UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-51759
H&E Equipment Services, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
81-0553291
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
7500 Pecue Lane,
70809
Baton Rouge, Louisiana
(ZIP Code)
(Address of Principal Executive Offices)
Registrant’s Telephone Number, Including Area Code: (225) 298-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
HEES
Nasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of July 20, 2023, there were 36,378,288 shares of H&E Equipment Services, Inc. common stock, $0.01 par value, outstanding.
H&E EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
June 30, 2023
Page
PART I. FINANCIAL INFORMATION
5
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022
Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022
6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
32
Item 4. Controls and Procedures
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 3. Defaults upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
35
Signatures
36
2
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by, or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” “foresee” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new marketing applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. In addition, even if our actual results are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative of results or developments in subsequent periods. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
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.
3
For a more detailed discussion of some of the foregoing risks and uncertainties, see Item 1A — “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and in Item 1A — “Risk Factors” in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, as well as other reports and registration statements filed by us with the SEC. These factors should not be construed as exhaustive and should be read with other cautionary statements in this Quarterly Report on Form 10-Q and our other public filings. All of our annual, quarterly and current reports, and any amendments thereto, filed with or furnished to the SEC are available on our Internet website under the Investor Relations link. For more information about us and the announcements we make from time to time, visit our Internet website at www.he-equipment.com.
4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
Balances at
June 30,
December 31,
2023
2022
(Unaudited)
ASSETS
Cash and cash equivalents
$
46,902
81,330
Receivables, net of allowance for doubtful accounts of $6,074 and $6,637, respectively
226,602
225,294
Inventories, net of reserves for obsolescence of $56 and $54, respectively
195,573
107,842
Prepaid expenses and other assets
34,788
21,455
Rental equipment, net of accumulated depreciation of $960,044 and $884,740, respectively
1,597,265
1,418,951
Property and equipment, net of accumulated depreciation and amortization of $186,965 and $177,017, respectively
150,788
134,637
Operating lease right-of-use assets, net of accumulated amortization of $60,623 and $51,419, respectively
169,438
164,566
Finance lease right-of-use assets, net of accumulated amortization of $186 and $105, respectively
1,684
1,545
Deferred financing costs, net of accumulated amortization of $17,042 and $16,518, respectively
5,173
758
Intangible assets, net of accumulated amortization of $22,734 and $19,369, respectively
29,266
32,631
Goodwill
102,719
102,690
Total assets
2,560,198
2,291,699
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Senior secured credit facility
127,787
—
Accounts payable
191,191
129,482
Manufacturer flooring plans payable
2,506
422
Accrued expenses payable and other liabilities
79,261
77,142
Dividends payable
224
377
Senior unsecured notes, net of unaccreted discount of $6,393 and $6,979 and deferred financing costs of $1,476 and $1,612, respectively
1,242,131
1,241,409
Operating lease liabilities
174,308
169,069
Finance lease liabilities
1,762
1,594
Deferred income taxes
291,132
271,162
Total liabilities
2,110,302
1,890,657
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; 40,695,054 and 40,567,876 shares issued at June 30, 2023 and December 31, 2022, respectively, and 36,378,288 and 36,309,321 shares outstanding at June 30, 2023 and December 31, 2022, respectively
406
405
Additional paid-in capital
256,930
251,901
Treasury stock at cost, 4,316,766 and 4,258,555 shares of common stock held at June 30, 2023 and December 31, 2022, respectively
(73,190
)
(69,964
Retained earnings
265,750
218,700
Total stockholders’ equity
449,896
401,042
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Three Months Ended
Six Months Ended
Revenues:
Equipment rentals
291,459
227,577
553,467
426,802
