H&E Equipment Services, Inc. - Quarter Report: 2007 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 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
Commission file number: 000-51759
H&E Equipment Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State of other jurisdiction of incorporation or organization) |
81-0553291 (I.R.S. Employer Identification No.) |
|
11100 Mead Road, Suite 200, Baton Rouge, Louisiana (Address of principal executive offices) |
70816 (Zip code) |
(225) 298-5200
(Registrants telephone number, including area code)
(Registrants 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 issuers classes of common stock, as of
the latest practicable date.
Number of shares of common stock outstanding as of the close of business on November 6, 2007:
38,176,339
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
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Certification Pursuant to Section 302 | ||||||||
Certification Pursuant to Section 1350 |
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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 managements 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 recently completed 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 any 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.
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PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
Balances at | ||||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash |
$ | 1,916 | $ | 9,303 | ||||
Receivables, net of allowance for doubtful accounts of $3,707 and $2,852,
respectively |
152,697 | 107,760 | ||||||
Inventories, net of reserve for obsolescence of $1,418 and $1,326, respectively |
144,823 | 126,737 | ||||||
Prepaid expenses and other assets |
8,336 | 6,122 | ||||||
Rental equipment, net of accumulated depreciation of $177,939 and $158,822,
respectively |
556,169 | 440,454 | ||||||
Property and equipment, net of accumulated depreciation and amortization of
$29,638 and $27,112, respectively |
42,948 | 29,663 | ||||||
Deferred financing costs, net of accumulated amortization of $5,860 and $4,983,
respectively |
9,023 | 9,296 | ||||||
Intangible assets, net of accumulated amortization of $258 and $103,
respectively |
11,430 | 34 | ||||||
Goodwill |
54,401 | 30,573 | ||||||
Total assets |
$ | 981,743 | $ | 759,942 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Amounts due on senior secured credit facility |
$ | 81,515 | $ | 9,134 | ||||
Accounts payable |
108,929 | 61,486 | ||||||
Manufacturer flooring plans payable |
160,498 | 148,028 | ||||||
Accrued expenses payable and other liabilities |
49,622 | 33,150 | ||||||
Related party obligation |
476 | 653 | ||||||
Notes payable |
1,993 | 2,354 | ||||||
Senior secured notes, net of original issue discount of $23 at December 31, 2006 |
| 4,477 | ||||||
Senior unsecured notes |
250,000 | 250,000 | ||||||
Capital lease payable |
2,418 | | ||||||
Deferred income taxes |
40,702 | 11,805 | ||||||
Deferred compensation payable |
1,902 | 3,271 | ||||||
Total liabilities |
698,055 | 524,358 | ||||||
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; 38,192,094 shares
issued at September 30, 2007 and December 31, 2006 and 38,176,339 and
38,192,094 shares outstanding at September 30, 2007 and December 31, 2006,
respectively |
382 | 382 | ||||||
Additional paid-in capital |
205,620 | 204,638 | ||||||
Treasury stock at cost, 15,755 shares of common stock held at September 30,
2007 and no shares held at December 31, 2006, respectively |
(432 | ) | | |||||
Retained earnings |
78,118 | 30,564 | ||||||
Total stockholders equity |
283,688 | 235,584 | ||||||
Total liabilities and stockholders equity |
$ | 981,743 | $ | 759,942 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 75,598 | $ | 67,327 | $ | 208,371 | $ | 185,333 | ||||||||
New equipment sales |
94,675 | 60,673 | 240,910 | 173,333 | ||||||||||||
Used equipment sales |
44,503 | 29,668 | 110,190 | 97,387 | ||||||||||||
Parts sales |
26,716 | 21,024 | 73,803 | 61,574 | ||||||||||||
Services revenues |
16,877 | 14,074 | 46,599 | 39,782 | ||||||||||||
Other |
12,218 | 11,369 | 33,595 | 31,472 | ||||||||||||
Total revenues |
270,587 | 204,135 | 713,468 | 588,881 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Rental depreciation |
24,468 | 20,644 | 68,132 | 56,674 | ||||||||||||
Rental expense |
11,173 | 10,339 | 33,802 | 31,427 | ||||||||||||
New equipment sales |
81,523 | 53,321 | 208,875 | 151,615 | ||||||||||||
Used equipment sales |
33,730 | 21,708 | 82,604 | 71,253 | ||||||||||||
Parts sales |
18,895 | 14,895 | 52,224 | 43,499 | ||||||||||||
Services revenues |
6,131 | 5,045 | 16,899 | 14,343 | ||||||||||||
Other |
10,768 | 9,436 | 30,112 | 27,005 | ||||||||||||
Total cost of revenues |
186,688 | 135,388 | 492,648 | 395,816 | ||||||||||||
Gross profit |
83,899 | 68,747 | 220,820 | 193,065 | ||||||||||||
Selling, general and administrative expenses |
41,609 | 34,118 | 117,124 | 108,545 | ||||||||||||
Gain on sales of property and equipment, net |
97 | 241 | 444 | 400 | ||||||||||||
Income from operations |
42,387 | 34,870 | 104,140 | 84,920 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(9,007 | ) | (9,060 | ) | (26,597 | ) | (29,342 | ) | ||||||||
Loss on early extinguishment of debt |
(325 | ) | (40,771 | ) | (325 | ) | (40,771 | ) | ||||||||
Other, net |
293 | 245 | 816 | 675 | ||||||||||||
Total other expense, net |
(9,039 | ) | (49,586 | ) | (26,106 | ) | (69,438 | ) | ||||||||
Income (loss) before provision (benefit) for income taxes |
33,348 | (14,716 | ) | 78,034 | 15,482 | |||||||||||
Provision (benefit) for income taxes |
13,154 | (3,185 | ) | 30,480 | 3,290 | |||||||||||
Net income (loss) |
$ | 20,194 | $ | (11,531 | ) | $ | 47,554 | $ | 12,192 | |||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.33 | |||||||
Diluted |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.33 | |||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
38,095 | 38,070 | 38,090 | 36,550 | ||||||||||||
Diluted |
38,095 | 38,070 | 38,090 | 36,587 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 47,554 | $ | 12,192 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation on property and equipment |
6,087 | 5,010 | ||||||
Amortization of property and equipment under capital lease |
23 | | ||||||
Depreciation on rental equipment |
68,132 | 56,674 | ||||||
Amortization of loan discounts and deferred financing costs |
1,019 | 2,056 | ||||||
Amortization of intangible assets |
270 | 34 | ||||||
Provision for losses on accounts receivable |
1,712 | 1,457 | ||||||
Provision for inventory obsolescence |
61 | 18 | ||||||
Provision for deferred income taxes |
28,897 | 2,692 | ||||||
Stock-based compensation expense |
938 | 681 | ||||||
Loss on early extinguishment of debt |
325 | 40,771 | ||||||
Gain on sales of property and equipment, net |
(444 | ) | (400 | ) | ||||
Gain on sales of rental equipment, net |
(25,594 | ) | (23,339 | ) | ||||
Changes in operating assets and liabilities, net of impact of acquisition: |
||||||||
Receivables, net |
(32,498 | ) | (4,363 | ) | ||||
Inventories |
(53,719 | ) | (58,315 | ) | ||||
Prepaid expenses and other assets |
(1,963 | ) | (4,437 | ) | ||||
Accounts payable |
38,684 | 5,513 | ||||||
Manufacturer flooring plans payable |
(7,317 | ) | 36,292 | |||||
Accrued expenses payable and other liabilities |
5,817 | 7,021 | ||||||
Deferred compensation payable |
(1,368 | ) | (8,507 | ) | ||||
Net cash provided by operating activities |
76,616 | 71,050 | ||||||
Cash flows from investing activities: |
||||||||
Acquisition of businesses, net of cash acquired |
(99,848 | ) | (56,961 | ) | ||||
Purchases of property and equipment |
(12,325 | ) | (13,353 | ) | ||||
Purchases of rental equipment |
(128,202 | ) | (174,372 | ) | ||||
Proceeds from sales of property and equipment |
651 | 1,841 | ||||||
Proceeds from sales of rental equipment |
91,626 | 76,068 | ||||||
Net cash used in investing activities |
(148,098 | ) | (166,777 | ) | ||||
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 |
754,616 | 718,819 | ||||||
Payments on senior secured credit facility |
(681,964 | ) | (799,005 | ) | ||||
Proceeds from issuance of senior unsecured notes |
| 250,000 | ||||||
Principal payment of senior secured notes |
(4,478 | ) | (214,608 | ) | ||||
Principal payment of senior subordinated notes |
(278 | ) | (59,155 | ) | ||||
Payments of deferred financing costs |
(547 | ) | (8,816 | ) | ||||
Payments of related party obligation |
(225 | ) | (225 | ) | ||||
Payments on capital lease obligations |
(2,280 | ) | | |||||
Proceeds from issuance of notes payable |
| 1,271 | ||||||
Principal payments of notes payable |
(361 | ) | (146 | ) | ||||
Net cash provided by financing activities |
64,095 | 95,153 | ||||||
Net decrease in cash |
(7,387 | ) | (574 | ) | ||||
Cash, beginning of period |
9,303 | 5,627 | ||||||
Cash, end of period |
$ | 1,916 | $ | 5,053 | ||||
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Amounts in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Amounts in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Supplemental schedule of noncash investing and financing activities: |
||||||||
Noncash asset purchases: |
||||||||
Assets transferred from new and used inventory to rental fleet |
$ | 59,324 | $ | 23,980 | ||||
Capital lease obligations incurred |
$ | 4,698 | $ | | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 28,594 | $ | 24,880 | ||||
Income taxes |
$ | 1,873 | $ | 576 | ||||
As of September 30, 2007 and 2006, we had $160.5 million and $130.0 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.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 operations for the three and nine
months ended September 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., H&E Equipment
Services (California) LLC and our most recent acquisition, as described in note 4 to the condensed
consolidated financial statements, of J.W. Burress, Incorporated (Burress) now known as H&E
Equipment Services (Mid-Atlantic), Inc., consummated on September 1, 2007, 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. Certain items in the prior periods have been reclassified to make
the presentation consistent with the current reporting periods. Operating results for the three and
nine months ended September 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.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Significant Accounting Policies
We describe our significant accounting policies in note 2 of the notes to consolidated
financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended
December 31, 2006.
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.
FIN 48 provides that the cumulative effect of applying the provisions 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 generate or 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 nine month periods ended
September 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 nine months ended September 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. federal tax returns for 2004 and subsequent years remain subject to examination by
tax authorities. We are also subject to examination in various state jurisdictions for 2003 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-instrument basis (the fair value option). SFAS 159 becomes effective for us on
January 1, 2008. Management is currently determining
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
whether fair value accounting is appropriate
for any of its eligible items and can not estimate the impact, if any, which SFAS 159 will have on
its financial condition, results of operations and cash flows.
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) Acquisitions
2007 Acquisition
We completed, effective as of September 1, 2007, and funded on September 4, 2007, the
previously announced acquisition of all of the outstanding capital stock of J.W. Burress,
Incorporated (Burress) for an estimated consideration of approximately $143.8 million, consisting
of cash paid of $97.8 million, liabilities assumed of $39.0 million, liabilities incurred of $5.0
million and transaction costs of approximately $2.0 million. The Burress
purchase price was funded from available cash on hand and borrowings under our senior secured
credit facility (see discussion below). Prior to the acquisition, Burress was a privately-held
company operating primarily as a distributor in the construction and industrial equipment markets
out of 12 locations in four states in the Mid-Atlantic region of the United States. We had no
material relationship with Burress prior to the acquisition. The name of Burress was changed to
H&E Equipment Services (Mid-Atlantic), Inc., effective September 4, 2007. This acquisition marks
our initial entry into three of the four Mid-Atlantic states that Burress operates in and is
consistent with our business strategy. For further information on our business strategy, see Item
1 of Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2006.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Burress acquisition has been accounted for using the purchase method of accounting. The
aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on
an estimate of their fair values as determined by a preliminary valuation performed by an
independent national firm. We anticipate that the valuation will be finalized during the fourth
quarter of fiscal 2007. 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 Burress to the
overall corporate strategy. We estimate that approximately $18.8 million of the goodwill acquired
will be tax deductible. Our purchase price allocation is subject to adjustment based on the
finalization of the aforementioned valuation, post-closing adjustments and settlement of amounts
currently held in escrow. We are in the process of evaluating the allocation of Burress goodwill to
our operating segments. Our operating results for the three and nine months ended September 30,
2007 include the operating results of Burress since the date of acquisition, September 1, 2007.
The purchase price of Burress, among other things, was based on a multiple of historical
adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Among the items
specifically excluded from the purchase price calculation was EBITDA derived from Burress
distribution relationship with Hitachi. Upon the consummation of the acquisition, the Burress
shareholders received notification from John Deere Construction & Forestry Company (John Deere),
Hitachis North American representative, of termination of the Hitachi dealer agreement (the
Termination Letter). Pursuant to the Termination Letter, all Hitachi related manufacturer
flooring plans payable totaling approximately $9.2 million became due. The possibility that the
Hitachi relationship would be terminated was anticipated by the Company and Burress at the time the
parties entered into the acquisition agreement and the amount of the outstanding Hitachi
manufacturer flooring plans payable was included in the calculation of the purchase price. We paid
the approximate $9.2 million of payables during September 2007 with funds available under our
senior secured credit facility. Additionally, certain Hitachi rental fleet, new equipment
inventory and parts inventory were to be returned to John Deere or other designated Hitachi
dealerships within 60 days of the termination notification. Upon the return of the equipment,
approximately $3.2 million of manufacturer flooring plans payable associated with that equipment
would be canceled and credits would be issued for the return of the equipment. Accordingly, these
items are excluded from the allocation of purchase price to the net assets acquired of Burress.
In conjunction with the termination of the Hitachi dealer agreement, the Burress shareholders
filed for arbitration proceedings concerning John Deeres contractual right to terminate the
Hitachi dealer agreement. No decision has been reached in these
proceedings to date. The Burress shareholders may be entitled to
receive additional consideration of approximately $15.1 million
payable over three years if the consent of Hitachi, meeting
requirements of the acquisition agreement, is obtained on or before
December 29, 2007. We have not recognized the contingent
liability for the additional purchase price consideration that would be due the Burress
shareholders should the Burress shareholders prevail in the arbitration proceedings.
