respectively, were approximately 152.7%  and 150.1% of net book value for the six month periods ended June 30, 2018 and 2017, respectively.

Parts Sales Gross Profit. Our parts sales gross profit for the six month period ended June 30, 2018 increased $0.3 million to $15.9 million, compared to $15.6 million for the same six month period last year on a $1.7 million increase in parts sales revenues. Gross profit margin for the six month period ended June 30, 2018 was 27.2%, a decrease of 0.2% from 27.4% in the same six month period in 2017, primarily as a result of the mix of parts sold.

Services Revenues Gross Profit. For the six month period ended June 30, 2018, our services revenues gross profit increased $0.3 million, or 1.6%, to $21.0 million from $20.7 million for the same six month period in 2017 on a $0.8 million increase in services revenues. Gross profit margin for the six month period ended June 30, 2018 was 66.1%, a decrease of 0.6% from 66.7% in the same six month period in 2017, as a result of services revenues mix.

Non-Segmented Other Revenues Gross Profit (Loss). Our non-segmented other revenues gross profit increased $1.2 million, from a gross loss of $0.9 million for the six month period ended June 30, 2017 to a gross profit of $0.3 million in the six month period ended June 30, 2018. Gross margin for the six month period ended June 30, 2018 was 0.9% compared to a gross margin of (2.9)% in the same six month period last year, an increase of 3.8%, primarily reflective of improved gross margins on hauling and transportation related charges in the current period.

Selling, General and Administrative Expenses (“SG&A”). SG&A expenses increased approximately $17.8 million, or approximately 15.2%, to $134.9 million for the six month period ended June 30, 2018 compared to $117.1 million for the six month period ended June 30, 2017. The net increase in SG&A expenses was attributable to several factors. SG&A expenses related to the branches acquired in the CEC and Rental Inc. acquisitions totaled $4.0 million and $1.5 million, respectively. Excluding the CEC and Rental Inc. impacts, employee salaries, wages, payroll taxes and related employee benefit and other employee expenses increased $9.2 million, primarily as a result of a larger workforce and higher compensation related to our revenue growth. Our results for the six month period ended June 30, 2018 also includes $1.5 million of amortization expense associated with the recognition of intangible assets resulting from the CEC and Rental Inc. purchase price allocations. Liability insurance costs increased $0.8 million, while legal

44


and professional fees decreased $1.4 million. Included in last year’s legal and professional fees is $2.2 million of merger costs associated with the proposed Neff acquisition, which we did not ultimately consummate. Approximately $2.1 million of the total increase in SG&A expenses was attributable to branches opened since January 1, 2017 with less than six months of comparable operations in either or both of the six month periods ended June 30, 2018 and 2017. As a percentage of total revenues, SG&A expenses were 23.6% for the six month period ended June 30, 2018 compared to 24.6% for the same six month period last year, a decrease of 1.0%, and is largely reflective of the increase in total revenues combined with the decrease in legal and professional fees noted above.

Gain on Sales of Property and Equipment, Net. During the six month period ended June 30, 2018, we sold a parcel of company-owned land and realized a gain of approximately $3.7 million, resulting in total net gains on sales of property and equipment of $4.9 million for the period, compared to $2.1 million for the six month period ended June 30, 2017, an increase of $2.8 million.

Other Income (Expense). For the six month period ended June 30, 2018, our net other expenses increased approximately $3.7 million to $29.5 million compared to $25.8 million for the same six month period in 2017, primarily reflective of a $3.7 million increase in interest expense to $30.3 million for the six month period ended June 30, 2018 compared to $26.6 million for the six month period ended June 30, 2017. The increase in interest expense is due to additional interest costs of $4.9 million associated with the upsize of our $950 million 5.625% senior unsecured notes that were issued in the third and fourth quarters of 2017 compared to our $630 million 7% senior unsecured notes. This increase was partially offset by a decrease of approximately $1.1 million in interest costs on our senior secured credit facility, resulting from lower interest costs due to lower average borrowings during the period.

Income Taxes. We recorded income tax expense of $10.7 million for the six month period ended June 30, 2018 compared to income tax expense of approximately $8.9 million for the six month period ended June 30, 2017. Our effective income tax rate was approximately 26.1% for the six month period ended June 30, 2018 compared to approximately 36.9% for the same six month period last year, a decrease of 10.8%. The decrease in our effective tax rate is primarily due to the decrease in the federal statutory tax rate from 35% to 21%, resulting from the Act, enacted in the fourth quarter of 2017. Our accounting for the income tax effects of the Act has been completed.

Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2018 are fully realizable through future reversals of existing taxable temporary differences and future taxable income, and are not subject to any limitations.