Used equipment sales
39,653
18,833
71,768
40,359
New equipment sales
8,857
21,486
16,675
47,522
Parts sales
12,028
16,172
24,185
32,231
Services revenues
7,133
8,889
14,319
17,023
Other
1,102
1,714
2,300
3,184
Total revenues
360,232
294,671
682,714
567,121
Cost of revenues:
Rental depreciation
85,913
62,288
167,785
122,309
Rental expense
38,757
30,815
76,624
59,574
Rental other
30,350
23,873
58,325
44,786
155,020
116,976
302,734
226,669
16,215
9,871
29,503
22,419
7,535
18,271
14,316
40,600
8,464
11,832
17,116
23,536
2,698
3,143
5,288
5,957
1,939
2,244
4,018
4,026
Total cost of revenues
191,871
162,337
372,975
323,207
Gross profit
168,361
132,334
309,739
243,914
Selling, general and administrative expenses
99,259
82,664
194,594
160,942
Gain on sales of property and equipment, net
436
996
1,103
2,382
Income from operations
69,538
50,666
116,248
85,354
Other income (expense):
Interest expense
(14,700
(13,500
(28,397
(26,947
Other, net
1,064
893
2,780
1,773
Total other expense, net
(13,636
(12,607
(25,617
(25,174
Income from operations before provision for income taxes
55,902
38,059
90,631
60,180
Provision for income taxes
14,686
10,189
23,741
16,014
Net income from continuing operations
41,216
27,870
66,890
44,166
Discontinued Operations:
Loss from discontinued operations before benefit from income taxes
(2,049
Benefit from income taxes
(525
Net loss from discontinued operations
(1,524
Net income
26,346
42,642
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
Net income from continuing operations per common share:
Basic
1.14
0.77
1.86
1.21
Diluted
0.76
1.84
Net loss from discontinued operations per common share:
(0.04
Net income per common share:
0.72
1.17
Weighted average common shares outstanding:
36,075
36,382
36,050
36,373
36,302
36,541
36,327
36,540
Dividends declared per common share outstanding
0.275
0.55
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment
16,326
13,881
Depreciation of rental equipment
Amortization of finance lease right-of-use assets
81
24
Amortization of intangible assets
3,365
1,985
Amortization of deferred financing costs
660
485
Accretion of note discount, net of premium amortization
586
Non-cash operating lease expense
9,204
6,794
Provision for losses on accounts receivable
1,846
1,360
Provision for inventory obsolescence
Change in deferred income taxes
19,970
13,811
Stock-based compensation expense
5,029
2,989
Loss on sale of discontinued operations
1,917
Gain from sales of property and equipment, net
(1,103
(2,382
Gain from sales of rental equipment, net
(42,121
(17,341
Changes in operating assets and liabilities:
Receivables
(3,184
(27,252
Inventories
(154,719
(87,557
(13,333
(6,737
61,710
41,270
2,084
583
(6,172
(5,178
Net cash provided by operating activities
134,910
104,189
Cash flows from investing activities:
Closing adjustment on sale of discontinued operations
(2,256
Purchases of property and equipment
(33,393
(24,457
Purchases of rental equipment
(308,142
(174,775
Proceeds from sales of property and equipment
1,474
2,794
Proceeds from sales of rental equipment
71,146
36,293
Net cash used in investing activities
(268,915
(162,401
Cash flows from financing activities:
Borrowings on senior secured credit facility
876,440
573,197
Payments on senior secured credit facility
(748,653
(573,197
Dividends paid
(19,993
(19,886
Purchases of treasury stock
(3,226
(343
Payments of deferred financing costs
(4,939
Payments of finance lease obligations
(52
(24
Net cash provided by (used in) financing activities
99,577
(20,253
Net decrease in cash and cash equivalents
(34,428
(78,465
Cash and cash equivalents, beginning of period
357,296
Cash and cash equivalents, end of period
278,831
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental schedule of non-cash investing and financing activities:
Non-cash asset purchases:
Assets transferred from used and new inventory to rental fleet
66,982
40,808
Purchases of property and equipment included in accrued expenses payable and other liabilities
545
(567
Operating lease assets obtained in exchange for new operating lease liabilities
14,076
13,110
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
26,481
30,426
Income taxes paid, net of refunds received
3,877
1,891
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Operations
Basis of Presentation
Our condensed consolidated financial statements include the financial position and results of operations of H&E Equipment Services, Inc. and its wholly-owned subsidiaries H&E Finance Corp., GNE Investments, Inc., Great Northern Equipment, Inc., H&E California Holding, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Midwest), Inc. and H&E Equipment Services (Mid-Atlantic), Inc., collectively referred to herein as “we”, “us”, “our” or the “Company.”