In connection with the Burress acquisition, we entered into a Second Amended and Restated
Credit Agreement on September 1, 2007, by and among the Company, Great Northern Equipment, Inc.,
GNE Investments, Inc., H&E Finance Corp., H&E Equipment Services (California), LLC, H&E California
Holdings, Inc., J.W. Burress, Incorporated, General Electric Capital Corporation, as Agent, and the
Lenders (as defined therein) amending and restating our Amended and Restated Credit Agreement,
dated as of August 4, 2006, and pursuant to which, among other things, (i) the principal amount of
availability of the credit facility was increased from $250.0 million to $320.0 million, (ii) an
incremental facility, at Agents and Companys mutual agreement, in an aggregate amount of up to
$130.0 million at any time after the closing of the amendment, subject to existing and/or new lender approval, was
added, and (iii) Burress was added as a guarantor. We paid $0.4 million to the lenders and also
incurred approximately $0.1 million in other transaction costs in connection with the transaction.
11
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes our purchase price allocation as of September 30, 2007, based
on estimated fair values of the Burress assets acquired and liabilities assumed on September 1,
2007 (amounts in thousands):
Receivables |
$ | 14,423 | ||
Inventories |
23,751 | |||
Rental equipment |
62,354 | |||
Property and equipment |
7,277 | |||
Prepaid expenses and other assets |
472 | |||
Intangible assets (1) |
11,688 | |||
Goodwill |
23,828 | |||
Accounts payable |
(8,758 | ) | ||
Manufacturer flooring plans payable |
(19,787 | ) | ||
Accrued expenses payable and other liabilities |
(5,692 | ) | ||
Due to Burress shareholders (2) |
(5,010 | ) | ||
Capital leases (3) |
(4,698 | ) | ||
Net assets acquired |
$ | 99,848 | ||
(1) | The following intangible assets were acquired in the Burress acquisition (dollar amounts in thousands): |
Balances at | ||||||||||||||||
Weighted-Average | September 30, 2007 | |||||||||||||||
Gross Carrying | Amortization Period | Accumulated | Net Intangible | |||||||||||||
Acquired Intangible Asset | Amount | (in Years) | Amortization | Assets | ||||||||||||
Trade name |
$ | 1,370 | 1.0 | $ | 114 | $ | 1,256 | |||||||||
Non-compete agreements |
788 | 4.0 | 16 | 772 | ||||||||||||
Customer relationships |
9,530 | 6.0 | 128 | 9,402 | ||||||||||||
Total |
$ | 11,688 | 5.3 | $ | 258 | $ | 11,430 | |||||||||
Amortization expense for the three and nine month periods ended September 30, 2007 amounted to
$0.3 million. Amortization expense is computed over the estimated useful life of the intangible
assets acquired on a straight-line basis.
(2) | Represents the amount payable to Burress shareholders for the gross up effect related to the Section 338 tax election pursuant to the acquisition agreement. |
(3) | Represents the present value of our obligation under capital leases assumed on the date of acquisition. Subsequent to the acquisition date and during the third quarter ended September 30, 2007, we paid approximately $3.2 million to purchase all vehicles previously held under capital leases. The accompanying condensed consolidated balance sheet reflects the incremental cost basis of the vehicles from the lease buyouts in property and equipment and reflects no obligation under those vehicle leases as of September 30, 2007. Additionally, Burress previously leased four branch facility locations under capital leases. On August 31, 2007, three of those capital leases related to Burress branch facility locations were amended and these amendments resulted in a lease classification change, pursuant to Statement on Financial Accounting Standard No. 13, Accounting for Leases, from capital leases to operating leases as of September 1, 2007, the acquisition date. Therefore, the accompanying condensed consolidated balance sheet as of September 30, 2007 reflects only one capital lease obligation on a Burress branch facility for approximately $2.4 million and the related asset, net of accumulated amortization, of $2.3 million is included in property and equipment. |
The following table contains unaudited pro forma condensed consolidated statements of
operations information for the three and
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
nine month periods ended September 30, 2007 and 2006, as if the Burress transaction had
occurred at the beginning of each respective period presented (amounts in thousands, except per
share data):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Total revenues |
$ | 301,529 | $ | 241,326 | $ | 827,183 | $ | 718,630 | ||||||||
Gross profit |
$ | 92,997 | $ | 84,632 | $ | 247,882 | $ | 228,666 | ||||||||
Operating income |
$ | 46,195 | $ | 39,035 | $ | 110,438 | $ | 97,311 | ||||||||
Net income (loss) |
$ | 20,655 | $ | (9,314 | ) | $ | 47,979 | $ | 17,718 | |||||||
Basic net income (loss) per common share |
$ | 0.54 | $ | (0.24 | ) | $ | 1.26 | $ | 0.48 | |||||||
Diluted net income (loss) per common share |
$ | 0.54 | $ | (0.24 | ) | $ | 1.26 | $ | 0.48 |
Net income (loss) and the resulting net income (loss) per common share for the three and nine
months ended September 30, 2006 includes the $40.8 million, or $32.0 million after tax, loss on
early extinguishment of debt. See note 9 to the condensed consolidated financial statements for
further information.
The pro forma information above does not include the pro forma effects of our 2006 acquisition
as presented below. The above pro forma information is presented for illustrative purposes only
and may not be indicative of the results of operations that would have actually occurred had the
Burress 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.
2006 Acquisition
We completed, effective as of February 28, 2006, the acquisition of all of the outstanding
capital stock of Eagle High Reach Equipment, Inc. (now known as H&E California Holdings, Inc.) and
all of the outstanding equity interests of its subsidiary, Eagle High Reach Equipment, LLC (now
known as H&E Equipment Services (California) LLC) (collectively, Eagle) for 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 marked our initial
entry into the southern California market and was 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 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 nine month periods ended September 30, 2007 and 2006 include
the operating results of Eagle since the date of acquisition, February 28, 2006.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes our final 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
operations information for the three and nine month periods ended September 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Total revenues |
$ | 270,587 | $ | 204,135 | $ | 713,468 | $ | 594,209 | ||||||||
Gross profit |
$ | 83,899 | $ | 68,747 | $ | 220,820 | $ | 194,839 | ||||||||
Operating income |
$ | 42,387 | $ | 34,870 | $ | 104,140 | $ | 84,212 | ||||||||
Net income (loss) |
$ | 20,194 | $ | (11,531 | ) | $ | 47,554 | $ | 11,842 | |||||||
Basic net income (loss) per common share |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.32 | |||||||
Diluted net income (loss) per common share |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.32 |
Net income (loss) and the resulting net income (loss) per common share for the three and nine
months ended September 30, 2006 includes the $40.8 million, or $32.0 million after tax, loss on
early extinguishment of debt. See note 9 to the condensed consolidated financial statements for
further information.
The pro forma information above does not include the pro forma effects of the Burress
acquisition as presented above. The above pro forma information 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.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Stockholders Equity
The following table summarizes the activity in Stockholders Equity for the nine month period
ended September 30, 2007 (amounts in thousands, except share data):
Additional | Total | |||||||||||||||||||||||
Common Stock | Paid-in | Treasury | Retained | Stockholders | ||||||||||||||||||||
Shares Issued | Amount | Capital | Stock | Earnings | Equity | |||||||||||||||||||
Balances at December 31, 2006 |
38,192,094 | $ | 382 | $ | 204,638 | $ | | $ | 30,564 | $ | 235,584 | |||||||||||||
Stock-based compensation |
| | 938 | | | 938 | ||||||||||||||||||
Tax benefits associated with stock-based
awards |
| | 44 | | | 44 | ||||||||||||||||||
Surrender of 15,755 shares(1) |
| | | (432 | ) | | (432 | ) | ||||||||||||||||
Net income |
| | | | 47,554 | 47,554 | ||||||||||||||||||
Balances at September 30, 2007 |
38,192,094 | $ | 382 | $ | 205,620 | $ | (432 | ) | $ | 78,118 | $ | 283,688 | ||||||||||||
(1) | On February 22, 2007, 40,650 shares of non-vested stock that was issued in 2006 subsequently vested in accordance with the terms of the respective grant agreements. In accordance with the provisions of our 2006 Stock-Based Incentive Compensation Plan, holders of those vested shares returned 15,755 common shares to the Company in payment of related employee withholding taxes. This resulted in the recognition of Treasury Stock for those 15,755 shares. |
(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 September 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 at the beginning of 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).
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Non-vested Stock
The following table summarizes our non-vested stock activity for the nine months ended
September 30, 2007:
Weighted Average | ||||||||
Grant Date Fair | ||||||||
Number of Shares | Value | |||||||
Non-vested stock at January 1, 2007 |
121,950 | $ | 24.60 | |||||
Granted |
| | ||||||
Vested |
(40,650 | ) | $ | 24.60 | ||||
Forfeited |
| | ||||||
Non-vested stock at September 30, 2007 |
81,300 | $ | 24.60 | |||||
As of September 30, 2007, we have unrecognized compensation expense of $1.4 million related to
non-vested stock. Compensation expense related to these awards included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of operations was
approximately $0.3 million for each of the three month periods ended September 30, 2007 and 2006.
Compensation expense included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations for the nine months ended September 30, 2007 and
2006 was $0.7 million and $0.6 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 nine month period ended September 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 common 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 nine month periods
ended September 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 September 30, 2007, there was $0.4 million of unrecognized compensation cost related to
these stock option awards that are expected to be recognized over a weighted-average period of 1.61
years. Compensation expense related to these awards included in selling, general and
administrative expenses in the accompanying condensed consolidated statements of operations was
$0.1 million in each of the three month periods ended September 30, 2007 and 2006. Compensation
expense related to these awards included in selling, general and administrative expenses in the
accompanying condensed consolidated statements of operations for the nine month periods ended
September 30, 2007 and 2006 was $0.2 million and $0.1 million, respectively.
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table represents stock option activity for the nine month period ended September
30, 2007:
Weighted Average | ||||||||||||
Number of | Weighted Average | Contractual Life | ||||||||||
Shares | Exercise Price | In Years | ||||||||||
Outstanding options at January 1, 2007 |
45,000 | $ | 24.60 | |||||||||
Granted |
6,000 | $ | 26.27 | |||||||||
Exercised |
| | ||||||||||
Canceled, forfeited or expired |
| | ||||||||||
Outstanding options at September 30, 2007 |
51,000 | $ | 24.80 | 8.55 | ||||||||
Options exercisable at September 30, 2007 |
15,000 | $ | 24.60 | 8.40 | ||||||||
The closing price of our common stock on September 30, 2007 was $17.98. All options
outstanding at September 30, 2007 have grant date fair values which exceed the September 30, 2007
closing stock price.
The following table summarizes non-vested stock option activity for the nine month period
ended September 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 September 30, 2007 |
36,000 | $ | 24.88 | |||||
(7) Earnings per Share
Earnings per common share for the three and nine month periods ended September 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 (loss) per common share
for the three and nine month periods ended September 30, 2007 and 2006 (amounts in thousands,
except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 20,194 | $ | (11,531 | ) | $ | 47,554 | $ | 12,192 | |||||||
Weighted average number of common shares outstanding |
38,095 | 38,070 | 38,090 | 36,550 | ||||||||||||
Net income (loss) per common share basic |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.33 | |||||||
Diluted net income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 20,194 | $ | (11,531 | ) | $ | 47,554 | $ | 12,192 | |||||||
Weighted average number of common shares outstanding |
38,095 | 38,070 | 38,090 | 36,550 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Effect of dilutive stock options and non-vested stock |
¯ | ¯ | ¯ | 37 | ||||||||||||
Weighted average number of shares outstanding diluted |
38,095 | 38,070 | 38,090 | 36,587 | ||||||||||||
Net income (loss) per common share diluted |
$ | 0.53 | $ | (0.30 | ) | $ | 1.25 | $ | 0.33 | |||||||
Common shares excluded from the denominator as
anti-dilutive: |
||||||||||||||||
Stock options |
132 | 23 | 132 | | ||||||||||||
Non-vested stock |
| 30 | 41 | | ||||||||||||
Total |
132 | 53 | 173 | | ||||||||||||
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) Senior Secured Notes
On July 31, 2007, we redeemed all of our remaining outstanding 11 1/8% Senior Secured Notes
due 2012, having an aggregate principal amount of $4.5 million. The redemption price of the Senior
Secured Notes was $1,055.63 per $1,000 principal amount, or 105.563% of the principal amount of the
Redeemed Notes, plus accrued interest through and including July 31, 2007. In connection with the
transaction, we recorded a loss on the early extinguishment of debt in the three month period ended
September 30, 2007 of approximately $0.3 million. On August 4, 2006, we redeemed $195.5 million in
aggregate principal amount of the senior secured notes as discussed in Note 9 below.
(9) Senior Unsecured Notes
On August 4, 2006, we completed a cash tender offer and consent solicitation for our 11 1/8%
senior secured notes due 2012 and 12 1/2% senior subordinated notes due 2013 (collectively, the
Notes). Additionally, we announced the closing of our previously announced private offering of
$250 million aggregate principal amount of our 8 3/8% senior unsecured notes due 2016 (the New
Notes).
Net proceeds to us, after deducting underwriting commissions, totaled approximately $245.3
million. We used the net proceeds of the offering of the New Notes, together with cash on hand and
borrowings under its existing senior secured credit facility, to purchase $195.5 million in
aggregate principal amount of the senior secured notes (representing approximately 97.8% of the
previously outstanding senior secured notes), and the $53.0 million in aggregate principal amount
of the senior subordinated notes (representing 100% of the previously outstanding senior
subordinated notes) that were validly tendered pursuant to the tender offer and consent
solicitation. The total principal amount, accrued and unpaid interest, consent fee amounts and
premiums paid for the senior secured notes was $217.6 million. The total principal amount, accrued
and unpaid interest, consent fee amounts and premiums paid for the senior subordinated notes was
approximately $60.1 million. Aggregate offering expenses totaled approximately $1.9 million.
In connection with the above transactions, we recorded a loss on the early extinguishment of
debt in the three month period ended September 30, 2006 of approximately $40.8 million, or
approximately $32.0 million after-tax, reflecting payment of the $25.3 million of tender premiums
and other estimated costs of $0.5 million in connection with the tender offer and consent
solicitation, combined with the write off of approximately $5.4 million of unamortized deferred
financing costs of the Notes and $9.6 million of remaining unamortized original issue discount on
the Notes.
The amendments to the indentures pursuant to which the Notes were issued which were proposed
in connection with the tender offer and consent solicitation became operative on August 4, 2006.
The amendments to the indentures eliminate substantially all of the restrictive covenants and
eliminate or modify certain events of default and related provisions contained in the indentures.