Liquidity and Capital Resources

Cash flow from operating activities. For the six month period ended June 30, 2018, the cash provided by our operating activities was $105.4 million. Our reported net income of $30.2 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of $133.9 million. These cash flows from operating activities were also positively impacted by a $59.7 million increase in accounts payable, a $9.1 million decrease in receivables and a $6.8 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $103.6 million increase in inventories, a $0.4 million decrease in accrued expenses payable and other liabilities and a $0.1 million increase in prepaid expenses and other assets.

For the six month period ended June 30, 2017, the net cash provided by our operating activities was $92.7 million. Our reported net income of $15.3 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of approximately $107.1 million. These cash flows from operating activities were also positively impacted by a $41.6 million increase in accounts payable and a $3.7 million increase in accrued expenses payable and other liabilities. Partially offsetting these positive cash flows were a $49.6 million increase in inventories and a $5.0 million decrease in manufacturing flooring plans payable, while prepaid expenses and other assets increased $1.9 million and receivables increased approximately $3.3 million.

Cash flow from investing activities. For the six month period ended June 30, 2018, our cash provided by our investing activities was exceeded by our cash used in our investing activities, resulting in net cash used in our investing activities of approximately $374.6 million. The acquisitions of CEC and Rental Inc. totaled $196.0 (net of cash acquired). Purchases of rental and non-rental equipment totaling $237.4 million and proceeds from the sale of rental and non-rental equipment of approximately $58.9 million.

For the six month period ended June 30, 2017, the cash provided by our investing activities was exceeded by cash used in our investing activities, resulting in net cash used in our investing activities of $75.9 million. This was a result of purchases of rental and non-rental equipment totaling $125.1 million and proceeds from the sale of rental and non-rental equipment of approximately $49.2 million.

45


Cash flow from financing activities. For the six month period ended June 30, 2018, cash provided by our financing activities was $112.8 million. Net borrowings under our Credit Facility for the six month period ended June 30, 2018 were $132.7 million, which was partially offset by dividends paid totaling $19.6 million, or $0.55 per common share. Payments on capital lease obligations were $0.1 million and payments of deferred financing costs were $0.1 million.

For the six month period ended June 30, 2017, the cash provided by our financing activities was exceeded by our cash used in our financing activities, resulting in net cash used in our financing activities of approximately $17.5 million. Dividends totaling approximately $19.6 million, or $0.55 per common share, were paid during the six month period ended June 30, 2017. Payments on capital lease obligations were $0.1 million. Net borrowings under the Credit Facility were $2.2 million for the six month period ended June 30, 2017.

Senior Secured Credit Facility

We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Capital Finance, LLC (as successor to General Electric Capital Corporation) as administrative agent, and the lenders named therein.

On December 22, 2017, we amended, extended and restated the Credit Facility by entering into the Fifth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, the other credit parties named therein, the lenders named therein, Wells Fargo Capital Finance, LLC, as administrative agent, the other credit parties named therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.

The Amended and Restated Credit Agreement, among other things, (i) extends the maturity date of the credit facility from May 21, 2019 to December 22, 2022, (ii) increases the commitments under the senior secured asset based revolver provided for therein from $602.5 million to $750 million, (iii) increases the uncommitted incremental revolving capacity from $150 million to $250 million, (iv) provides that the unused line fee margin will be either 0.375% or 0.25%, depending on the Average Revolver Usage (as defined in the Amended and Restated Credit Agreement) of the borrowers, (v) lowers the interest rate (a) in the case of base rate revolving loans, to the base rate plus an applicable margin of 0.50% to 1.00% depending on the Average Availability (as defined in the Amended and Restated Credit Agreement) and (b) in the case of LIBOR revolving loans, to LIBOR (as defined in the Amended and Restated Credit Agreement) plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability, (vi) lowers the margin applicable to the letter of credit fee to between 1.50% and 2.00%, depending on the Average Availability, and (vii) permits, subject to certain conditions, an unlimited amount of Permitted Acquisitions, Restricted Payments and prepayments of Indebtedness (in each case, as defined in the Amended and Restated Credit Agreement).

The Amended and Restated Credit Agreement continues to provide for, among other things, a $30 million letter of credit sub-facility, and a guaranty by certain of the Company’s subsidiaries of the obligations under the credit facility. In addition, the credit facility remains secured by substantially all of the assets of the Company and certain of its subsidiaries.

At June 30, 2018, we had total borrowings under the credit facility of $132.7 million and we could borrow up to $609.6 million and remain in compliance with the debt covenants under the Company’s credit facility. At July 19, 2018, we had $592.9 million of available borrowings under our Credit Facility, net of a $7.7 million outstanding letter of credit.

 

Cash Requirements Related to Operations

Our principal sources of liquidity have been from cash provided by operating activities and the sales of new, used and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash have been to fund operating activities and working capital (including new and used equipment inventories), purchases of rental fleet equipment and property and equipment, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new start-up locations. We anticipate that the above described uses will be the principal demands on our cash in the future.