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. In the opinion of management, all adjustments (consisting of all normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, 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, 2022, from which the consolidated balance sheet amounts as of December 31, 2022 were derived. All significant intercompany accounts and transactions have been eliminated in these condensed consolidated financial statements.
On October 1, 2021, the Company sold its crane business (the “Crane Sale”) and during June 2022, closing adjustments were finalized. The results of operations of the Crane Sale are reported in discontinued operations in the Condensed Consolidated Statements of Income for the 2022 period presented. All results and information in the consolidated financial statements are presented as continuing operations and exclude the Crane Sale unless otherwise noted specifically as discontinued operations. The Condensed Consolidated Statements of Cash Flows include cash flows related to the discontinued operations and accordingly, cash flow amounts for discontinued operations are disclosed in Note 3 “Acquisitions and Dispositions”. For additional information, refer to Note 3.
The nature of our business is such that short-term obligations are typically met by cash flows generated from long-term assets. Consequently, the accompanying condensed consolidated balance sheets are presented on an unclassified basis.
Nature of Operations
Founded in 1961, H&E Equipment Services, Inc. is one of the largest rental equipment companies in the nation, serving customers at our 126 branch locations across 29 states. The Company’s fleet is comprised of aerial work platforms, earthmoving, material handling, and other general and specialty lines. H&E serves a diverse set of end markets in many high-growth geographies including branches throughout the Pacific Northwest, West Coast, Intermountain, Southwest, Gulf Coast, Southeast, Midwest and Mid-Atlantic regions.
(2) Significant Accounting Policies
We describe our significant accounting policies in Note 2 of the notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022. During the three and six months ended June 30, 2023, there were no significant changes to those accounting policies.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with an original maturity of three months or less.
Use of Estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, which requires management to use its judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. These assumptions and estimates could have a material effect on our condensed consolidated financial statements. Actual results may differ materially from those estimates. We review our estimates on an ongoing basis based on information currently available, and changes in facts and circumstances may cause us to revise these estimates.
Revenue Recognition
We recognize revenue in accordance with two different Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) standards: 1) Topic 606 and 2) Topic 842.
Under Topic 606, Revenue from Contracts with Customers, revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Our contracts with customers generally do not include multiple performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.
Under Topic 842, Leases, we account for equipment rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. Because the rental contracts can extend across multiple reporting periods, we record unbilled rental revenues and deferred rental revenues at the end of reporting periods so rental revenues earned is appropriately stated for the periods presented.
In the table below, revenues as presented in our condensed consolidated statements of income for the three and six months ended June 30, 2023 and 2022 are summarized by type and by the applicable accounting standard.
Three Months Ended June 30,
Topic 842
Topic 606
Total
Rental revenues
Owned equipment rentals
250,718
113
250,831
193,704
77
193,781
Re-rent revenue
7,892
7,462
Ancillary and other rental revenues:
Delivery and pick-up
17,674
13,899
15,062
12,435
Total ancillary rental revenues
32,736
26,334
Total equipment rental revenues
273,672
17,787
213,601
13,976
Service revenues
86,560
81,070
Six Months Ended June 30,
474,298
250
474,548
364,433
186
364,619
16,251
13,806
33,165
24,999
23,378
62,668
48,377
520,052
33,415
401,617
25,185
162,662
165,504
11
Revenues by reporting segment are presented in Note 11 of our Condensed Consolidated Financial Statements, using the revenue captions reflected in our Consolidated Statements of Income. We believe that the disaggregation of our revenues from contracts to customers as reflected above, coupled with further discussion below and the reporting segments in Note 11, depict how the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors. For further information related to our accounting for revenues pursuant to Topic 606 and Topic 842, see Significant Accounting Policies in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2022.
Receivables and contract assets and liabilities
We manage credit risk associated with our accounts receivables at the customer level. Because the same customers typically generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and our allowance for doubtful accounts address our total revenues from Topic 606 and Topic 842.
We believe concentration of credit risk with respect to our receivables is limited because our customer base is comprised of a large number of geographically diverse customers. No single customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented in this Quarterly Report on Form 10-Q. We manage credit risk through credit approvals, credit limits and other monitoring procedures.