The New Notes were issued at par and require semiannual interest payments on January
15th and July 15th of each year, beginning on January 15, 2007. No
principal payments are due until maturity (January 15, 2016). We may redeem some or all of the New
Notes on or after July 15, 2011, at the applicable redemption prices plus accrued and unpaid
interest and additional interest, if any, to the date of redemption. Additionally, we may redeem
up to 35% of the aggregate principal amount of the notes using net cash proceeds from certain
equity offerings completed on or prior to July 15, 2009.
The New Notes rank equal in right of payment to all of our and our guarantors existing and
future unsecured senior indebtedness and senior in right of payment to any of our or our
guarantors future subordinated indebtedness. The New Notes are effectively junior in priority to
our and our guarantors obligations under all of our existing and future secured indebtedness,
including borrowings under our senior secured credit facility, the $4.5 million of senior secured
notes outstanding at September 30, 2006 (and subsequently redeemed on July 31, 2007), and any other
secured obligations, in each case, to the extent of the value of the assets securing such
obligations. The New Notes are also effectively junior to all liabilities (including trade
payables) of our non-guarantor subsidiaries.
18
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Concurrently with the closing of the private offering, we entered into an Amended and Restated
Credit Agreement, amending and restating our senior secured credit agreement primarily to, (i)
increase the principal amount of availability of the credit facility from $165.0 million to $250.0
million; (ii) reduce the applicable unused line fee margin in respect of undrawn commitments to
0.25%; (iii) increase the advance rate on rental fleet assets from the lesser of 100% of net book
value or 80% of orderly liquidation value to the lesser of 100% of net book value or 85% of orderly
liquidation value; (iv) extend the maturity date of the facility from February 10, 2009 to August
4, 2011; and (v) add H&E Equipment Services (California), LLC as a borrower. Furthermore, the
measurement frequency of our computed Leverage Ratio was changed from a monthly calculation to a
quarterly calculation. We paid $1.4 million to the Lenders in connection with this transaction
and incurred other transaction costs of approximately $0.2 million. On September 1, 2007, and in
connection with the Burress acquisition, we entered into a Second Amended and Restated Credit
Agreement. See note 4 to the condensed consolidated financial statements for further information.
On October 3, 2006, the Company and the guarantors filed a Form S-4 Registration Statement, as
subsequently amended on October 11, 2006, with respect to an offer to exchange the New Notes for
notes of the Company being issued in a transaction registered under the Securities Act of 1933, as
amended, having terms identical in all material respects to the New Notes (except that the exchange
notes will not contain terms with respect to transfer restrictions). Upon the Form S-4
Registration Statement being declared effective on October 13, 2006, the Company launched the
exchange offer. The exchange offer expired on November 13, 2006, with $250.0 million of the
aggregate principal amount, or 100%, of the New Notes exchanged for new notes registered under the
Securities Act of 1933, as amended.
(10) 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):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 75,598 | $ | 67,327 | $ | 208,371 | $ | 185,333 | ||||||||
New equipment sales |
94,675 | 60,673 | 240,910 | 173,333 | ||||||||||||
Used equipment sales |
44,503 | 29,668 | 110,190 | 97,387 | ||||||||||||
Parts sales |
26,716 | 21,024 | 73,803 | 61,574 | ||||||||||||
Services revenues |
16,877 | 14,074 | 46,599 | 39,782 | ||||||||||||
Total segmented revenues |
258,369 | 192,766 | 679,873 | 557,409 | ||||||||||||
Non-segmented revenues |
12,218 | 11,369 | 33,595 | 31,472 | ||||||||||||
Total revenues |
$ | 270,587 | $ | 204,135 | $ | 713,468 | $ | 588,881 | ||||||||
Gross Profit: |
||||||||||||||||
Equipment rentals |
$ | 39,957 | $ | 36,344 | $ | 106,437 | $ | 97,232 | ||||||||
New equipment sales |
13,152 | 7,352 | 32,035 | 21,718 | ||||||||||||
Used equipment sales |
10,773 | 7,960 | 27,586 | 26,134 | ||||||||||||
Parts sales |
7,821 | 6,129 | 21,579 | 18,075 | ||||||||||||
Services revenues |
10,746 | 9,029 | 29,700 | 25,439 | ||||||||||||
Total segmented gross profit |
82,449 | 66,814 | 217,337 | 188,598 | ||||||||||||
Non-segmented gross profit |
1,450 | 1,933 | 3,483 | 4,467 | ||||||||||||
Total gross profit |
$ | 83,899 | $ | 68,747 | $ | 220,820 | $ | 193,065 | ||||||||
19
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Balances at | ||||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Segment identified assets: |
||||||||
Equipment sales |
$ | 117,628 | $ | 104,648 | ||||
Equipment rentals |
556,169 | 440,454 | ||||||
Parts and services |
27,195 | 22,089 | ||||||
Total segment identified assets |
700,992 | 567,191 | ||||||
Non-segment identified assets |
280,751 | 192,751 | ||||||
Total assets |
$ | 981,743 | $ | 759,942 | ||||
We operate primarily in the United States. Our sales to international customers were no
greater than 1.2% 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.
(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 (formerly known as Eagle High Reach Equipment, LLC), H&E California Holdings,
Inc. (formerly known as Eagle High Reach Equipment, Inc.) and J.W. Burress, Incorporated
(Burress), now known as H&E Equipment Services (Mid-Atlantic), 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 Companys 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 California Holdings, Inc. are included in the periods presented from the date of our
acquisition of Eagle on February 28, 2006. The financial
statements of Burress, now known as H&E Equipment Services (Mid-Atlantic), Inc., are included from the date
of acquisition, September 1, 2007 to September 30, 2007 and as of September 30, 2007.
20
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2007 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash |
$ | 3,088 | $ | (1,172 | ) | $ | | $ | 1,916 | |||||||
Receivables, net |
129,401 | 23,296 | | 152,697 | ||||||||||||
Inventories, net |
112,062 | 32,761 | | 144,823 | ||||||||||||
Prepaid expenses and other assets |
7,562 | 774 | | 8,336 | ||||||||||||
Rental equipment, net |
426,238 | 129,931 | | 556,169 | ||||||||||||
Property and equipment, net |
28,335 | 14,613 | | 42,948 | ||||||||||||
Deferred financing costs, net |
8,898 | 125 | | 9,023 | ||||||||||||
Intangible assets, net |
11,430 | | | 11,430 | ||||||||||||
Investment in guarantor subsidiaries |
200,328 | | (200,328 | ) | | |||||||||||
Goodwill |
54,401 | | | 54,401 | ||||||||||||
Total assets |
$ | 981,743 | $ | 200,328 | $ | (200,328 | ) | $ | 981,743 | |||||||
Liabilities and Stockholders Equity |
||||||||||||||||
Amount due on senior secured credit facility |
$ | 91,167 | $ | (9,652 | ) | $ | | $ | 81,515 | |||||||
Accounts payable |
105,574 | 3,355 | | 108,929 | ||||||||||||
Manufacturer flooring plans payable |
143,240 | 17,258 | | 160,498 | ||||||||||||
Accrued expenses payable and other liabilities |
42,239 | 7,383 | | 49,622 | ||||||||||||
Intercompany balances |
(163,732 | ) | 163,732 | | | |||||||||||
Related party obligation |
476 | | | 476 | ||||||||||||
Notes payable |
1,254 | 739 | | 1,993 | ||||||||||||
Senior unsecured notes |
250,000 | | | 250,000 | ||||||||||||
Capital lease payable |
| 2,418 | | 2,418 | ||||||||||||
Deferred income taxes |
40,702 | | | 40,702 | ||||||||||||
Deferred compensation payable |
1,902 | | | 1,902 | ||||||||||||
Total liabilities |
512,822 | 185,233 | | 698,055 | ||||||||||||
Stockholders equity |
468,921 | 15,095 | (200,328 | ) | 283,688 | |||||||||||
Total liabilities and stockholders equity |
$ | 981,743 | $ | 200,328 | $ | (200,328 | ) | $ | 981,743 | |||||||
21
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, net |
9,296 | | | 9,296 | ||||||||||||
Intangible assets, net |
34 | | | 34 | ||||||||||||
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 | |||||||
22
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2007 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 62,806 | $ | 12,792 | $ | | $ | 75,598 | ||||||||
New equipment sales |
89,198 | 5,477 | | 94,675 | ||||||||||||
Used equipment sales |
39,565 | 4,938 | | 44,503 | ||||||||||||
Parts sales |
23,741 | 2,975 | | 26,716 | ||||||||||||
Services revenues |
15,207 | 1,670 | | 16,877 | ||||||||||||
Other |
10,616 | 1,602 | | 12,218 | ||||||||||||
Total revenues |
241,133 | 29,454 | | 270,587 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Rental depreciation |
20,536 | 3,932 | | 24,468 | ||||||||||||
Rental expense |
9,473 | 1,700 | | 11,173 | ||||||||||||
New equipment sales |
76,760 | 4,763 | | 81,523 | ||||||||||||
Used equipment sales |
29,825 | 3,905 | | 33,730 | ||||||||||||
Parts sales |
16,917 | 1,978 | | 18,895 | ||||||||||||
Services revenues |
5,387 | 744 | | 6,131 | ||||||||||||
Other |
9,110 | 1,658 | | 10,768 | ||||||||||||
Total cost of revenues |
168,008 | 18,680 | | 186,688 | ||||||||||||
Gross profit: |
||||||||||||||||
Equipment rentals |
32,797 | 7,160 | | 39,957 | ||||||||||||
New equipment sales |
12,438 | 714 | | 13,152 | ||||||||||||
Used equipment sales |
9,740 | 1,033 | | 10,773 | ||||||||||||
Parts sales |
6,824 | 997 | | 7,821 | ||||||||||||
Services revenues |
9,820 | 926 | | 10,746 | ||||||||||||
Other |
1,506 | (56 | ) | | 1,450 | |||||||||||
Gross profit |
73,125 | 10,774 | | 83,899 | ||||||||||||
Selling, general and administrative expenses |
33,065 | 8,544 | | 41,609 | ||||||||||||
Equity in loss of guarantor subsidiaries |
(155 | ) | | 155 | | |||||||||||
Gain (loss) on sales of property and equipment, net |
131 | (34 | ) | | 97 | |||||||||||
Income from operations |
40,036 | 2,196 | 155 | 42,387 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(6,632 | ) | (2,375 | ) | | (9,007 | ) | |||||||||
Loss on early extinguishment of debt |
(325 | ) | | | (325 | ) | ||||||||||
Other, net |
269 | 24 | | 293 | ||||||||||||
Total other expense, net |
(6,688 | ) | (2,351 | ) | | (9,039 | ) | |||||||||
Income (loss) before provision for income taxes |
33,348 | (155 | ) | 155 | 33,348 | |||||||||||
Provision for income taxes |
13,154 | | | 13,154 | ||||||||||||
Net income (loss) |
$ | 20,194 | $ | (155 | ) | $ | 155 | $ | 20,194 | |||||||
23
Table of Contents
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended September 30, 2006 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 56,205 | $ | 11,122 | $ | | $ | 67,327 | ||||||||
New equipment sales |
58,659 | 2,014 | | 60,673 | ||||||||||||
Used equipment sales |
27,270 | 2,398 | | 29,668 | ||||||||||||
Parts sales |
20,162 | 862 | | 21,024 | ||||||||||||
Services revenues |
13,528 | 546 | | 14,074 | ||||||||||||
Other |
9,855 | 1,514 | | 11,369 | ||||||||||||
Total revenues |
185,679 | 18,456 | | 204,135 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Rental depreciation |
17,548 | 3,096 | | 20,644 | ||||||||||||
Rental expense |
8,912 | 1,427 | | 10,339 | ||||||||||||
New equipment sales |
51,557 | 1,764 | | 53,321 | ||||||||||||
Used equipment sales |
20,066 | 1,642 | | 21,708 | ||||||||||||
Parts sales |
14,298 | 597 | | 14,895 | ||||||||||||
Services revenues |
4,874 | 171 | | 5,045 | ||||||||||||
Other |
8,040 | 1,396 | | 9,436 | ||||||||||||
Total cost of revenues |
125,295 | 10,093 | | 135,388 | ||||||||||||
Gross profit: |
||||||||||||||||
Equipment rentals |
29,745 | 6,599 | | 36,344 | ||||||||||||
New equipment sales |
7,102 | 250 | | 7,352 | ||||||||||||
Used equipment sales |
7,204 | 756 | | 7,960 | ||||||||||||
Parts sales |
5,864 | 265 | | 6,129 | ||||||||||||
Services revenues |
8,654 | 375 | | 9,029 | ||||||||||||
Other |
1,815 | 118 | | 1,933 | ||||||||||||
Gross profit |
60,384 | 8,363 | | 68,747 | ||||||||||||
Selling, general and administrative expenses |
30,499 | 3,619 | | 34,118 | ||||||||||||
Equity in earnings of guarantor subsidiaries |
3,192 | | (3,192 | ) | | |||||||||||
Gain on sales of property and equipment, net |
139 | 102 | | 241 | ||||||||||||
Income from operations |
33,216 | 4,846 | (3,192 | ) | 34,870 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(7,397 | ) | (1,663 | ) | | (9,060 | ) | |||||||||
Loss on early extinguishment of debt |
(40,771 | ) | | | (40,771 | ) | ||||||||||
Other, net |
236 | 9 | | 245 | ||||||||||||
Total other expense, net |
(47,932 | ) | (1,654 | ) | | (49,586 | ) | |||||||||
Income (loss) before benefit for income taxes |
(14,716 | ) | 3,192 | (3,192 | ) | (14,716 | ) | |||||||||
Provision (benefit) for income taxes |
(3,185 | ) | | | (3,185 | ) | ||||||||||
Net income (loss) |
$ | (11,531 | ) | $ | 3,192 | $ | (3,192 | ) | $ | (11,531 | ) | |||||
24
Table of Contents
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2007 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 175,843 | $ | 32,528 | $ | | $ | 208,371 | ||||||||
New equipment sales |
231,759 | 9,151 | | 240,910 | ||||||||||||
Used equipment sales |
100,014 | 10,176 | | 110,190 | ||||||||||||
Parts sales |
68,772 | 5,031 | | 73,803 | ||||||||||||
Services revenues |
43,314 | 3,285 | | 46,599 | ||||||||||||