The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. Our gross rental fleet capital expenditures for the six month period ended June 30, 2018 were approximately $239.4 million, including $21.6 million of non-cash transfers from new and used equipment to rental fleet inventory. Our gross property and equipment capital expenditures for the six month period ended June 30, 2018 were $19.6 million. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either up or down) to match our actual performance.

46


To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the Credit Facility, the Senior Notes and our other indebtedness), will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. As of July 19, 2018, we had $592.9 million of available borrowings under the Credit Facility, net of $7.7 million of outstanding letters of credit.

We cannot provide absolute assurance that our future cash flow from operating activities will be sufficient to meet our long-term obligations and commitments. If we are unable to generate sufficient cash flow from operating activities in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. Given current economic and market conditions, including the significant disruptions in the global capital markets, we cannot assure investors that any of these actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Credit Facility and the indenture governing the Senior Notes, as well as any future debt agreements, contain or may contain restrictive covenants, which may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Quarterly Dividend

On May 16, 2018, the Company announced a quarterly dividend of $0.275 per share to stockholders of record, which was paid on June 15, 2018, totaling approximately $9.8 million. The Company intends to continue to pay regular quarterly cash dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other things, business and market conditions.

Seasonality

Although we believe our business is not materially impacted by seasonality, the demand for our rental equipment tends to be lower in the winter months. The level of equipment rental activities is directly related to commercial and industrial construction and maintenance activities. Therefore, equipment rental performance will be correlated to the levels of current construction activities. The severity of weather conditions can have a temporary impact on the level of construction activities. Adverse weather has a seasonal impact in parts of the markets we serve, including our Intermountain region, particularly in the winter months.

Equipment sales cycles are also subject to some seasonality with the peak selling period during the spring season and extending through the summer. Parts and services activities are typically less affected by changes in demand caused by seasonality.

 

Contractual and Commercial Commitments

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings may be affected by changes in interest rates since interest expense on the Credit Facility is currently calculated based upon the index rate plus an applicable margin of 0.50% to 1.00%, depending on the Average Availability (as defined in the Credit Facility), in the case of index rate revolving loans and LIBOR plus an applicable margin of 1.50% to 2.00%, depending on the Average Availability (as defined in the Credit Facility), in the case of LIBOR revolving loans.  At June 30, 2018, we had outstanding borrowings under the Credit Facility totaling $132.7 million. A 1.0% increase in the interest rate on the Credit Facility would result in an increase of approximately $1.3 million in interest expense on an annualized basis. At July 19, 2018, we had borrowings outstanding totaling $149.3 million, with $592.9 million of available borrowings, net of $7.7 million of outstanding letters of credit.  We did not have significant exposure to changing interest rates as of June 30, 2018 on the fixed-rate senior unsecured notes.  Historically, we have not engaged in derivatives or other financial instruments for trading, speculative or hedging purposes, though we may do so from time to time if such instruments are available to us on acceptable terms and prevailing market conditions are accommodating.

 

47


 

Item 4. Controls and Procedures

Management’s Quarterly Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2018, our current disclosure controls and procedures were effective.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

48


PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings.

From time to time, we are involved in various claims and legal actions arising in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

 

 

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to the Company’s risk factors previously disclosed on Form 10-K for the year ended December 31, 2017.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

 

Item 3. Defaults upon Senior Securities.

None.

 

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

 

Item 5. Other Information.

None.

 

 

Item 6. Exhibits.

 

 

 

 

  31.1

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

  31.2

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

  32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

 

101.INS

 

XBRL Instance Document (filed herewith).

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document (filed herewith).

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

 

 

49


SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

H&E EQUIPMENT SERVICES, INC.

 

 

Dated: July 26, 2018

By: 

/s/ John M. Engquist

 

 

John M. Engquist

Chief Executive Officer

(Principal Executive Officer)

 

 

 

Dated: July 26, 2018

By:

/s/ Leslie S. Magee

 

 

Leslie S. Magee

Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer)

 

 

50

hees-ex311_7.htm

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, John M. Engquist, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of H&E Equipment Services, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: July 26, 2018

By:

/s/ John M. Engquist

 

 

John M. Engquist

Chief Executive Officer

(Principal Executive Officer)

 

hees-ex312_8.htm

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Leslie S. Magee, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of H&E Equipment Services, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: July 26, 2018

By:

/s/ Leslie S. Magee

 

 

Leslie S. Magee

Chief Financial Officer and Secretary

(Principal Financial Officer)

 

hees-ex321_6.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of H&E Equipment Services, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Engquist, Chief Executive Officer of the Company, and Leslie S. Magee, Chief Financial Officer and Secretary of the Company, each certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

to my knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: July 26, 2018

By:

/s/ John M. Engquist

 

 

John M. Engquist

Chief Executive Officer

(Principal Executive Officer)

 

 

 

Dated: July 26, 2018

By:

/s/ Leslie S. Magee

 

 

Leslie S. Magee

Chief Financial Officer and Secretary

(Principal Financial Officer)