UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2007

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

For the transition period from                                         to

H&E Equipment Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware		81-0553291
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
11100 Mead Road, Suite 200, Baton Rouge, Louisiana		70816
(Address of principal executive offices)		(Zip code)

(225) 298-5200
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o      Non-Accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     Number of shares of common stock outstanding as of the close of business on August 6, 2007: 38,176,339

 

 

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
JUNE 30, 2007

		Page
PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006			4
Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2007 and 2006			5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2007 and 2006			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			39
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION			40
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			40
Item 3. Defaults upon Senior Securities			40
Item 4. Submission of Matters to a Vote of Security Holders			40
Item 5. Other Information			41
Item 6. Exhibits			41
Signatures			42
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 1350

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 of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

     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 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 that differ materially from those contained in any forward-looking statement. 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 activity in the markets where we operate in North America;
	•		relationships with new equipment suppliers;
	•		increased maintenance and repair costs;
	•		our substantial leverage;
	•		the risks associated with the expansion of our business;
	•		our possible inability to integrate any businesses we acquire, including our potential acquisition of J.W. Burress, Incorporated;
	•		competitive pressures;
	•		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, 2006 or elsewhere in this Quarterly Report on Form 10-Q.

     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 risk and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, as well as other reports and registration statements filed by us with the SEC. All of our annual, quarterly and current reports and amendments thereto, filed with the SEC are available on our website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our website at www.he-equipment.com.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Balances at
		June 30,				December 31,
		2007				2006
		(Unaudited)
ASSETS
Cash and cash equivalents		$	34,967			$	9,303
Receivables, net of allowance for doubtful accounts of $3,152 and $2,852, respectively			114,408				107,760
Inventories, net of reserve for obsolescence of $1,149 and $1,326, respectively			134,595				126,737
Prepaid expenses and other assets			7,368				6,122
Rental equipment, net of accumulated depreciation of $171,268 and $158,822, respectively			470,181				440,454
Property and equipment, net of accumulated depreciation of $30,169 and $27,112, respectively			31,568				29,663
Deferred financing costs and other intangible assets, net of accumulated amortization of $5,643 and $5,086, respectively			9,777				9,330
Goodwill			30,573				30,573
Total assets		$	833,437			$	759,942
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Amounts due on senior secured credit facility		$	—			$	9,134
Accounts payable			94,325				61,486
Manufacturer flooring plans payable			151,749				148,028
Accrued expenses payable and other liabilities			37,482				33,150
Related party obligation			536				653
Notes payable			2,000				2,354
Senior secured notes, net of original issue discount of $21 and $23, respectively			4,479				4,477
Senior unsecured notes			250,000				250,000
Deferred income taxes			27,823				11,805
Deferred compensation payable			1,866				3,271
Total liabilities			570,260				524,358
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued at June 30, 2007 and December 31, 2006			—				—
Common stock, $0.01 par value, 175,000,000 shares authorized; 38,192,094 shares issued at June 30, 2007 and December 31, 2006 and 38,176,339 and 38,192,094 shares outstanding at June 30, 2007 and December 31, 2006, respectively			382				382
Additional paid-in capital			205,303				204,638
Treasury stock at cost, 15,755 shares of common stock held at June 30, 2007 and no shares held at December 31, 2006, respectively			(432	)			—
Retained earnings			57,924				30,564
Total stockholders’ equity			263,177				235,584
Total liabilities and stockholders’ equity		$	833,437			$	759,942