Pursuant to Topic 842 and Topic 326 for rental and non-rental receivables, respectively, we maintain an allowance for doubtful accounts that reflects our estimate of our expected credit losses. Our allowance is estimated using a loss rate model based on delinquency. The estimated loss rate is based on our historical experience with specific customers, our understanding of our current economic circumstances, reasonable and supportable forecasts, and our own judgment as to the likelihood of ultimate payment based upon available data. Our largest exposure to doubtful accounts is our rental operations, which as discussed above is accounted for under Topic 842 and as of June 30, 2023 represents 81.1% of our total revenues and an approximate corresponding percentage of our receivables, net and associated allowance for doubtful accounts. We perform credit evaluations of customers and establish credit limits based on reviews of our customers’ current credit information and payment histories. We believe our credit risk is somewhat mitigated by our geographically diverse customer base and our credit evaluation procedures. The actual rate of future credit losses, however, may not be similar to past experience. Our estimate of doubtful accounts could change based on changing circumstances, including changes in the economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease our allowance for doubtful accounts. Bad debt expense as a percentage of total revenues for both the six months ended June 30, 2023 and 2022 were approximately 0.3%.
We do not have material contract assets, impairment losses associated therewith, or material contract liabilities associated with contracts with customers. Our contracts with customers do not generally result in material amounts billed to customers in excess of recognizable revenue. We did not recognize material revenues during the three months ended June 30, 2023 and 2022 that was included in the contract liability balance as of the beginning of such periods.
The change to the carrying amount of goodwill for the period ended June 30, 2023 is as follows (amounts in thousands):
Equipment Rentals
Used Eq. Sales
New Eq. Sales
Parts Sales
Service Revenues
Balance at December 31, 2021 (1)
48,976
8,447
5,714
63,137
Increase (2)
39,553
Balance at December 31, 2022 (1)
88,529
Increase (3)
29
Balance at June 30, 2023 (1)
88,558
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
On January 1, 2023 we adopted Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform, particularly, the risk of cessation of the
12
London Interbank Offered Rate (“LIBOR”) on financial reporting. Our exposure related to the expected cessation of LIBOR was limited to the interest expense and certain fees we incur on balances outstanding under our Senior Secured Credit Facility (the “Credit Facility”). We amended and restated our Credit Facility to transition to Secured Overnight Financing Rate (“SOFR”) as of February 2, 2023. The impact from the cessation of LIBOR as a reference rate did not have a material impact on our consolidated financial statements.
(3) Acquisitions and Dispositions
2022 Acquisition
One Source Equipment Rentals, Inc.
Effective October 1, 2022, we acquired 100% of the equity of One Source Equipment Rentals, Inc. (“OSR”), an equipment rental company with ten branches located in the Midwest. The acquisition expands our presence in the surrounding market, including initial locations in Illinois, Indiana, and Kentucky.
The aggregate cash consideration paid was approximately $136.7 million. The acquisition and related fees and expenses were funded from available cash. Customary closing adjustments were finalized during the first quarter of 2023. The following table summarizes the fair value of the assets acquired and liabilities assumed as of the acquisition date.
$'s in thousands
Cash
337
Accounts receivable (1)
11,163
Inventory
332
374
Rental equipment
102,436
Property and equipment
4,216
Operating lease right-of-use assets
2,388
Intangible assets (2)
12,300
Total identifiable assets acquired
133,546
(4,723
Tax payable
(1,674
(2,388
(27,653
Total liabilities assumed
(36,438
Net identifiable assets acquired
97,108
Goodwill (3)
39,582
Net assets acquired
136,690
Fair Value(amounts inthousands)
Life (years)
Customer relationships
10,600
Noncompetition agreements
1,700
1
Included in the total goodwill amount of $39.6 million is approximately $0.8 million of accrued purchase price consideration to be paid to the sellers pursuant to the terms of the purchase agreement among the parties named thereto. The level of goodwill that resulted from the OSR acquisition is primarily reflective of OSR’s going-concern value, the value of assembled workforce, new customer relationships expected to arise from the acquisition and expected synergies from combining operations.
Total acquisition costs were $0.8 million and included within selling, general and administrative (“SG&A”) expenses on the Consolidated Statement of Operations during the year ended December 31, 2022. Since our acquisition of OSR on October 1, 2022, significant amounts of equipment rental fleet have been moved between H&E locations and the acquired locations, and it is impractical to reasonably estimate the amount of OSR revenues and earnings since the acquisition date.