Other |
29,455 | 4,140 | | 33,595 | ||||||||||||
Total revenues |
649,157 | 64,311 | | 713,468 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Rental depreciation |
58,222 | 9,910 | | 68,132 | ||||||||||||
Rental expense |
28,405 | 5,397 | | 33,802 | ||||||||||||
New equipment sales |
200,877 | 7,998 | | 208,875 | ||||||||||||
Used equipment sales |
74,819 | 7,785 | | 82,604 | ||||||||||||
Parts sales |
48,836 | 3,388 | | 52,224 | ||||||||||||
Services revenues |
15,725 | 1,174 | | 16,899 | ||||||||||||
Other |
25,367 | 4,745 | | 30,112 | ||||||||||||
Total cost of revenues |
452,251 | 40,397 | | 492,648 | ||||||||||||
Gross profit: |
||||||||||||||||
Equipment rentals |
89,216 | 17,221 | | 106,437 | ||||||||||||
New equipment sales |
30,882 | 1,153 | | 32,035 | ||||||||||||
Used equipment sales |
25,195 | 2,391 | | 27,586 | ||||||||||||
Parts sales |
19,936 | 1,643 | | 21,579 | ||||||||||||
Services revenues |
27,589 | 2,111 | | 29,700 | ||||||||||||
Other |
4,088 | (605 | ) | | 3,483 | |||||||||||
Gross profit |
196,906 | 23,914 | | 220,820 | ||||||||||||
Selling, general and administrative expenses |
99,879 | 17,245 | | 117,124 | ||||||||||||
Equity in earnings of guarantor subsidiaries |
626 | | (626 | ) | | |||||||||||
Gain on sales of property and equipment, net |
393 | 51 | | 444 | ||||||||||||
Income from operations |
98,046 | 6,720 | (626 | ) | 104,140 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(20,466 | ) | (6,131 | ) | | (26,597 | ) | |||||||||
Loss on early extinguishment of debt |
(325 | ) | | | (325 | ) | ||||||||||
Other, net |
779 | 37 | | 816 | ||||||||||||
Total other expense, net |
(20,012 | ) | (6,094 | ) | | (26,106 | ) | |||||||||
Income before provision for income taxes |
78,034 | 626 | (626 | ) | 78,034 | |||||||||||
Provision for income taxes |
30,480 | | | 30,480 | ||||||||||||
Net income |
$ | 47,554 | $ | 626 | $ | (626 | ) | $ | 47,554 | |||||||
25
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2006 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Equipment rentals |
$ | 160,730 | $ | 24,603 | $ | | $ | 185,333 | ||||||||
New equipment sales |
167,944 | 5,389 | | 173,333 | ||||||||||||
Used equipment sales |
90,354 | 7,033 | | 97,387 | ||||||||||||
Parts sales |
59,319 | 2,255 | | 61,574 | ||||||||||||
Services revenues |
38,444 | 1,338 | | 39,782 | ||||||||||||
Other |
28,119 | 3,353 | | 31,472 | ||||||||||||
Total revenues |
544,910 | 43,971 | | 588,881 | ||||||||||||
Cost of revenues: |
||||||||||||||||
Rental depreciation |
49,741 | 6,933 | | 56,674 | ||||||||||||
Rental expense |
27,592 | 3,835 | | 31,427 | ||||||||||||
New equipment sales |
146,990 | 4,625 | | 151,615 | ||||||||||||
Used equipment sales |
66,340 | 4,913 | | 71,253 | ||||||||||||
Parts sales |
41,968 | 1,531 | | 43,499 | ||||||||||||
Services revenues |
13,934 | 409 | | 14,343 | ||||||||||||
Other |
23,849 | 3,156 | | 27,005 | ||||||||||||
Total cost of revenues |
370,414 | 25,402 | | 395,816 | ||||||||||||
Gross profit: |
||||||||||||||||
Equipment rentals |
83,397 | 13,835 | | 97,232 | ||||||||||||
New equipment sales |
20,954 | 764 | | 21,718 | ||||||||||||
Used equipment sales |
24,014 | 2,120 | | 26,134 | ||||||||||||
Parts sales |
17,351 | 724 | | 18,075 | ||||||||||||
Services revenues |
24,510 | 929 | | 25,439 | ||||||||||||
Other |
4,270 | 197 | | 4,467 | ||||||||||||
Gross profit |
174,496 | 18,569 | | 193,065 | ||||||||||||
Selling, general and administrative expenses |
98,378 | 10,167 | | 108,545 | ||||||||||||
Equity in earnings of guarantor subsidiaries |
5,019 | | (5,019 | ) | | |||||||||||
Gain on sales of property and equipment, net |
268 | 132 | | 400 | ||||||||||||
Income from operations |
81,405 | 8,534 | (5,019 | ) | 84,920 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(25,814 | ) | (3,528 | ) | | (29,342 | ) | |||||||||
Loss on early retirement of debt |
(40,771 | ) | | | (40,771 | ) | ||||||||||
Other, net |
662 | 13 | | 675 | ||||||||||||
Total other expense, net |
(65,923 | ) | (3,515 | ) | | (69,438 | ) | |||||||||
Income before provision for income taxes |
15,482 | 5,019 | (5,019 | ) | 15,482 | |||||||||||
Provision for income taxes |
3,290 | | | 3,290 | ||||||||||||
Net income |
$ | 12,192 | $ | 5,019 | $ | (5,019 | ) | $ | 12,192 | |||||||
26
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2007 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income |
$ | 47,554 | $ | 626 | $ | (626 | ) | $ | 47,554 | |||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||||||
Depreciation on property and equipment |
5,229 | 858 | | 6,087 | ||||||||||||
Amortization of property and equipment under capital lease |
23 | | | 23 | ||||||||||||
Depreciation on rental equipment |
58,222 | 9,910 | | 68,132 | ||||||||||||
Amortization of loan discounts and deferred financing costs |
(34,373 | ) | 35,392 | | 1,019 | |||||||||||
Amortization of intangible assets |
270 | | | 270 | ||||||||||||
Provision for losses on accounts receivable |
1,648 | 64 | | 1,712 | ||||||||||||
Provision for inventory obsolescence |
61 | | | 61 | ||||||||||||
Provision for deferred income taxes |
28,897 | | | 28,897 | ||||||||||||
Stock-based compensation expense |
938 | | | 938 | ||||||||||||
Loss on early extinguishment of debt |
325 | | | 325 | ||||||||||||
Gain on sales of property and equipment |
(193 | ) | (251 | ) | | (444 | ) | |||||||||
Gain on sales of rental equipment |
(23,355 | ) | (2,239 | ) | | (25,594 | ) | |||||||||
Equity in earnings of guarantor subsidiaries |
(626 | ) | | 626 | | |||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Receivables, net |
(38,769 | ) | 6,271 | | (32,498 | ) | ||||||||||
Inventories, net |
(25,515 | ) | (28,204 | ) | | (53,719 | ) | |||||||||
Prepaid expenses and other assets |
(1,787 | ) | (176 | ) | | (1,963 | ) | |||||||||
Accounts payable |
43,591 | (4,907 | ) | | 38,684 | |||||||||||
Manufacturer flooring plans payable |
(4,788 | ) | (2,529 | ) | | (7,317 | ||||||||||
Accrued expenses payable and other liabilities |
10,038 | (4,221 | ) | | 5,817 | |||||||||||
Intercompany balances |
(92,779 | ) | 92,779 | | | |||||||||||
Deferred compensation payable |
(1,368 | ) | | | (1,368 | ) | ||||||||||
Net cash provided by (used in) operating activities |
(26,757 | ) | 103,373 | | 76,616 | |||||||||||
Cash flows from investing activities: |
||||||||||||||||
Acquisition of businesses, net of cash acquired |
| (99,848 | ) | | (99,848 | ) | ||||||||||
Purchases of property and equipment |
(9,330 | ) | (2,995 | ) | | (12,325 | ) | |||||||||
Purchases of rental equipment |
(128,553 | ) | 351 | | (128,202 | ) | ||||||||||
Proceeds from sales of property and equipment |
306 | 345 | | 651 | ||||||||||||
Proceeds from sales of rental equipment |
82,444 | 9,182 | | 91,626 | ||||||||||||
Net cash used in investing activities |
(55,133 | ) | (92,965 | ) | | (148,098 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Excess tax benefits from stock-based awards |
(44 | ) | | | 44 | |||||||||||
Purchase of treasury stock at cost |
(432 | ) | | | (432 | ) | ||||||||||
Borrowings on senior secured credit facility |
754,616 | | | 754,616 | ||||||||||||
Payments on senior secured credit facility |
(672,583 | ) | (9,381 | ) | | (681,964 | ) | |||||||||
Principal payment of senior secured notes |
(4,478 | ) | | | (4,478 | ) | ||||||||||
Principal payment of senior subordinated notes |
(278 | ) | | | (278 | ) | ||||||||||
Payments of deferred financing costs |
(547 | ) | | | (547 | ) | ||||||||||
Payments of related party obligation |
(225 | ) | | | (225 | ) | ||||||||||
Payments on capital lease obligation |
| (2,280 | ) | | (2,280 | ) | ||||||||||
Principal payments of notes payable |
(353 | ) | (8 | ) | | (361 | ) | |||||||||
Net cash provided by (used in) financing activities |
75,764 | (11,669 | ) | | 64,095 | |||||||||||
Net decrease in cash |
(6,126 | ) | (1,261 | ) | | (7,387 | ) | |||||||||
Cash, beginning of period |
9,214 | 89 | | 9,303 | ||||||||||||
Cash, end of period |
$ | 3,088 | $ | (1,172 | ) | $ | | $ | 1,916 | |||||||
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H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2006 | ||||||||||||||||
H&E Equipment | Guarantor | |||||||||||||||
Services | Subsidiaries | Elimination | Consolidated | |||||||||||||
(Amounts in thousands) | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net income |
$ | 12,192 | $ | 5,019 | $ | (5,019 | ) | $ | 12,192 | |||||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||||||||||
Depreciation on property and equipment |
4,466 | 544 | | 5,010 | ||||||||||||
Depreciation on rental equipment |
49,852 | 6,822 | | 56,674 | ||||||||||||
Amortization of loan discounts and deferred financing costs |
2,056 | | | 2,056 | ||||||||||||
Amortization of intangible assets |
34 | | | 34 | ||||||||||||
Provision for losses on accounts receivable |
1,457 | | | 1,457 | ||||||||||||
Provision for inventory obsolescence |
18 | | | 18 | ||||||||||||
Provision for deferred income taxes |
2,692 | | | 2,692 | ||||||||||||
Stock-based compensation expense |
681 | | | 681 | ||||||||||||
Gain on sales of property and equipment, net |
(268 | ) | (132 | ) | | (400 | ) | |||||||||
Gain on sales of rental equipment, net |
(16,293 | ) | (7,046 | ) | | (23,339 | ) | |||||||||
Loss on early extinguishment of debt |
40,771 | | | 40,771 | ||||||||||||
Equity in earnings of guarantor subsidiaries |
(5,019 | ) | | 5,019 | | |||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Receivables, net |
(2,678 | ) | (1,685 | ) | | (4,363 | ) | |||||||||
Inventories, net |
(31,572 | ) | (26,743 | ) | | (58,315 | ) | |||||||||
Prepaid expenses and other assets |
(2,941 | ) | (1,496 | ) | | (4,437 | ) | |||||||||
Accounts payable |
5,980 | (467 | ) | | 5,513 | |||||||||||
Manufacturer flooring plans payable |
36,292 | | | 36,292 | ||||||||||||
Accrued expenses payable and other liabilities |
6,214 | 807 | | 7,021 | ||||||||||||
Intercompany balances |
(60,678 | ) | 60,678 | | | |||||||||||
Deferred compensation payable |
(8,507 | ) | | | (8,507 | ) | ||||||||||
Net cash provided by operating activities |
34,749 | 36,301 | | 71,050 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Acquisition of businesses, net of cash acquired |
(15,051 | ) | (41,910 | ) | | (56,961 | ) | |||||||||
Purchases of property and equipment |
(12,377 | ) | (976 | ) | | (13,353 | ) | |||||||||
Purchases of rental equipment |
(177,421 | ) | 3,049 | | (174,372 | ) | ||||||||||
Proceeds from sales of property and equipment |
1,882 | (41 | ) | | 1,841 | |||||||||||
Proceeds from sales of rental equipment |
69,705 | 6,363 | | 76,068 | ||||||||||||
Net cash used in investing activities |
(133,262 | ) | (33,515 | ) | | (166,777 | ) | |||||||||
Cash flows from financing activities: |
||||||||||||||||
Proceeds from initial public offering, net of issuance costs |
207,018 | | | 207,018 | ||||||||||||
Payment of deferred financing costs |
(8,816 | ) | | | (8,816 | ) | ||||||||||
Borrowings on senior secured credit facility |
718,819 | | | 718,819 | ||||||||||||
Payments on senior secured credit facility |
(795,534 | ) | (3,471 | ) | | (799,005 | ) | |||||||||
Proceeds from issuance of senior unsecured notes, net of issue costs |
250,000 | | | 250,000 | ||||||||||||
Principal payment of senior secured notes |
(214,608 | ) | | | (214,608 | ) | ||||||||||
Principal payment of senior subordinated notes |
(59,155 | ) | | | (59,155 | ) | ||||||||||
Payment of related party obligation |
(225 | ) | | | (225 | ) | ||||||||||
Proceeds from issuance of notes payable |
1,271 | | | 1,271 | ||||||||||||
Principal payments of notes payable |
(895 | ) | 749 | | (146 | ) | ||||||||||
Net cash provided by (used in) financing activities |
97,875 | (2,722 | ) | | 95,153 | |||||||||||
Net increase (decrease) in cash |
(638 | ) | 64 | | (574 | ) | ||||||||||
Cash, beginning of period |
5,610 | 17 | | 5,627 | ||||||||||||
Cash, end of period |
$ | 4,972 | $ | 81 | $ | | $ | 5,053 | ||||||||
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ITEM 2. MANAGEMENTS 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 September 30, 2007, and its results of their operations for the three and
nine month periods ended September 30, 2007, 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, 2006.
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 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 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 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.
As of November 6, 2007, we operated 63 full-service facilities throughout the Intermountain,
Southwest, Gulf Coast, West Coast, Southeast and Mid-Atlantic regions of the United States,
including the 12 facilities we acquired in the Burress acquisition (see note 4 to the condensed
consolidated financial statements for further information on the Burress acquisition). 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 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 at 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 46 years. H&E Equipment Services L.L.C. was formed in June 2002 through the
combination of Head & Engquist, a wholly-owned subsidiary of Gulf Wide, and 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 a June 2002 transaction, Head & Engquist
and ICM were merged with and into Gulf Wide, which was renamed H&E Equipment Services L.L.C. 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.