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

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Equipment rentals		$	69,572			$	64,011			$	132,773			$	118,006
New equipment sales			78,465				56,945				146,235				112,660
Used equipment sales			34,747				36,065				65,687				67,719
Parts sales			23,951				21,237				47,087				40,550
Services revenues			15,099				13,374				29,722				25,708
Other			11,311				10,904				21,377				20,103
Total revenues			233,145				202,536				442,881				384,746
Cost of revenues:
Rental depreciation			22,321				19,170				43,664				36,030
Rental expense			11,842				10,476				22,629				21,088
New equipment sales			68,378				49,733				127,352				98,294
Used equipment sales			26,354				25,746				48,874				49,545
Parts sales			17,060				15,080				33,329				28,604
Services revenues			5,628				4,731				10,768				9,298
Other			10,352				9,305				19,344				17,569
Total cost of revenues			161,935				134,241				305,960				260,428
Gross profit			71,210				68,295				136,921				124,318
Selling, general and administrative expenses			38,360				33,384				75,515				74,427
Gain on sales of property and equipment, net			39				60				347				159
Income from operations			32,889				34,971				61,753				50,050
Other income (expense):
Interest expense			(8,887	)			(10,115	)			(17,590	)			(20,282	)
Other, net			386				355				523				430
Total other expense, net			(8,501	)			(9,760	)			(17,067	)			(19,852	)
Income before provision for income taxes			24,388				25,211				44,686				30,198
Provision for income taxes			9,162				5,408				17,326				6,475
Net income		$	15,226			$	19,803			$	27,360			$	23,723
Net income per common share:
Basic		$	0.40			$	0.52			$	0.72			$	0.66
Diluted		$	0.40			$	0.52			$	0.72			$	0.66
Weighted average common shares outstanding:
Basic			38,095				38,070				38,088				35,777
Diluted			38,161				38,096				38,159				35,790

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

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	27,360			$	23,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation on property and equipment			3,946				3,263
Depreciation on rental equipment			43,664				36,030
Amortization of loan discounts and deferred financing costs			684				1,445
Amortization of other intangible assets			12				23
Provision for losses on accounts receivable			1,090				1,001
Provision for inventory obsolescence			25				17
Provision for deferred income taxes			16,107				5,843
Stock-based compensation expense			621				374
Gain on sales of property and equipment, net			(347	)			(159	)
Gain on sales of rental equipment, net			(15,713	)			(16,293	)
Changes in operating assets and liabilities, net of impact of acquisition:
Receivables, net			(7,738	)			(2,078	)
Inventories			(57,113	)			(52,224	)
Prepaid expenses and other assets			(2,344	)			(3,089	)
Accounts payable			32,839				20,750
Manufacturer flooring plans payable			3,721				23,255
Accrued expenses payable and other liabilities			4,365				3,368
Deferred compensation payable			(1,406	)			(8,564	)
Net cash provided by operating activities			49,773				36,685
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			—				(56,961	)
Purchases of property and equipment			(5,994	)			(10,171	)
Purchases of rental equipment			(63,791	)			(105,453	)
Proceeds from sales of property and equipment			490				382
Proceeds from sales of rental equipment			55,343				54,390
Net cash used in investing activities			(13,952	)			(117,813	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issue costs			—				207,018
Excess tax benefits from stock-based awards			(44	)			—
Purchase of treasury stock			(432	)			—
Borrowings on senior secured credit facility			428,086				487,673
Payments on senior secured credit facility			(437,220	)			(594,124	)
Payments of deferred financing costs			(43	)			(190	)
Payments of related party obligation			(150	)			(150	)
Principal payments of notes payable			(354	)			(85	)
Net cash provided by (used in) financing activities			(10,157	)			100,142
Net increase in cash and cash equivalents			25,664				19,014
Cash, beginning of period			9,303				5,627
Cash and cash equivalents, end of period		$	34,967			$	24,641

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Amounts in thousands)

		Six Months Ended
		June 30,
		2007				2006
Supplemental schedule of noncash investing activities:
Noncash asset purchases:
Assets transferred from new and used inventory to rental fleet		$	49,230			$	21,849
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	15,261			$	19,027
Income taxes		$	1,552			$	500

     As of June 30, 2007 and 2006, we had $151.7 million and $117.0 million, respectively, in manufacturer flooring plans payable outstanding, which are used to finance purchases of inventory and rental equipment.

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

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES

(1) Organization and Nature of Operations

Basis of Presentation

     In connection with our initial public offering of common stock in February 2006 (see note 3 to the condensed consolidated financial statements), we converted H&E Equipment Services L.L.C. (“H&E LLC”), a Louisiana limited liability company and the wholly-owned operating subsidiary of H&E Holding L.L.C. (“Holdings”), into H&E Equipment Services, Inc., a Delaware corporation. Prior to our initial public offering, our business was conducted through H&E LLC. In order to have an operating Delaware corporation as the issuer of our initial public offering, immediately prior to the closing of the initial public offering, on February 3, 2006, H&E LLC and Holdings merged with and into us (H&E Equipment Services, Inc.), with us surviving the reincorporation merger as the operating company. Effective February 3, 2006, H&E LLC and Holdings no longer existed. In these transactions (collectively, the “Reorganization Transactions”), holders of preferred limited liability company interests and holders of common limited liability company interests in H&E Holdings received shares of our common stock. All references to common stock share and per share amounts included in our condensed consolidated statements of income for the three and six months ended June 30, 2007 and 2006 have been retroactively adjusted to reflect the Reorganization Transactions as if the Reorganization Transactions had taken place as of the beginning of the earliest period presented.

     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 Holdings, Inc. and H&E Equipment Services (California) LLC, collectively referred to herein as “we” or “us” or “our” or the “Company.”

     The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007, 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, 2006, from which the balance sheet amounts as of December 31, 2006 were derived.

     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 service support for four core categories of specialized equipment: (1) hi-lift or aerial platform equipment; (2) cranes; (3) earthmoving equipment; and (4) industrial lift trucks. By providing equipment sales, rental, on-site parts and 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 an extremely 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 service operations.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(2) Significant Accounting Policies

     We describe our significant accounting policies in note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. At June 30, 2007, a portion of our available cash on hand was invested in cash equivalents whereas no portion of our available cash on hand at December 31, 2006 was invested in cash equivalents. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

     Use of Estimates

     We prepare our condensed 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 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 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.

     Recently Adopted Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109 (“SFAS 109”). FIN 48 clarifies the application of SFAS 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The issuance of FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” in May 2007 amends FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purposes of recognizing previously unrecognized tax benefits.

     The cumulative effect of applying the provisions of FIN 48 is reported as an adjustment to opening retained earnings in the period of adoption. We adopted the provisions of FIN 48 as of January 1, 2007, and in so doing, have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. The cumulative effect of applying this interpretation did not result in any adjustment to our retained earnings as of January 1, 2007.

     Consistent with our historical financial reporting, to the extent we incur interest income, interest expense, or penalties related to unrecognized income tax benefits, such items are recorded in “Other income or expense.” We did not incur any income tax related interest income, interest expense or penalties related to FIN 48 for the three and six months ended June 30, 2007.

     As of January 1, 2007, we had an unrecognized tax benefit of $6.2 million. The net impact of recording this liability was a reclass between deferred income tax liabilities and deferred income tax assets, resulting in no adjustment to retained earnings. If recognized, there would be no impact to the 2007 effective income tax rate. There was no change in the unrecognized tax benefit for the three and six months ended June 30, 2007. At this time we do not expect to recognize significant increases or decreases in unrecognized tax benefits during the year ending December 31, 2007 related to FIN 48.

     Our U.S. tax returns for 2003 and subsequent years remain subject to examination by tax authorities. We are also subject to examination in various state jurisdictions for 2002 and subsequent years.

     Recently Issued Accounting Pronouncements

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

instrument basis (the fair value option). SFAS 159 becomes effective for us on January 1, 2008. Management is evaluating the impact of adopting SFAS 159 and currently does not expect that the election of fair value measurement will have a material impact on our consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 becomes effective for us on January 1, 2008. Upon adoption, the provisions of SFAS 157 are to be applied prospectively with limited exceptions. The adoption of SFAS 157 is not expected to have a material impact on our consolidated financial statements.

(3) Initial Public Offering and Use of Proceeds

     We completed an initial public offering of our common stock, par value $.01 per share, on February 3, 2006. In the offering, we sold 12,578,125 shares for an aggregate offering price of $226.4 million. Net proceeds to us, after deducting underwriting discounts and commissions and offering expenses, totaled approximately $207.0 million. Aggregate underwriting discounts and commissions totaled approximately $15.9 million and aggregate offering expenses totaled approximately $3.5 million.