In connection with our initial public offering in February 2006, we converted H&E LLC into H&E
Equipment Services, Inc. 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 for our initial public
offering, H&E Equipment Services, Inc. was formed as a Delaware corporation and wholly-owned
subsidiary of 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 us (H&E Equipment Services, Inc.),
with us surviving the reincorporation merger as the operating company (see note 3 to the condensed
consolidated financial statements for further information on our initial public offering).
Critical Accounting Policies
Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31,
2006, 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. These include, among other things, revenue recognition, stock-based
compensation, 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, 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
29
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deferred tax assets.
Information regarding our other 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, 2006 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 believe that we have an extremely well-maintained rental fleet, with 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 (equipment usage based on customer demand), rental rate trends and targets, and equipment demand, 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 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 used 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 the 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 equipment 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 service 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 owned 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 services to that equipment that will be covered under the manufacturers 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 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 nine months ended September 30, 2007, approximately 29.2% of our
total revenues were attributable to equipment rentals, 33.8% of our total revenues were
attributable to new equipment sales, 15.5% were attributable to used equipment sales, 10.3% were
attributable to parts sales, 6.5% were attributable to our services revenues and 4.7% were
attributable to non-segmented other revenues.
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 a result, our 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
30
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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. Revenues from equipment rentals depend on rental rates. Because rental
rates are impacted by competition in specific regions and markets, we continuously monitor and
adjust rental rates. Equipment rental revenue is also impacted by the availability of equipment
and by time utilization (equipment usage based on customer demand). We generate reports on,
among other things, time utilization, demand pricing (rental rate pricing based on physical
utilization), and rental rate trends on a piece-by-piece basis for our rental fleet. We
recognize revenues from equipment rentals in the period earned on a straight-line basis, over
the contract term, regardless of the timing of billing to customers.
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. New equipment sales also lead to future parts and
services revenues. We recognize revenue from the sale of new equipment at the time of delivery
to, or pick-up by, the customer and when all obligations under the sales contract have been
fulfilled and collectibility is reasonably assured.
Used Equipment Sales. We generate the majority of our used equipment sales revenues by
selling equipment from our rental fleet. The remainder of used equipment sales revenues comes
from the sale of inventoried used 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 a
profitable distribution channel for disposal of rental equipment. We recognize revenue for the
sale of used equipment at the time of delivery to, or pick-up by, the customer and when all
obligations under the sales contract have been fulfilled and collectibility is reasonably
assured.
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 less sensitive to the economic cycles that affect our rental and equipment sales
operations. We recognize revenues from parts sales at the time of delivery to, or pick-up by,
the customer and when all obligations under the sales contract have been fulfilled and
collectibility is reasonably assured.
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 services provide a high-margin, relatively stable source of revenue through
changing economic cycles. We recognize services revenues at the time such services are rendered
and collectibility is reasonably assured.
Non-Segmented Other Revenues. Our non-segmented other revenues consist of billings to
customers for equipment support and activities including; transportation, hauling, parts freight
and loss damage waiver charges. We recognize non-segmented other revenues at the time of billing
and after the services have been provided.
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 nine months ended
September 30, 2007, our total cost of revenues was approximately $492.6 million. Our operating
expenses consist principally of selling, general and administrative expense. For the nine months
ended September 30, 2007, our selling, general and administrative expenses were approximately
$117.1 million. In addition, we have interest expense related to our debt instruments. We are also
subject to federal and state income taxes. Operating expenses and all other income and expense
items below the gross profit line of our condensed consolidated statements of income are not
generally allocated to our reportable segments.
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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 an estimated 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.
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, equipment operating lease expense and other miscellaneous costs of
rental equipment.
New Equipment Sales. Cost of new equipment sold principally 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 cost 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 revenue represents costs attributable to services
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, parts freight, and damage waiver including, among other items, drivers wages fuel
costs, shipping costs, and our costs related to damage waiver policies.
Selling, General and Administrative Expenses:
Our selling, general and administrative expenses (SG&A) include sales and marketing
expenses, payroll and related costs, insurance expense, professional fees, property and other
taxes, administrative overhead, depreciation associated with property and equipment (other than
rental equipment) and amortization expense associated with the intangible assets acquired in the
Burress acquisition (see note 4 to the condensed consolidated financial statements for further
information on the Burress acquisition). 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 indebtedness outstanding under our senior secured credit facility, senior
secured notes due 2012 facility through July 31, 2007 (see note 7 to the condensed consolidated
financial statements regarding the redemption of our senior secured notes), senior unsecured notes
due 2016, notes payable and our capital lease obligation. Additionally, interest expense for the
three and nine months ended September 30, 2006 includes interest on our senior subordinated notes.
The senior subordinated notes, along with a significant portion of our senior secured notes, were
subsequently repaid on August 4, 2006, as further described below in Refinancing. Interest
expense for the periods presented also includes non-cash interest expense related to the
amortization cost of (1) deferred financing costs and (2) original issue discount accretion related
to our senior secured notes (through July 31, 2007) and senior subordinated notes (for the 2006
period only).
Refinancing. On August 4, 2006, we completed a cash tender offer and consent solicitation for
our 11 1/8% senior secured notes due 2012 and 12 1/2% senior subordinated notes due 2013
(collectively, the Notes). Additionally, we completed the closing of our private offering of
$250.0 million aggregate principal amount of our 8 3/8% senior unsecured notes due 2016 (the New
Notes).
Net proceeds to us, after deducting underwriting commissions, totaled approximately $245.3
million. We used the net proceeds of the offering of the New Notes, together with cash on hand and
borrowings under our existing senior secured credit facility, to
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purchase $195.5 million in aggregate principal amount of the senior secured notes
(representing approximately 97.8% of the previously outstanding senior secured notes), and the
$53.0 million in aggregate principal amount of the senior subordinated notes (representing 100% of
the previously outstanding senior subordinated notes) that were validly tendered pursuant to the
tender offer and consent solicitation. The New Notes were issued at par and require semiannual
interest payments on January 15th and July 15th of each year, beginning on
January 15, 2007. No principal payments are due until maturity (January 15, 2016). See also note
9 to the condensed consolidated financial statements for additional information on our senior
unsecured notes. The remaining $4.5 million in aggregate principal
amount of the outstanding senior
secured notes were subsequently redeemed on July 31, 2007 (see note
8 to the condensed consolidated financial statements for further
information).
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
our revolving senior secured credit facility as the primary sources of funds to purchase our
inventory and to fund working capital and capital expenditures.
Rental Fleet
A significant portion of our overall value is in our rental fleet equipment. Our rental fleet,
as of September 30, 2007, consisted of approximately 19,465 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 $779.9 million. As of September 30, 2007, our rental fleet
composition was as follows (dollars in millions):
% of | Original | % of Original | Average | |||||||||||||||||
Total | Acquisition | Acquisition | Age in | |||||||||||||||||
Units | Units | Cost | Cost | Months | ||||||||||||||||
Hi-Lift or Aerial Work Platforms |
14,044 | 72.2 | % | $ | 459.0 | 58.9 | % | 38.4 | ||||||||||||
Cranes |
475 | 2.4 | % | 89.9 | 11.5 | % | 31.7 | |||||||||||||
Earthmoving |
1,682 | 8.6 | % | 163.3 | 20.9 | % | 17.0 | |||||||||||||
Industrial Lift Trucks |
1,418 | 7.3 | % | 40.0 | 5.1 | % | 24.0 | |||||||||||||
Other |
1,846 | 9.5 | % | 27.7 | 3.6 | % | 18.3 | |||||||||||||
Total |
19,465 | 100.0 | % | $ | 779.9 | 100.0 | % | 33.4 | ||||||||||||
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 and market conditions,
competition and customer demand. On average, we decreased the average age of our rental fleet
equipment by approximately 5.6 months during the nine months ended September 30, 2007, exclusive of
Burress. When combined with Burress, we decreased the average age of our rental fleet equipment by
approximately 6.0 months. The average age of the acquired Burress fleet on September 1, 2007, the
acquisition date, was approximately 21.5 months. We have de-aged the Burress rental fleet
approximately 1.9 months as of September 30, 2007 since our acquisition of Burress. The original
acquisition cost of our overall gross rental fleet increased, through the normal course of business
activities, by approximately $50.6 million during the nine months ended September 30, 2007,
exclusive of Burress, and $124.6 million when combined with the Burress fleet. We acquired on
September 1, 2007, approximately $75.7 million of gross rental fleet in the Burress acquisition.
Our average rental rates for the nine month period ended September 30, 2007 were 0.1% lower than
the comparative nine month period ended September 30, 2006. The rental equipment mix among our
four core product lines remained consistent with that of prior year comparable period as a
percentage of total units available for rent. As a percentage of original acquisition cost,
earthmoving equipment increased approximately 8% while hi-lift or aerial work platform equipment
decreased 8% over the comparable periods. As a result of our in-house service capabilities and
extensive maintenance program, we believe our fleet is consistently well-maintained.
The mix and age of our rental fleet, as well as our cash flows, are impacted by the normal
sales of equipment from the rental fleet 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 life of the specific equipment, among other things.
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
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discussed below and in Item 1ARisk Factors of our Annual Report on Form 10-K for the year
ended December 31, 2006:
| Spending levels by customers. Rentals and sales of equipment to the construction industry and to industrial companies constitute a significant portion of our 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. | ||
| Economic downturns. The demand for our products is dependent on the general economy, the industries in which our customers operate or serve, and other factors. Downturns in the general economy or in the construction and manufacturing industries can cause demand for our products to materially decrease. | ||
| Adverse weather. Adverse weather in any 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. The adverse weather also has a seasonal impact in parts of our Intermountain region. |
We believe that our integrated business tempers the effects of downturns in a particular
segment. For a discussion of seasonality, see Seasonality included in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report
on Form 10Q.
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. The
period-to-period comparisons of financial results are not necessarily indicative of future results.
Our operating results for the three and nine months ended September 30, 2007 and 2006 include
the operating results of Eagle since the date of acquisition, February 28, 2006. Therefore, our
operating results for 2007 include a full three and nine months of Eagles operations compared to
three and approximately seven months for the three and nine month periods ended September 30, 2006.
Our operating results for the three and nine months ended September 30, 2007 include the
operating results of Burress since the date of acquisition, September 1, 2007. Therefore, our
operating results for the three and nine months ended September 30, 2007, include only one month of
Burress operations.
Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006
Revenues.
Three Months Ended | Total | Total | ||||||||||||||
September 30, | Dollar | Percentage | ||||||||||||||
2007 | 2006 | Change | Change | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Segment Revenues: |
||||||||||||||||
Equipment rentals |
$ | 75,598 | $ | 67,327 | $ | 8,271 | 12.3 | % | ||||||||
New equipment sales |
94,675 | 60,673 | 34,002 | 56.0 | % | |||||||||||
Used equipment sales |
44,503 | 29,668 | 14,835 | 50.0 | % | |||||||||||
Parts sales |
26,716 | 21,024 | 5,692 | 27.1 | % | |||||||||||
Services revenues |
16,877 | 14,074 | 2,803 | 19.9 | % | |||||||||||
Non-Segmented revenues |
12,218 | 11,369 | 849 | 7.5 | % | |||||||||||
Total revenues |
$ | 270,587 | $ | 204,135 | $ | 66,452 | 32.6 | % | ||||||||
Total Revenues. Our total revenues were $270.6 million for the three months ended September
30, 2007 compared to $204.1 million for the same period in 2006, an increase of $66.5 million, or
32.6%. Total revenues related to Burress in the current year period were $10.1 million. As
discussed below, revenues increased for all reportable segments.
Equipment Rental Revenues. Our revenues from equipment rentals for the three months ended
September 30, 2007 increased $8.3
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million, or 12.3%, to $75.6 million from $67.3 million for the same three month period in
2006. Rental revenues increased for all four core product lines. Revenues from aerial work
platforms increased $1.8 million, cranes increased $1.0 million, earthmoving increased $4.1
million, lift trucks increased $0.5 million and other equipment rentals increased $0.9 million. Of
the $8.3 million increase in total equipment rental revenues, Burress rental revenues comprised
approximately $1.3 million of the increase. The remaining increase is primarily the result of a
larger fleet size available for rent. We had approximately 19,465 pieces of rental fleet equipment
at September 30, 2007 and 18,994 pieces of rental equipment fleet net of Burress, compared to
18,284 pieces of rental fleet equipment at June 30, 2007. We had 18,173 pieces of rental fleet
equipment at September 30, 2006 compared to 17,597 pieces of equipment at June 30, 2006.
Rental equipment time utilization (equipment usage based on customer demand) improved to 70.7%
for the three months ended September 30, 2007, a 0.4% increase from 70.3% in the same period last
year. This increase in time utilization was negatively impacted by a 1.2% decrease in average
rental rates in the comparative periods, which negatively impacted our rental equipment dollar
utilization (quarterly rental revenues divided by the average original rental fleet equipment
costs). Rental equipment dollar utilization was approximately 41.9% in 2007 compared to 42.4% in
2006. Excluding the one month impact of Burress, rental equipment dollar utilization was
approximately 42.7% compared to 42.4% in 2006.
New Equipment Sales Revenues. Our new equipment sales for the three months ended September 30,
2007 increased $34.0 million, or 56.0%, to $94.7 million from $60.7 million for the comparable
period in 2006. Total new equipment sales revenues for the current year period related to Burress
were $3.1 million. Sales of new cranes increased $33.0 million, new earthmoving sales increased
$0.6 million, aerial work platforms increased $1.0 million and other new equipment sales increased
$0.6 million. These increases are primarily a result of an increase in demand for cranes.
Partially offsetting these increases was a $1.2 million decrease in comparative new equipment sales
of new lift trucks.
Used Equipment Sales Revenues. Our used equipment sales increased $14.8 million, or 50.0%, to
$44.5 million for the three months ended September 30, 2007, from $29.7 million for the same period
in 2006. Total used equipment sales revenues for the current year period related to Burress were
$2.9 million. The remaining increase in used equipment sales reflects a combination of increased
demand and the sale of crane equipment previously rented under rental purchase options.
Parts Sales Revenues. Our parts sales increased $5.7 million, or 27.1%, to $26.7 million for
the three months ended September 30, 2007 from approximately $21.0 million in the 2006 comparable
period and is primarily attributable to increased customer demand for equipment parts combined with
parts sales revenues related to Burress of $1.8 million.
Services Revenues. Our services revenues for the three months ended September 30, 2007
increased $2.8 million, or 19.9%, to $16.9 million from $14.1 million for the same period last
year. Total services revenues for the current year period related to Burress were $0.9 million.
The remaining increase is primarily attributable to increased customer demand for service support
resulting from our strategic focus on offering these services to our customers.
Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of
equipment support activities including transportation, hauling, parts freight and damage waiver
charges. For the three months ended September 30, 2007, our other revenues increased $0.8 million,
or 7.5%, over the same period last year. Total non-segmented other revenues for the current year
period related to Burress were $0.1 million. The remaining increase is primarily due to an increase
in the volume in these services as a result of increased customer demand and a strategic focus on
offering these services to our customers.
Gross Profit.
Three Months Ended | Total | Total | ||||||||||||||
September 30, | Dollar | Percentage | ||||||||||||||
2007 | 2006 | Change | Change | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Segment Gross Profit: |
||||||||||||||||
Equipment rentals |
$ | 39,957 | $ | 36,344 | $ | 3,613 | 9.9 | % | ||||||||
New equipment sales |
13,152 | 7,352 | 5,800 | 78.9 | % | |||||||||||
Used equipment sales |
10,773 | 7,960 | 2,813 | 35.3 | % | |||||||||||
Parts sales |
7,821 | 6,129 | 1,692 | 27.6 | % | |||||||||||
Services revenues |
10,746 | 9,029 | 1,717 | 19.0 | % | |||||||||||
Non-Segmented gross profit |
1,450 | 1,933 | (483 | ) | (25.0 | )% | ||||||||||
Total gross profit |
$ | 83,899 | $ | 68,747 | $ | 15,152 | 22.0 | % | ||||||||
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Total Gross Profit. Our total gross profit was $83.9 million for the three months ended
September 30, 2007 compared to $68.7 million for the three months ended September 30, 2006, an
increase of $15.2 million, or 22.0%. Gross profit increased primarily as a result of increased
revenues from all reporting segments combined with gross profit related to Burress of $2.3 million.
Total gross profit margin for three months ended September 30, 2007 was 31.0%, a decrease of 2.7%
from the 33.7% gross profit margin for the same three month period in 2006. The decrease in gross
profit margin is largely attributable to comparative revenue mix. The revenue mix of our business
can have a significant impact on our related gross profit margins. For example, and as indicated
below, our gross profit margin on equipment rentals is significantly higher than the gross profit
margins we realize on new equipment sales. New equipment sales represented approximately 35.0% of
our total revenues this year compared to 29.7% last year while equipment rental revenues
represented 27.9% of our total revenues this year compared to 33.0% last year. This change in
revenue mix had a negative impact on our comparative gross profit margins. Our gross profit
increase and gross profit margin decline are further described below:
Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the three months
ended September 30, 2007 increased $3.6 million, or 9.9%, to approximately $39.9 million from $36.3
million in the same period in 2006. Burress contributed $0.4 million of the increase in the current
period. The increase is primarily a result of a $8.3 million increase in rental revenue, which was
partially offset by a $0.9 million net increase in rental expenses and a $3.8 million increase in
rental equipment depreciation expense. The increase in rental expenses is the result of a $0.9
million increase in maintenance and repair costs and other costs as a result of maintaining a
larger rental fleet. As a percentage of equipment rental revenues, maintenance and repair costs
were 11.2% in 2007, down from 11.7% in the prior year. The increase in rental depreciation expense
is the result of higher depreciation expense associated with a larger rental fleet size, the impact
of higher fleet replacement costs and the incremental depreciation associated with the Burress
rental equipment fleet. Gross profit margin in 2007 was 52.9%, down 1.1% from 54.0% in the same
period last year. This decrease is largely due to the increase in rental depreciation expense.
Rental depreciation expense as a percentage of total equipment rental revenues was 32.4% and 30.7%
for the three month periods ended September 30, 2007 and 2006, respectively. Additionally, the
growth in our distribution business has resulted in an increase in our rent-to-sell business. Our
rent-to-sell business realizes a lower margin than our rent-to-rent business.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three months
ended September 30, 2007 increased $5.8 million, or 78.9%, to $13.2 million compared to $7.4
million for the same period in 2006. The increase in new equipment sales gross profit is primarily
attributable to higher new equipment sales revenues from increased demand and improved availability
for new equipment from our manufacturers. Burress new equipment sales contributed $0.4 million of
the gross profit increase for the three month period ended September 30, 2007. Gross profit margin
in 2007 was 13.9% compared to 12.1% in the same period last year. The increase in comparative
gross margin realized in the current year quarter is primarily a result of improved margins on
crane sales due to high market demand for crane equipment and the mix of cranes sold.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three months
ended September 30, 2007 increased $2.8 million, or 35.3%, to $10.8 million from the $8.0 million
for the same period in 2006 and is largely due to the increase in used equipment sales revenues as
discussed above. Burress used equipment sales contributed $0.5 million of the gross profit for the
three month period ended September 30, 2007. Gross profit margin in 2007 was 24.2%, down 2.6% from
26.8% in the same period last year. This decrease in gross profit margin is related to our
continued strategic focus on disposing older used equipment with less resale value and the mix of
used equipment sold, primarily used cranes, which carry a higher net book value (and lower gross
profit margin) due to the de-aging of our crane rental fleet since last year and the significantly
higher original equipment cost for cranes compared to our other equipment product lines. Also, the
gross margin realized on the crane equipment sold in the third quarter that was previously rented
under rental purchase option agreements is lower. Our used equipment sales from the fleet were
approximately 137.4% of net book value compared to 148.2% for the three month period ended
September 30, 2006.
Parts Sales Gross Profit. For the three months ended September 30, 2007, our parts sales
revenue gross profit increased $1.7 million, or 27.6%, to $7.8 million from $6.1 million for the
same period in 2006, of which Burress contributed $0.6 million of the increase. The remaining
increase was primarily attributable to higher parts sales. Gross profit margin in 2007 was 29.3%,
up 0.1% from 29.2% in the same period last year.
Services Revenues Gross Profit. For the three months ended September 30, 2007, our services
revenues gross profit increased $1.7 million, or 19.0%, to $10.7 million from $9.0 million for the
same period in 2006, of which Burress contributed $0.3 million of the increase. The increase is
primarily attributable to higher services revenues resulting from our strategic focus of offering
these services to our customers. Gross profit margin in 2007 was 63.7%, down 0.5% from 64.2% in
the same period last year, primarily as a result of the mix of services sold.
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Non-Segmented Other Revenues Gross Profit. For the three months ended September 30, 2007, our
non-segmented other revenues gross profit decreased $0.5 million, or (25.0)%, on a 7.5% improvement
in revenues over the three months ended September 30, 2006, of which Burress contributed $0.1
million of the gross profit. Gross profit margin was 11.9% in the current year period, down 5.1%
from 17.0% in the comparable period last year. The decline in gross profit margin is primarily
related to higher hauling costs associated with the de-aging of our rental fleet through our fleet
rotation process.
Selling, General and Administrative Expenses. SG&A expenses increased $7.5 million, or 22.0%,
to $41.6 million for the three months ended September 30, 2007 compared to $34.1 million for the
same period last year. Burress SG&A expenses for the month of
September 2007 were approximately $1.2 million. Of the remaining $6.3
million increase, approximately $3.3 million is related to higher employee salaries and wages and related employee expenses and $0.9
million is related to higher outside services, such as legal,
professional and consulting costs. The remaining increase is the
result of a net increase
of approximately $1.8 million
in other SG&A costs, which reflects the growth of the Company over the past year. The
remaining $0.3 million increase is attributable to the amortization of intangible assets acquired
in the Burress acquisition (see note 4 to the condensed consolidated financial statements for
further information on the Burress acquisition). As a percent of total revenues, SG&A expenses were
15.4% over the three months ended September 30, 2007, down 1.3% from 16.7% in the prior year,
reflecting the fixed cost nature of certain SG&A expenses combined with higher total revenues in
the current year period.
Other Income (Expense). For the three months ended September 30, 2007, our net other expenses
decreased by $40.6 million to $9.0 million compared to $49.6 million for the same period in 2006.
The $40.6 million decrease is substantially the result of a $40.8 million loss of early
extinguishment of debt associated with our Refinancing in 2006 (see note 9 to the condensed
consolidated financial information for further information on our Refinancing) compared to a $0.3
million loss on the early extinguishment of debt associated with the redemption of our senior
secured notes on July 31, 2007 (see note 8 to the condensed consolidated financial statements for
further information). Comparative interest expense decreased $0.1 million. Interest savings
associated with the Refinancing and this quarters note redemption was substantially offset by (1)
an increase in interest expense related to borrowings under our senior secured credit facility
(from an increase in the amount of average borrowings and higher interest rates) and higher
amortization costs related to the increase in related deferred financing costs associated with
amendments to the senior secured credit facility in 2007 and 2006 and (2) an increase in interest
costs on manufacturer flooring plans payable used to finance inventory purchases as a result on an
increase in the amount of such payables combined with slightly higher interest rates.
Income Taxes. Effective with the Reorganization Transactions on February 3, 2006, we are a
C-corporation for income tax purposes. Prior to the Reorganization Transactions, we were a limited
liability company that elected to be treated as a C-corporation for income tax purposes.
Income tax expense for the three months ended September 30, 2007 increased approximately $16.3
million to $13.1 million compared to a $3.2 million benefit taxes for the three months ended
September 30, 2006. The provision for income taxes is based upon the expected effective tax rate
applicable to the full year for both federal income taxes, which has a statutory income tax rate of
35%, and state income taxes. The effective income tax rate for the three months ended September
30, 2007 was 39.4% compared to 21.6% for the three months ended September 30, 2006. The increase is
a result of our increased taxable income in 2007 that resulted in higher state income taxes. Also,
our 2006 effective income tax rate was lower due to the impact of the reversal of our deferred tax
asset valuation allowance, which created a current year income tax benefit, thereby lowering our
estimated effective tax rate for 2006. Based on available evidence, both positive and negative, we
believe it is more likely than not that our deferred tax assets at September 30, 2007 are fully
realizable through future reversals of existing taxable temporary differences and future taxable
income, and are not subject to any limitations.
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Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
Revenues.
Nine Months Ended | Total | Total | ||||||||||||||
September 30, | Dollar | Percentage | ||||||||||||||
2007 | 2006 | Change | Change | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Segment Revenues: |
||||||||||||||||
Equipment rentals |
$ | 208,371 | $ | 185,333 | $ | 23,038 | 12.4 | % | ||||||||
New equipment sales |
240,910 | 173,333 | 67,577 | 39.0 | % | |||||||||||
Used equipment sales |
110,190 | 97,387 | 12,803 | 13.1 | % | |||||||||||
Parts sales |
73,803 | 61,574 | 12,229 | 19.9 | % | |||||||||||
Services revenues |
46,599 | 39,782 | 6,817 | 17.1 | % | |||||||||||
Non-Segmented revenues |
33,595 | 31,472 | 2,123 | 6.7 | % | |||||||||||
Total revenues |
$ | 713,468 | $ | 588,881 | $ | 124,587 | 21.2 | % | ||||||||
Total Revenues. Our total revenues were $713.5 million for the nine months ended September 30,
2007 compared to $588.9 million for the same period in 2006, an increase of $124.6 million, or
21.2%. Total revenues related to Eagle for the nine months ended September 30, 2007 and 2006 were
$29.7 million and $22.6 million, respectively. Total revenues related to Burress in the current
year period were $10.1 million, which only includes the month of September 2007. As discussed
below, revenues increased for all reportable segments.
Equipment Rental Revenues. Our revenues from equipment rentals for the nine months ended
September 30, 2007 increased $23.0 million, or 12.4%, to approximately $208.3 million from $185.3
million for the same nine month period in 2006. Rental revenues increased for all four core product
lines. Revenues from aerial work platforms increased $8.6 million, cranes increased $2.7 million,
earthmoving increased $6.8 million, lift trucks increased $1.9 million and other equipment rentals
increased $3.0 million. Total equipment rental revenues for the nine months ended September 30,
2007 and 2006 related to Eagle were $22.1 million and $17.8 million, respectively. Total equipment
rental revenues for the current year period related to Burress were $1.3 million. The remaining
increase is primarily the result of a larger fleet size available for rent. At September 30, 2007,
we had approximately 19,465 pieces of rental fleet equipment, or 18,994 pieces of rental equipment
fleet net of Burress, compared to 18,132 pieces of rental fleet equipment at December 31, 2006. We
had 18,173 pieces of rental fleet equipment at September 30, 2006 compared to 14,341 pieces of
rental fleet equipment at December 31, 2005.
Average rental rates decreased 0.1% for the comparative periods. Rental equipment dollar
utilization (quarterly rental revenues divided by the average original rental fleet equipment
costs) for the nine months ended September 30 was approximately 40.8% in 2007 compared to 41.4% in
2006, a decrease of 0.6%. The decrease in comparative rental equipment dollar utilization is
primarily the result of a 1.7% decrease in rental equipment time utilization (equipment usage based
on customer demand) from 69.8% last year to 68.1% this year. We believe that the decrease in
rental equipment time utilization is the result of several factors. Adverse weather conditions in
the first quarter of the current year primarily in our Gulf Coast and Intermountain regions when
compared to the prior year had a negative impact on our rental equipment time utilization. Rental
revenues in the prior year first quarter also include the impact of strong demand for rental
equipment related to the rebuilding efforts in the Gulf Coast region following hurricane Katrina.
Additionally, our continued strategic focus on disposing of our older rental fleet has
impacted rental equipment time utilization. We sometimes sell such equipment in bulk packages to
international customers. During the second quarter ended June 30, 2007, the Asian markets provided
us with an outlet for the profitable disposal of significant quantities of our older aerial work
platform fleet. However, these package deals typically require a longer sales process due to
additional documentation requirements and the time needed to prepare large quantities of machines
for sale and transportation arrangements. This lag resulted in temporary softness in our rental
equipment time utilization as our equipment is typically not on rental contract during this get
ready period. As noted in the above quarterly discussion, rental equipment time utilization
improved in the three month period ended September 30, 2007 compared to the three months ended
September 30, 2006.
Also contributing to our lower equipment time utilization in the current year period was a
softer than expected aerial work platform market in our Florida rental operations during the
current year. As a result of this market decline, we moved a portion of our Florida aerial work
platform rental fleet to other geographic areas where we have operations and demand for that
equipment is higher.
New Equipment Sales Revenues. Our new equipment sales for the nine months ended September 30,
2007 increased
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approximately $67.6 million, or 39.0%, to $240.9 million from $173.3 million for the
comparable period in 2006. Total new equipment sales revenues for the nine months ended September
30, 2007 and 2006 related to Eagle were $0.9 million and $0.4 million, respectively. Total new
equipment sales revenues in the current year period related to Burress were $3.1 million. Sales of
new cranes increased $62.6 million, new earthmoving sales increased $3.3 million, new aerial work
platforms increased $1.8 million and other new equipment sales increased $1.0 million, primarily as
a result of an increase in demand for new equipment and improved availability from most of our
manufacturers. Partially offsetting these increases was a $1.1 million decrease in comparative new
equipment sales of new lift trucks.