     We used the net offering proceeds to us of $207.0 million as follows:

	•		$56.9 million to complete our acquisition of Eagle High Reach Equipment, Inc. and all of the equity interests of its subsidiary, Eagle High Reach Equipment, LLC (together, “Eagle”), on February 28, 2006 (for information on the Eagle acquisition, see note 4 to the condensed consolidated financial statements);
	•		$30.3 million to purchase rental equipment under operating leases;
	•		$8.6 million to pay deferred compensation owed to one of our current executives and a former executive; and
	•		$96.6 million to repay outstanding principal indebtedness under our senior secured credit facility.

     Additionally, we paid $8.0 million to Bruckmann, Rosser, Sherill & Co., L.L.C. (an affiliate of Bruckmann, Rosser, Sherill & Co., L.P. and Bruckmann, Rosser, Sherill & Co. II, L.P., two of our principal stockholders) in connection with the termination of a management services agreement. The remaining net proceeds of approximately $6.6 million were used for general corporate purposes.

(4) Acquisition

     We completed, effective as of February 28, 2006, the acquisition of all of the capital stock of Eagle High Reach Equipment, Inc. (now known as H&E California Holdings, Inc.) and all of the equity interests of its subsidiary, Eagle High Reach Equipment, LLC (now known as H&E Equipment Services (California) LLC) for an estimated consideration of approximately $66.3 million, consisting of cash paid of $59.9 million, liabilities assumed of $3.6 million, liabilities incurred of $2.2 million, and transaction costs of $0.6 million. The Eagle purchase price was determined based on the expected cash flows from the Eagle business and negotiation with the sellers. The purchase price was funded out of the proceeds from our initial public offering (see note 3 to the condensed consolidated financial statements for further information on our initial public offering). Prior to the acquisition Eagle was a privately-held construction and industrial equipment rental company. Eagle serves the southern California construction and industrial markets out of four locations. This acquisition marks our initial entry into the southern California market and is consistent with our business strategy. For further information on our business strategy, see Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2006.

     The Eagle acquisition has been accounted for using the purchase method of accounting. The aggregate purchase price has been

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

allocated to the assets acquired and liabilities assumed based an estimate of their fair values as determined by a valuation performed by an independent national firm. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired has been allocated to goodwill. Goodwill generated from the acquisition was recognized given the expected contribution of Eagle to the overall corporate strategy. We estimate that approximately $9.9 million of the goodwill acquired will be tax deductible. Our operating results for the three and six month periods ended June 30, 2007 and 2006 include the operating results of Eagle since the date of acquisition, February 28, 2006.

     The following table summarizes our purchase price allocation based on fair values of the Eagle assets acquired and liabilities assumed in February 2006 (amounts in thousands):

Cash		$	32
Receivables			7,300
Inventories			915
Rental equipment			32,235
Property and equipment			3,154
Prepaid expenses and other assets			654
Goodwill			22,001
Accounts payable			(483	)
Accrued expenses payable and other liabilities			(2,349	)
Deferred income taxes			(2,192	)
Notes payable			(755	)
Net assets acquired		$	60,512

     The following table contains unaudited pro forma condensed consolidated statements of income information for the three and six month periods ended June 30, 2007 and 2006, as if the Eagle transaction had occurred at the beginning of each respective period presented (amounts in thousands, except per share data):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Total revenues		$	233,145			$	202,536			$	442,881			$	390,074
Gross profit		$	71,210			$	68,295			$	136,921			$	126,092
Operating income		$	32,889			$	34,971			$	61,753			$	49,342
Net income		$	15,226			$	19,803			$	27,360			$	23,374
Basic net income per common share		$	0.40			$	0.52			$	0.72			$	0.65
Diluted net income per common share		$	0.40			$	0.52			$	0.72			$	0.65

     The pro forma information above is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred had the Eagle transaction occurred as presented. Further, the above pro forma amounts do not consider any potential synergies or integration costs that may result from the transaction. In addition, future results may vary significantly from the results reflected in such pro forma information.