Used Equipment Sales Revenues. Our used equipment sales increased $12.8 million, or 13.1%, to
$110.2 million for the nine months ended September 30, 2007, from $97.4 million for the same period
in 2006. Total used equipment sales revenues for the nine months ended September 30, 2007 and 2006
related to Eagle were $2.5 million and $1.7 million, respectively. Total used equipment sales
revenues in the current year period related to Burress were $2.9 million. The remaining increase
was primarily attributable to a strong current year quarter in used crane equipment sales from
increased customer demand and the sale of crane equipment previously rented under rental purchase
option agreements.
Parts Sales Revenues. Our parts sales increased $12.2 million, or 19.9%, to $73.8 million for
the nine months ended September 30, 2007 from approximately $61.6 million in the 2006 comparable
period. Total parts sales revenues for the nine months ended September 30, 2007 and 2006 related to
Eagle were $0.7 million and $0.3 million, respectively. Total parts sales revenues in the current
year period related to Burress were $1.8 million. The remaining increase was primarily
attributable to increased customer demand for equipment parts.
Services Revenues. Our services revenues for the nine months ended September 30, 2007
increased $6.8 million, or 17.1%, to $46.6 million from $39.8 million for the same period last year
and is primarily attributable to increased customer demand for service support resulting from our
strategic focus on offering these services to our customers. Total services revenues for the nine
months ended September 30, 2007 and 2006 related to Eagle were $0.9 million and $0.2 million,
respectively. Total services revenues related to Burress in the current year period were $0.9
million, respectively.
Non-Segmented Other Revenues. Our non-segmented other revenues consisted primarily of
equipment support activities including transportation, hauling, parts freight and damage waiver
charges. For the nine months ended September 30, 2007, our other revenue increased $2.1 million, or
6.7%, over the same period last year. Total non-segmented revenues for the nine months ended
September 30, 2007 and 2006 related to Eagle were $2.6 million and $2.2 million, respectively.
Total non-segmented other revenues in the current year period related to Burress were $0.1 million.
The remaining increase is due to an increase in the volume in these services as a result of
increased customer demand and a strategic focus on offering these services to our customers.
Gross Profit.
Nine Months Ended | Total | Total | ||||||||||||||
September 30, | Dollar | Percentage | ||||||||||||||
2007 | 2006 | Change | Change | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Segment Gross Profit: |
||||||||||||||||
Equipment rentals |
$ | 106,437 | $ | 97,232 | $ | 9,205 | 9.5 | % | ||||||||
New equipment sales |
32,035 | 21,718 | 10,317 | 47.5 | % | |||||||||||
Used equipment sales |
27,586 | 26,134 | 1,452 | 5.6 | % | |||||||||||
Parts sales |
21,579 | 18,075 | 3,504 | 19.4 | % | |||||||||||
Services revenues |
29,700 | 25,439 | 4,261 | 16.7 | % | |||||||||||
Non-Segmented gross profit |
3,483 | 4,467 | (984 | ) | (22.0 | )% | ||||||||||
Total gross profit |
$ | 220,820 | $ | 193,065 | $ | 27,755 | 14.4 | % | ||||||||
Total Gross Profit. Our total gross profit was $220.8 million for the nine months ended
September 30, 2007 compared to $193.1 million for the nine months ended September 30, 2006, a $27.7
million, or 14.4%, increase. Gross profit increased primarily as a result of increased revenues in
all reporting segments and the impact of the Eagle and Burress acquisitions. Total gross profit
related to Eagle for the nine months ended September 30, 2007 and 2006 was $12.4 million and $10.8
million, respectively. Total gross profit in the current year period related to Burress was $2.3
million. Total gross profit margin for the nine months ended September 30, 2007 was 31.0%, a
decrease of 1.8% from the 32.8% gross profit margin for the same nine month period in 2006. The
decrease in gross profit margin is largely attributable to comparative revenue mix. The revenue
mix of our business can have a significant impact on our related gross profit margins. For
example, and as indicated below, our gross profit margin on equipment rentals is significantly
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higher than the gross profit margins we realize on new equipment sales. New equipment sales
represented approximately 33.8% of our total revenues this year compared to 29.4% last year.
Conversely, equipment rentals represented approximately 29.2% of our total revenues this year
compared to 31.5% last year. This change in revenue mix had a negative impact on our comparative
gross profit margins. Our gross profit increase and gross profit margin decline are further
described below:
Equipment Rentals Gross Profit. Our gross profit from equipment rentals for the nine months
ended September 30, 2007 increased $9.2 million, or 9.5%, to $106.4 million from $97.2 million in
the same period in 2006. The increase is primarily a result of a $23.0 million increase in rental
revenues, which was offset by a $2.3 million net increase in rental expenses and a $11.5 million
increase in rental equipment depreciation expense. Eagle contributed $11.6 million and $10.0
million of the equipment rental gross profit for the nine month periods ended September 30, 2007
and 2006, respectively. Burress rental operations contributed $0.4 million of the gross profit in
the current year period. The increase in rental expenses is the net result of a $1.0 million
decrease in operating lease costs and a $3.3 million increase in maintenance and repair costs and
other costs as a result of maintaining a larger rental fleet. The decrease in operating lease costs
is the result of our payoff of all rental fleet operating leases in the first quarter of 2006 with
the proceeds of our initial public offering (see note 3 to the condensed consolidated financial
statements for further information on our initial public offering). As a percentage of equipment
rental revenues, maintenance and repair costs were 12.3% in 2007, down from 12.8% in the prior
year. The increase in current year rental depreciation expense is the result of the incremental
depreciation expense incurred on the rental equipment purchased under those operating leases
combined with the higher depreciation expense associated with a larger rental fleet size, the
impact of higher fleet replacement costs and incremental depreciation associated with the Burress
rental equipment fleet. Gross profit margin in 2007 was 51.1%, down 1.4% from the 52.5% in the same
period last year. This gross profit margin decline is primarily due to higher cost of sales related
to depreciation expense combined with lower rental equipment time utilization as discussed in the
Equipment Rental Revenues section above. Rental depreciation expense as a percentage of total
equipment rental revenues was 32.7% and 30.6% for the nine month periods ended September 30, 2007
and 2006, respectively. Additionally, the growth in our distribution business has resulted in an
increase in our rent-to-sell business. Our rent-to-sell business realizes a lower margin that our
rent-to-rent business.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the nine months
ended September 30, 2007 increased $10.3 million, or 47.5%, to $32.0 million compared to $21.7
million for the same period in 2006, of which Eagle contributed approximately $0.1 million in both
of the respective periods. Burress new equipment sales contributed $0.4 million of the gross profit
in the current year period. The increase in new equipment sales gross profit is primarily
attributable to higher new equipment sales revenues from increased demand and improved availability
of new equipment. Gross profit margin in 2007 was 13.3% compared to 12.5% in the same period last
year. The increase in comparative gross margin realized in the current year quarter is primarily a
result of improved margins on crane sales due to high market demand for crane equipment and the mix
of cranes sold.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the nine months
ended September 30, 2007 increased $1.5 million, or 5.6%, to $27.6 million from the $26.1 million
for the same period in 2006, of which Eagle contributed $0.6 million and $0.5 million in the
respective periods. Burress used equipment sales contributed $0.5 million of the gross profit in
the current year period. Gross profit margin in 2007 was 25.0%, down 1.8% from 26.8% in the same
period last year. This decrease in gross profit margin is related to the sale of older used
equipment with less resale value and the mix of used equipment sold, primarily used cranes, which
carry a higher net book value (and lower gross profit margin) due to the de-aging of our crane
rental fleet since last year and the significantly higher original equipment cost for cranes
compared to our other equipment product lines. Also, the gross margin realized on the crane
equipment sold in the third quarter of the current year that was previously rented under rental
purchase option agreements is lower. Our used equipment sales from the fleet were approximately
138.8% of net book value compared to 144.3% for the nine month period ended September 30, 2006.
Parts Sales Gross Profit. For the nine months ended September 30, 2007, our parts sales
revenue gross profit increased $3.5 million, or 19.4%, to $21.6 million from $18.1 million for the
same period in 2006, of which Eagle contributed $0.3 million and $0.1 million in the respective
periods. Burress parts sales contributed $0.6 million of the gross profit in the current period.
The increase was primarily attributable to higher parts sales. Gross profit margin in 2007 was
29.2%, down 0.2% from 29.4% in the same period last year, as a result of the mix of parts sold.
Services Revenues Gross Profit. For the nine months ended September 30, 2007, our services
revenues gross profit increased $4.2 million, or 16.7%, to $29.7 million from $25.5 million for the
same period in 2006, of which Eagle contributed $0.6 million and $0.1 million in the respective
periods. Burress services revenue contributed $0.3 million of the gross profit in the current year
period. The increase was primarily attributable to higher services revenues resulting from our
strategic focus on offering these services to our customers. Gross profit margin in 2007 was 63.7%,
down 0.2% from 63.9% in the same period last year, primarily as a result of the mix of services
sold.
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Non-Segmented Other Revenues Gross Profit. For the nine months ended September 30, 2007, our
non-segmented other revenues gross profit decreased $1.0 million, or (22.0)%, on a 6.7% improvement
in revenues over the nine months ended September 30, 2006. Burress non-segmented other revenues
contributed $0.1 million of gross profit in the current year period. Gross profit margin in 2007
was 10.4%, down 3.8% from 14.2% in the same period last year. This decrease is due to a $0.8
million gross loss in the current period related to Eagles non-segmented revenue operations
combined with higher hauling costs associated with the de-aging of Eagles rental fleet through our
fleet rotation process. The Eagle gross loss is due to the integration and start-up nature of such
non-segmented revenues into Eagle operations, which were largely not part of Eagles operations in
the first nine months of 2006.
Selling, General and Administrative Expenses. SG&A expenses increased $8.6 million, or 7.9%,
to $117.1 million for the nine months ended September 30, 2007 compared to $108.5 million for the
same period last year. Included in SG&A in the prior year first quarter is an $8.0 million expense
to terminate a management services agreement in connection with our initial public offering of
common stock in February 2006 (see note 3 to the consolidated financial statements for further
information on our initial public offering). This $8.0 million decrease in comparative SG&A was
offset by an increase of $10.9 million in employee salaries and wages and related employee
expenses, a $0.7 million increase in insurance costs, and a net increase of approximately $5.0
million in other SG&A costs. These increases are primarily a reflection of the Companys growth
over the last year, including approximately $1.2 million of SG&A
expenses related to Burress for the month of September 2007. Stock-based compensation expense was $0.9 million and $0.7 million for the
nine months ended September 30, 2007 and 2006, respectively. As a percent of total revenues, SG&A
expenses for the nine months ended September 30, 2007 were 16.4%, down 2.0% from 18.4% in the prior
year. The prior year $8.0 million expense described above comprised approximately 1.4% of total
prior year SG&A as a percent of total 2006 revenues. The remaining 0.6% decrease in comparative
SG&A reflects the fixed cost nature of certain SG&A costs combined with higher revenues in the
current year compared to the prior year.
Other Income (Expense). For the nine months ended September 30, 2007, our net other expenses
decreased by $43.3 million to $26.1 million compared to $69.4 million for the same period in 2006.
The $43.3 million decrease is primarily the result of a $40.8 million loss on the early
extinguishment of debt associated with our Refinancing in 2006 (see note 9 to the condensed
consolidated financial statements for further information) compared to a $0.3 million loss on the
early extinguishment of debt associated with the redemption of our senior secured notes on July 31,
2007 (see note 8 to the condensed consolidated financial statements for further information).
Interest expense for the nine months ended September 30, 2007 was $26.6 million compared to $29.3
million in the prior year, a decrease of $2.7 million. The decrease in interest expense is due to
several factors. The Refinancing transactions, as further described above, resulted in a net
decrease in interest expense for the comparative periods of $5.1 million. Additionally,
comparative interest expense incurred on our senior secured credit facility was approximately $1.0
million lower in the current year, largely as a result of a decrease in our average borrowings
under the senior secured credit facility for the comparative nine month periods. These decreases
in interest expense were offset by a $3.3 million increase in interest expense related to our
manufacturer flooring plans payable used to finance inventory purchases, due to a combination of
higher interest rates and higher average manufacturer flooring plans payable outstanding in the
current year period.
Income Taxes. Effective with the Reorganization Transactions on February 3, 2006, we are a
C-corporation for income tax purposes. Prior to the Reorganization Transactions, we were a limited
liability company that elected to be treated as a C-corporation for income tax purposes.
Income tax expense for the nine months ended September 30, 2007 increased approximately $27.2
million to $30.5 million compared to $3.3 million for the nine months ended September 30, 2006. The
provision for income taxes is based upon the expected effective tax rate applicable to the full
year for both federal income taxes, which has a statutory income tax rate of 35%, and state income
taxes. The effective income tax rate for the nine months ended September 30, 2007 was 39.1%
compared to 21.3% for the nine months ended September 30, 2006. The increase is a result of our
increased taxable income in 2007 that resulted in higher state income taxes. Also, our 2006
effective income tax rate was lower due to the impact of the reversal of our deferred tax asset
valuation allowance, which created a current year income tax benefit, thereby lowering our
estimated effective tax rate for 2006. Based on available evidence, both positive and negative, we
believe it is more likely than not that our deferred tax assets at September 30, 2007 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. Our cash flows from operating activities for the nine
months ended September 30, 2007 resulted in net cash provided by operating activities of $76.6
million. Our reported net income of $47.6 million, which, when adjusted for non-cash expense
items, such as depreciation and amortization, deferred income taxes, provision for losses on
accounts receivable,
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loss on early extinguishment of debt, stock-based compensation expense, and net gains on the
sale of long-lived assets, provided positive cash flows of approximately $129.0 million. These cash
flows from operating activities were also positively impacted by an increase of $38.7 million in
accounts payable and a $5.8 million increase in accrued expenses and other liabilities. Partially
offsetting these positive cash flows were increases in our inventories of $53.7 million, an
increase of $32.5 million in net accounts receivable, an increase of approximately $2.0 million in
prepaid expenses and other assets, a $32.5 million increase in net accounts receivable, a $1.4
million decrease in deferred compensation payable and a net decrease of $7.3 million in
manufacturing flooring plans payable.