(5) Stockholders’ Equity

     The following table summarizes the activity in Stockholders’ Equity for the six month period ended June 30, 2007 (amounts in thousands, except share data):

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

		Common Stock								Additional												Total
		Shares								Paid-in				Treasury				Retained				Stockholders’
		Issued				Amount				Capital				Stock				Earnings				Equity
Balances at December 31, 2006			38,192,094			$	382			$	204,638			$	—			$	30,564			$	235,584
Stock-based compensation			—				—				621				—				—				621
Tax benefits associated with stock-based awards			—				—				44				—				—				44
Surrender of 15,755 shares(1)			—				—				—				(432	)			—				(432	)
Net income			—				—				—				—				27,360				27,360
Balances at June 30, 2007			38,192,094			$	382			$	205,303			$	(432	)		$	57,924			$	263,177

(6) Stock-Based Compensation

     We adopted our 2006 Stock-Based Incentive Compensation Plan (the “Stock Incentive Plan”) in January 2006 prior to our initial public offering of common stock. The Stock Incentive Plan was further amended and restated with the approval of our stockholders at the 2006 annual meeting of the stockholders of the Company to provide for the inclusion of non-employee directors as persons eligible to receive awards under the Stock Incentive Plan. Prior to the adoption of the Stock Incentive Plan in January 2006, no share-based payment arrangements existed. The Stock Incentive Plan is administered by the Compensation Committee of our Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions, performance measures, if any, and other provisions of the award. Under the Stock Incentive Plan, we may offer deferred shares or restricted shares of our common stock and grant options, including both incentive stock options and nonqualified stock options, to purchase shares of our common stock. Shares available for future stock-based payment awards under our Stock Incentive Plan were 4,411,222 shares as of June 30, 2007.

     We account for our stock-based compensation plan using the fair value recognition provisions of Statement of Financial Accounting Standard No. 123 (revised), (“SFAS 123(R)”), “Share-Based Payment.” SFAS 123(R) became effective for us in the first quarter of our fiscal year ended December 31, 2006. Under the provisions of SFAS 123(R), 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).

Non-vested Stock

     The following table summarizes our non-vested stock activity for the six months ended June 30, 2007.

						Weighted Average
		Number of				Grant Date Fair
		Shares				Value
Non-vested stock at January 1, 2007			121,950			$	24.60
Granted			—				—
Vested			(40,650	)		$	24.60
Forfeited			—				—
Non-vested stock at June 30, 2007			81,300			$	24.60

     As of June 30, 2007, we have unrecognized compensation expense of $1.6 million related to non-vested stock. Compensation expense related to these awards included in selling, general and administrative expenses in the accompanying condensed consolidated

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

statements of income was approximately $0.3 million for each of the three month periods ended June 30, 2007 and 2006. Compensation expense included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the six months ended June 30, 2007 and 2006 was $0.5 million and $0.4 million, respectively.

     We receive a tax deduction when non-vested stock vests at a higher value than the value used to recognize compensation expense at the date of grant. Excess tax benefits are recorded when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes. For the six month period ended June 30, 2007, we recognized $44 thousand of excess tax benefits associated with the vesting of the above 40,650 shares on February 22, 2007.

Stock Options

     On June 5, 2007, we granted stock options for 6,000 shares of our common stock with an exercise price of $26.27 per share, the closing market price of our stock on the date of grant. These options vest in three equal parts over three years and expire ten years from the date of grant.

     We use the Black-Scholes option pricing model to estimate the fair value of stock-based option awards with the following weighted-average assumptions for the three and six month periods ended June 30, 2007:

Risk-free interest rate			5.0	%
Expected life of options (in years)			6.0
Expected volatility			33.0 - 35.0	%
Expected annual dividend yield			—

     The assumptions above are based on multiple factors. We determined the expected life of the option awards to be approximately 6.0 years. Since we are a public entity with limited historical data on the price of our publicly traded common shares due to our initial public offering in 2006 and no prior history of share-based stock option exercise activity, we, as provided for in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” based our estimate of expected volatility on the historical, expected or implied volatility of similar entities within our industry whose share or option prices are publicly available.

     At June 30, 2007, there was $0.5 million of unrecognized compensation cost related to these stock option awards that is expected to be recognized over a weighted-average period of 1.85 years. Compensation expense related to these awards included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three month periods ended June 30, 2007 and 2006 was $62 thousand and $16 thousand, respectively. Compensation expense related to these awards included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the six month periods ended June 30, 2007 and 2006 was $122 thousand and $16 thousand, respectively.

     The following table represents stock option activity for the six month period ended June 30, 2007:

		Number of				Weighted Average				Weighted Average
		Shares				Exercise Price				Contractual Life
Outstanding options at January 1, 2007			45,000			$	24.60
Granted			6,000			$	26.27
Exercised			—				—
Canceled, forfeited or expired			—				—
Outstanding options at June 30, 2007			51,000			$	24.80			$	8.71
Options exercisable at June 30, 2007			15,000			$	24.60			$	8.65

     The aggregate intrinsic value of options outstanding at June 30, 2007 was $0.2 million and the aggregate intrinsic value of options exercisable was approximately $47 thousand.

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

     The following table summarizes non-vested stock option activity for the six month period ended June 30, 2007:

						Weighted Average
		Number of				Grant Date Fair
		Shares				Value
Non-vested stock options at January 1, 2007			45,000			$	24.60
Granted			6,000			$	26.27
Vested			(15,000	)		$	24.60
Forfeited			—				—
Non-vested stock options at June 30, 2007			36,000			$	24.88

(7) Earnings per Share

     Earnings per common share for the three and six month periods ended June 30, 2007 and 2006 are based on the weighted-average number of common shares outstanding during the respective periods and have been retroactively adjusted to reflect the Reorganization Transactions as if the Reorganization Transactions had occurred at the beginning of the earliest period presented. The following table sets forth the computation of basic and diluted net income per common share for the three and six month periods ended June 30, 2007 and 2006 (amounts in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Basic net income per share:
Net income		$	15,226			$	19,803			$	27,360			$	23,723
Weighted average number of common shares outstanding			38,095				38,070				38,088				35,777
Net income per common share — basic		$	0.40			$	0.52			$	0.72			$	0.66
Diluted net income per share:
Net income		$	15,226			$	19,803			$	27,360			$	23,723
Weighted average number of common shares outstanding			38,095				38,070				38,088				35,777
Effect of dilutive securities:
Effect of dilutive stock options and non-vested stock			66				26				71				13
Weighted average number of shares outstanding — diluted			38,161				38,096				38,159				35,790
Net income per common share — diluted		$	0.40			$	0.52			$	0.72			$	0.66
Common shares excluded from the denominator as anti-dilutive:
Stock options			6,000				—				6,000				—

(8) Segment Information

     We have identified five reportable segments: equipment rentals, new equipment sales, used equipment sales, parts sales and service 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.

     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):

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Equipment rentals		$	69,572			$	64,011			$	132,773			$	118,006
New equipment sales			78,465				56,945				146,235				112,660
Used equipment sales			34,747				36,065				65,687				67,719
Parts sales			23,951				21,237				47,087				40,550
Services revenues			15,099				13,374				29,722				25,708
Total segmented revenues			221,834				191,632				421,504				364,643
Non-segmented revenues			11,311				10,904				21,377				20,103
Total revenues		$	233,145			$	202,536			$	442,881			$	384,746
Gross Profit:
Equipment rentals		$	35,409			$	34,365			$	66,480			$	60,888
New equipment sales			10,087				7,212				18,883				14,366
Used equipment sales			8,393				10,319				16,813				18,174
Parts sales			6,891				6,157				13,758				11,946
Services revenues			9,471				8,643				18,954				16,410
Total segmented gross profit			70,251				66,696				134,888				121,784
Non-segmented gross profit			959				1,599				2,033				2,534
Total gross profit		$	71,210			$	68,295			$	136,921			$	124,318

		Balances at
		June 30,				December 31,
		2007				2006
Segment identified assets:
Equipment sales		$	112,081			$	104,648
Equipment rentals			470,181				440,454
Parts and services			22,514				22,089
Total segment identified assets			604,776				567,191
Non-segment identified assets			228,661				192,751
Total assets		$	833,437			$	759,942

     We operate primarily in the United States. Our sales to international customers were no greater than 1.3% of total revenues for all periods presented in this Quarterly Report on Form 10-Q. No one customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented.