For the nine months ended September 30, 2006, our cash provided by operating activities was
$71.1 million. Our cash flows from operations were primarily attributable to our reported net
income of $12.2 million, which, when adjusted for non-cash expense items, such as depreciation,
taxes and amortization, and net gains on the sale of long-lived assets provided positive cash flows
of $97.8 million. These cash flows from operating activities were positively impacted by an
increase of $5.5 million in accounts payable, and a net increase of $36.3 million in manufacturer
flooring plans payable, primarily due to an increase in inventory purchases. Offsetting these
positive cash flows in operating activities were increases of $58.3 million in inventories and net
cash payments of $8.5 million in deferred compensation liabilities. Also, as discussed in note 3
to the condensed consolidated financial statements, we used a portion of the proceeds from our
initial public offering to pay approximately $8.6 million of deferred compensation liabilities.
Cash flow for investing activities. For the nine months ended September 30, 2007, cash used in
our investing activities was approximately $148.1 million. This is a net result of our acquisition
of Burress (see note 4 to the condensed consolidated financial statements for further information
on the Burress acquisition) resulting in a cash outflow of $99.8 million, combined with rental and
non-rental equipment purchases of $140.5 million, which was partially offset by proceeds from the
sales of rental and non-rental equipment totaling $92.3 million. For the nine months ended
September 30, 2006, cash used in our investing activities was $166.8 million. This is a net result
of our acquisition of Eagle requiring a cash outflow of $56.9 million (see note 4 to the condensed
consolidated financial statements for further information on the Eagle acquisition) combined with
rental and nonrental equipment purchases of $187.7 million offset by $77.9 million in cash
proceeds from the sale of rental and nonrental equipment.
Cash flow from financing activities. For the nine months ended September 30, 2007, cash
provided by our financing activities was approximately $64.1 million. Our total borrowings during
the period under our senior secured credit facility were $754.6 million and total payments under
the senior secured credit facility in the same period were $682.0 million. We also purchased $0.4
million of treasury stock and made payments under our related party obligation of $0.2 million. We
made principal payments on our notes payable of $0.4 million and payments on capital lease
obligations were $2.3 million. On July 31, 2007, we redeemed all of our remaining outstanding 11
1/8% Senior Secured Notes due 2012, having an aggregate principal amount of $4.5 million (see note
8 to the condensed consolidated financial statements for further information on our senior secured
notes redemption). We also paid $0.5 million of deferred financing costs in connection with our
Second Amended and Restated Credit Agreement (see discussion below regarding amendments to our
senior secured credit facility).
Cash provided by our financing activities for the nine months ended September 30, 2006 was
$95.2 million. We completed an initial public offering of our common stock in February 2006,
resulting in total net proceeds to us, after deducting underwriting commissions and other fees and
expenses, of approximately $207.0 million (see note 3 to the condensed consolidated financial
statements for further information related to our initial public offering). Our total borrowings
under the senior secured credit facility were $718.8 million and total payments under the senior
secured credit facility were $799.0 million. Financing costs paid in cash related to an amendment
to our senior secured credit facility totaled $0.2 million and $1.6 million in financing costs were
paid related to the amended and restated senior credit facility.
Senior Secured Credit Facility Amendments
On August 4, 2006, and concurrently with our Refinancing, we entered into an Amended and
Restated Credit Agreement, amending and restating our senior secured credit facility primarily to,
(i) increase the principal amount of availability of the credit facility from $165.0 million to
$250.0 million; (ii) reduce the applicable unused line fee margin in respect of undrawn
commitments to 0.25%,; (iii) increase the advance rate on rental fleet assets from the lesser of
100% of net book value or 80% of orderly liquidation value to the lesser of 100% of net book value
or 85% of orderly liquidation value; (iv) extend the maturity date of the facility from February
10, 2009 to August 4, 2011; and (v) add H&E Equipment Services (California), LLC as a borrower.
Furthermore, the Amended Credit Agreement changed the measurement frequency of our computed
Leverage Ratio from a monthly calculation to a quarterly calculation We paid $1.4 million to
the Lenders in connection with this transaction and incurred other transaction costs of
approximately $0.2 million.
On September 1, 2007, and in connection with our acquisition of Burress, we entered into a
Second Amended and Restated Credit
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Agreement, by and among the Company, Great Northern Equipment, Inc., GNE Investments, Inc.,
H&E Finance Corp., H&E Equipment Services (California), LLC, H&E California Holdings, Inc.,
Burress, General Electric Capital Corporation, as Agent, and the Lenders (as defined therein)
amending and restating our Restated Credit Agreement dated as of August 4, 2006 and pursuant to
which, among other things, (i) the principal amount of availability of the credit facility was
increased from $250.0 million to $320.0 million, (ii) an incremental facility, at Agents and
Companys mutual agreement, in an aggregate amount of up to $130.0 million at any time after
the closing of the amendment, subject to existing and/or new lender approval, was added, and (iii) Burress was
added as a guarantor. We paid $0.4 million to the lenders in connection with this transaction and
$0.1 million in other transaction costs.
On
November 7, 2007, we amended the Second Amended and Restated Credit
Agreement in Connection with our stock repurchase program announced
on November 8, 2007, to allow such stock repurchase program, subject
to certain restrictions.
As
of November 6, 2007, we had $229.6 million of available borrowings under our senior secured
credit facility, net of $7.3 million of outstanding letters 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 our amended and restated senior secured credit facility. In February
2006, we also completed an initial public offering of our common stock (see note 3 to the condensed
consolidated financial statements for further information on our initial public offering).
Our principal uses of cash have been to fund operating activities and working capital,
purchase of rental fleet equipment and property and equipment, fund payments due under operating
leases and manufacturer flooring plans payable, and to meet debt service requirements. In February
2006, we completed the Eagle acquisition and most recently, in September 2007, we completed the
Burress acquisition (see note 4 to the condensed consolidated financial statements for further
information on each acquisition). In the future, we may pursue additional strategic acquisitions.
In addition, we expect to use cash from working capital and/or borrowings under the senior secured
credit facility to fund the repurchases of the Companys common stock pursuant to the stock
repurchase program announced on November 8, 2007, under which the Company may purchase up to $100
million of the Companys outstanding common stock. In connection
with the stock repurchase program, we amended our senior secured
credit facility to allow such stock repurchase program, subject to
certain restrictions. The repurchase program is expected to continue
until December 31, 2008 unless extended or shortened by the Board of Directors. 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 nine months ended September 30, 2007 were $199.9 million, including $59.3 million of non-cash
transfers from new and used equipment to rental fleet inventory, to replace the rental fleet
equipment we sold during the period. Our gross property and equipment capital expenditures for the
nine months ended September 30, 2007 were $12.3 million. We anticipate that our gross rental fleet
capital expenditures for the remainder of 2007 will be used to primarily replace the rental fleet
equipment we anticipate selling during 2007. We anticipate that we will fund these rental fleet
capital expenditures with the proceeds from the sales of new, used and rental fleet equipment, cash
flow from operating activities and, if required, from borrowings under our senior secured credit
facility. 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.
Should we pursue any other strategic acquisitions during the remainder of 2007, the funding of the
cash consideration for those acquisitions will be largely dependent upon available borrowings under
our senior secured credit facility.
To service our debt, we will require a significant amount of cash. Our ability to pay interest
and principal on our indebtedness (including the senior unsecured notes and future obligations
under the senior secured credit facility) and to satisfy our other debt obligations, will depend
upon our future operating performance and the availability of borrowings under our senior secured
credit facility and/or other debt and equity financing alternatives available to us, which will be
affected by prevailing economic conditions and financial, business and other factors, some of which
are beyond our control. Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under the senior secured credit facility will
be adequate to meet our future liquidity needs for the foreseeable future.
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. We cannot assure 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 or future debt
agreements, including the indentures and the amended senior secured credit facility, 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
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accelerations of all of our debt.
Contractual and Commercial Commitments Summary
Our contractual obligations and commercial commitments principally include obligations
associated with our outstanding indebtedness and interest payments as of September 30, 2007.
Amounts for 2007 represent the period October 1, 2007 through December 31, 2007.
Payments Due by Year | ||||||||||||||||||||
Total | 2007 | 2008-2009 | 2010-2011 | Thereafter | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Long-term debt (including senior unsecured notes
payable) |
$ | 250,807 | $ | 7 | $ | 58 | $ | 58 | $ | 250,684 | ||||||||||
Interest payments on senior unsecured notes (1) |
188,438 | | 41,875 | 41,875 | 104,688 | |||||||||||||||
Senior secured credit facility |
81,514 | | | | 81,514 | |||||||||||||||
Interest payments on senior secured credit facility (2) |
23,816 | 1,562 | 12,392 | 9,862 | | |||||||||||||||
Related party obligation (including interest) (3) |
525 | 75 | 450 | | | |||||||||||||||
Capital lease obligations (4) |
2,438 | 27 | 231 | 259 | 1,921 | |||||||||||||||
Operating leases (5) |
72,529 | 2,873 | 18,930 | 12,405 | 38,321 | |||||||||||||||
Other long-term obligations (6) |
160,923 | 10,834 | 83,517 | 56,958 | 9,614 | |||||||||||||||
Total contractual cash obligations |
$ | 780,990 | $ | 15,378 | $ | 157,453 | $ | 121,417 | $ | 486,742 | ||||||||||
(1) | Future interest payments are calculated based on the assumption that all debt is outstanding until maturity. For debt instruments with variable interest rates, interest has been calculated for all periods using rates in effect on September 30, 2007. | |
(2) | Future interest payments are calculated based on the assumption that all debt is outstanding until maturity. For debt instruments with variable interest rates, interest has been calculated for all future periods using rates in effect on September 30, 2007. | |
(3) | Payments under the consulting and non-competition agreement with Mr. Thomas Engquist. | |
(4) | This includes a capital lease for which the related liabilities have been recorded at the present value of future minimum lease payments due under this lease. | |
(5) | This includes total operating lease rental payments (including interest) having initial or remaining non-cancelable lease terms longer than one year. | |
(6) | Includes $160.5 million in manufacturer flooring plans payable, which is used by the Company to finance purchases of inventory and rental equipment. |
Additionally, as of September 30, 2007, we have standby letters of credit totaling $7.3
million that expire in January 2008 and September 2008.
Seasonality
Although our business is not significantly impacted by seasonality, the demand for our rental
equipment tends to be lower in the winter months. The level of equipment rental activities are
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.
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 service activities are less
affected by changes in demand caused by seasonality.
Inflation
Although we cannot accurately anticipate the effect of inflation on our operations, we believe
that inflation has not had for the periods covered by this Quarterly Report on Form 10-Q, and is
not likely in the foreseeable future to have, a material impact on our results of operations.
Acquisitions
We periodically engage in evaluations of potential acquisitions and start-up facilities. The
success of our growth strategy depends,
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in part, on selecting strategic acquisition candidates at attractive prices and identifying
strategic start-up locations. We expect to face competition for acquisition candidates, which may
limit the number of acquisition opportunities and lead to higher acquisition costs. We may not have
the financial resources necessary to consummate any acquisitions or to successfully open any new
facilities in the future or the ability to obtain the necessary funds on satisfactory terms. For
further information regarding our risks related to acquisitions, see Item 1A of Part I of our
Annual Report on Form 10-K for the year ended December 31, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings are affected by changes in interest rates due to the fact that interest on our
amended senior secured credit facility is calculated based upon LIBOR plus 125 basis points as of
September 30, 2007. At September 30, 2007, we had $81.5 million of outstanding borrowings under
our senior secured credit facility. The interest rate in effect on those borrowings at September
30, 2007 was approximately 7.60%. A 1.0% increase in the effective interest rate on our
outstanding borrowings at September 30, 2007, would increase our interest expense by approximately
$0.8 million on an annualized basis. We do not have significant exposure to changing interest
rates as of September 30, 2007 on our fixed-rate senior unsecured notes or on our other notes
payable. 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.
Item 4. Controls and Procedures
Managements 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 we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to the Companys
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) 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 September 30, 2007, our disclosure controls and procedures are effective to provide reasonable
assurance that material information required to be included in our periodic SEC reports is
recorded, processed, summarized and reported within the time periods specified in rules and forms.
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 Controls
There have been no changes in our internal controls over financial reporting that occurred
during the three month period ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are party to various litigation matters, in most cases involving normal ordinary course and
routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and
financial liability with respect to such pending matters. However, we believe, based on our
examination of such pending matters, that our ultimate liability for such matters will not have a
material adverse effect on our business, financial condition and/or operating results.
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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, 2006, which could materially affect our
business, financial condition or future results. The risks described in our Annual Report on Form
10-K are not the only risks facing our Company, additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits.
A. Exhibits
2.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 31, 2007, by and among H&E Equipment Services, Inc., HE-JWB Acquisition, Inc., J.W. Burress, Incorporated, the Burress Shareholders (as defined therein), and Richard S. Dudley, as Burress Shareholders Representative (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on September 4, 2007). | ||
10.1 | Second Amended and Restated Credit Agreement, dated as of September 1, 2007, by and among H&E Equipment Services, Inc., Great Northern Equipment, Inc., GNE Investments, Inc., H&E Finance Corp., H&E Equipment Services (California), LLC, H&E California Holdings, Inc., J.W. Burress, Incorporated, General Electric Capital Corporation, as Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on September 4, 2007). | ||
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). |
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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 hereunto duly authorized.
H&E EQUIPMENT SERVICES, INC. |
||||
Dated: November 8, 2007 | By: | /s/ John M. Engquist | ||
John M. Engquist | ||||
President and Chief Executive
Officer (Principal Executive Officer) |
||||
Dated: November 8, 2007 | By: | /s/ Leslie S. Magee | ||
Leslie S. Magee | ||||
Chief Financial Officer and
Secretary (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
2.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of August 31, 2007, by and among H&E Equipment Services, Inc., HE-JWB Acquisition, Inc., J.W. Burress, Incorporated, the Burress Shareholders (as defined therein), and Richard S. Dudley, as Burress Shareholders Representative (as defined therein) (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on September 4, 2007). | |
10.1 | Second Amended and Restated Credit Agreement, dated as of September 1, 2007, by and among H&E Equipment Services, Inc., Great Northern Equipment, Inc., GNE Investments, Inc., H&E Finance Corp., H&E Equipment Services (California), LLC, H&E California Holdings, Inc., J.W. Burress, Incorporated, General Electric Capital Corporation, as Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K of H&E Equipment Services, Inc. (File No. 000-51759), filed on September 4, 2007). | |
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). |
48