(9) 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 (formerly known as Eagle High Reach Equipment, LLC), and H&E California Holdings, Inc. (formerly known as Eagle High Reach Equipment, Inc.). 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 the Company’s ability to obtain funds from the guarantor subsidiaries by dividend or loan.

     The condensed consolidating financial statements of H&E Equipment Services, Inc. and its subsidiaries are included below. The financial statements for H&E Finance Corp., the subsidiary co-issuer, are not included within the consolidating financial statements because H&E Finance Corp. has no assets or operations. The financial statements of H&E Equipment Services (California), LLC and

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

H&E California Holdings, Inc. are included in the periods presented from the date of our acquisition of Eagle on February 28, 2006.

CONDENSED CONSOLIDATING BALANCE SHEET

		As of June 30, 2007
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
		(Amounts in thousands)
Assets
Cash and cash equivalents		$	34,912			$	55			$	—			$	34,967
Receivables, net			103,222				11,186				—				114,408
Inventories, net			116,685				17,910				—				134,595
Prepaid expenses and other assets			7,282				86				—				7,368
Rental equipment, net			402,902				67,279				—				470,181
Property and equipment, net			26,191				5,377				—				31,568
Deferred financing costs and other intangible assets, net			9,777				—				—				9,777
Investment in guarantor subsidiaries			101,893				—				(101,893	)			—
Goodwill			30,573				—				—				30,573
Total assets		$	833,437			$	101,893			$	(101,893	)		$	833,437
Liabilities and Stockholders’ Equity
Accounts payable		$	94,120			$	205			$	—			$	94,325
Manufacturer flooring plans payable			151,749				—				—				151,749
Accrued expenses payable and other liabilities			36,590				892				—				37,482
Intercompany balances			(84,804	)			84,804				—				—
Related party obligation			536				—				—				536
Notes payable			1,258				742				—				2,000
Senior secured notes, net of discount			4,479				—				—				4,479
Senior unsecured notes			250,000				—				—				250,000
Deferred income taxes			27,823				—				—				27,823
Deferred compensation payable			1,866				—				—				1,866
Total liabilities			483,617				86,643				—				570,260
Stockholders’ equity			349,820				15,250				(101,893	)			263,177
Total liabilities and stockholders’ equity		$	833,437			$	101,893			$	(101,893	)		$	833,437

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

		As of December 31, 2006
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
		(Amounts in thousands)
Assets
Cash		$	9,214			$	89			$	—			$	9,303
Receivables, net			92,281				15,479				—				107,760
Inventories, net			123,695				3,042				—				126,737
Prepaid expenses and other assets			5,995				127				—				6,122
Rental equipment, net			377,910				62,544				—				440,454
Property and equipment, net			24,369				5,294				—				29,663
Deferred financing costs and other intangible assets, net			9,330				—				—				9,330
Investment in guarantor subsidiaries			86,575				—				(86,575	)			—
Goodwill			30,573				—				—				30,573
Total assets		$	759,942			$	86,575			$	(86,575	)		$	759,942
Liabilities and Stockholders’ Equity
Amount due on senior secured credit facility		$	9,134			$	—			$	—			$	9,134
Accounts payable			61,982				(496	)			—				61,486
Manufacturer flooring plans payable			148,028				—				—				148,028
Accrued expenses payable and other liabilities			32,248				902				—				33,150
Intercompany balances			(70,953	)			70,953				—				—
Related party obligation			653				—				—				653
Notes payable			1,607				747				—				2,354
Senior secured notes, net of discount			4,477				—				—				4,477
Senior unsecured notes			250,000				—				—				250,000
Deferred income taxes			11,805				—				—				11,805
Deferred compensation payable			3,271				—				—				3,271
Total liabilities			452,252				72,106				—				524,358
Stockholders’ equity			307,690				14,469				(86,575	)			235,584
Total liabilities and stockholders’ equity		$	759,942			$	86,575			$	(86,575	)		$	759,942

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME

		Three Months Ended June 30, 2007
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
		(Amounts in thousands)
Revenues:
Equipment rentals		$	58,857			$	10,715			$	—			$	69,572
New equipment sales			76,014				2,451				—				78,465
Used equipment sales			31,665				3,082				—				34,747
Parts sales			22,877				1,074				—				23,951
Services revenues			14,219				880				—				15,099
Other			9,939				1,372				—				11,311
Total revenues			213,571				19,574				—				233,145
Cost of revenues:
Rental depreciation			19,331				2,990				—				22,321
Rental expense			9,923				1,919				—				11,842
New equipment sales			66,223				2,155				—				68,378
Used equipment sales			24,034				2,320				—				26,354
Parts sales			16,286				774				—				17,060
Services revenues			5,400				228				—				5,628
Other			8,835				1,517				—				10,352
Total cost of revenues			150,032				11,903				—				161,935
Gross profit:
Equipment rentals			29,603				5,806				—				35,409
New equipment sales			9,791				296				—				10,087
Used equipment sales			7,631				762				—				8,393
Parts sales			6,591				300				—				6,891
Services revenues			8,819				652				—				9,471
Other			1,104				(145	)			—				959
Gross profit			63,539				7,671				—				71,210
Selling, general and administrative expenses			33,380				4,980				—				38,360
Equity in earnings of guarantor subsidiaries			872				—				(872	)			—
Gain on sales of property and equipment, net			36				3				—				39
Income from operations			31,067				2,694				(872	)			32,889
Other income (expense):
Interest expense			(7,056	)			(1,831	)			—				(8,887	)
Other, net			377				9				—				386
Total other expense, net			(6,679	)			(1,822	)			—				(8,501	)
Income before provision for income taxes			24,388				872				(872	)			24,388
Provision for income taxes			9,162				—				—				9,162
Net income		$	15,226			$	872			$	(872	)		$	15,226

H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF INCOME

		Three Months Ended June 30, 2006
		H&E Equipment				Guarantor
		Services				Subsidiaries				Elimination				Consolidated
		(Amounts in thousands)
Revenues:
Equipment rentals		$	54,536			$	9,475			$	—			$	64,011
New equipment sales			55,439				1,506				—				56,945
Used equipment sales			33,519				2,546				—				36,065
Parts sales			20,435				802				—				21,237
Services revenues			12,936				438				—				13,374
Other			9,660				1,244				—				10,904
Total revenues			186,525				16,011				—				202,536
Cost of revenues:
Rental depreciation			16,752				2,418				—				19,170
Rental expense			8,915				1,561				—				10,476
New equipment sales			48,529				1,204				—				49,733
Used equipment sales			23,865				1,881				—				25,746
Parts sales			14,544				536				—				15,080
Services revenues			4,600				131				—				4,731
Other			8,166				1,139				—				9,305
Total cost of revenues			125,371				8,870				—				134,241
Gross profit:
Equipment rentals			28,869				5,496				—				34,365
New equipment sales			6,910				302				—				7,212
Used equipment sales			9,654				665				—				10,319
Parts sales			5,891				266				—				6,157
Services revenues			8,336				307				—				8,643
Other			1,494				105				—				1,599
Gross profit			61,154				7,141				—				68,295
Selling, general and administrative expenses			28,870				4,514				—				33,384
Equity in earnings of guarantor subsidiaries			1,359				—				(1,359	)			—
Gain on sales of property and equipment, net			60				—				—				60
Income from operations			33,703				2,627				(1,359	)			34,971
Other income (expense):
Interest expense			(8,839	)			(1,276	)			—				(10,115	)
Other, net			347				8				—				355
Total other expense, net			(8,492	)			(1,268	)			—				(9,760	)
Income before provision for income taxes			25,211				1,359				(1,359	)			25,211
Provision for income taxes			5,408				—				—				5,408
Net income		$	19,803			$	1,359			$	(1,359	)		$	19,803