13
The assets and liabilities were recorded as of October 1, 2022 and the results of operations are included in the Company's consolidated results as of that date.
Pro forma financial information (unaudited)
We completed the OSR acquisition effective October 1, 2022. Therefore, our reported Condensed Consolidated Statement of Income for the quarter ended June 30, 2022 does not include OSR.
The pro forma information for the three and six months ended June 30, 2022 in the table below (amounts in thousands) are for informational purposes only and gives effect to the OSR acquisition as if it had been completed on January 1, 2022 (the “pro forma acquisition date”). The pro forma information is not necessarily indicative of our results of operations had the acquisition been completed on the pro forma acquisition date, nor is it necessarily indicative of our future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition, nor does it reflect additional revenue opportunities following the acquisition. The unaudited pro forma financial information includes adjustments primarily related to the incremental depreciation and amortization expense of the rental equipment and intangible assets acquired, the elimination of interest expense related to historical debt as well as other expenses that are not part of the combined entity and transaction expenses.
Pro FormaThree Months Ended June 30,
Pro FormaSix Months Ended June 30,
309,700
597,179
28,534
45,261
2022 Disposition
Komatsu Earthmoving Distributorship
On December 15, 2022, we sold our Komatsu earthmoving distribution business to Houston, Texas based Waukesha-Pearce Industries, LLC (“WPI”) for $29.2 million, subject to customary closing adjustments. The WPI sale included the rights to the distribution of Komatsu earthmoving equipment in the state of Louisiana and counties located in southwestern Arkansas, a branch location and its associated property, plant and equipment in Kenner, LA, Komatsu new equipment inventory, assets at a leased facility in Bossier City, LA and certain other equipment, parts and supplies with a net book value of approximately $14.7 million. We recorded a gain from sales of property and equipment, net of $12.9 million and a gain of $2.5 million within other income on the Consolidated Statement of Operations for the year ended December 31, 2022. The WPI sale did not qualify for discontinued operations as the divestiture does not meet the definition of a component.
2021 Disposition
Crane Sale
On July 19, 2021, the Company entered into a definitive agreement to sell its crane business to a wholly-owned subsidiary of The Manitowoc Company, Inc. for $130.0 million in cash, which was subject to adjustment based on actual amounts of net working capital and crane rental fleet net book value delivered at transaction closing. The Company executed the transaction closing on October 1, 2021 subject to customary closing conditions, including regulatory approval under the Hart-Scott-Rodino Act, resulting in proceeds of $135.9 million, which was subject to the finalization of adjustments. During June 2022, closing adjustments of $1.9 million were finalized and recorded as discontinued operations on the consolidated statement of income.
This disposition represents the Company’s strategic shift to a pure-play rental business. In accordance with ASC 360, Property, Plant, and Equipment, the Company ceased recording depreciation and amortization for Crane Sale related rental fleet, property, plant and equipment, and right of use lease assets upon qualifying as held for sale. In accordance with ASC 205-20, the Company determined that discontinued operations presentation was met during the third quarter of fiscal year 2021. As part of the divestiture, we entered into a transition services agreement with the buyer to assist them in the transition of certain functions, including, but not limited to, information technology, accounting and human resources for a period of sixty days up to six months. Aside from these customary transition services, there will be no continuing involvement with the crane business after its disposal.
The Company reported financial results of the crane business within all of our segments: equipment rentals, used equipment sales, new equipment sales, parts sales and service revenues. Additionally, the crane business was included within the equipment rental component 2, used equipment sales, new equipment sales, parts sales and service revenues goodwill reporting units.
As a result of the agreement to sell the Company’s crane business, its results are reported separately as discontinued operations in our consolidated statements of income for all periods presented. As permitted, the Company elected not to adjust the consolidated
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statements of cash flows to exclude cash flows attributable to discontinued operations. Accordingly, we disclosed the depreciation, capital expenditures and significant operating and investing non-cash items related to the Crane Sale below.
The following tables (amounts in thousands) present the Crane Sale results as reported in loss from discontinued operations within our condensed consolidated statements of income.
Merger and other
132
Loss on sales of property and equipment, net
Loss from discontinued operations
(132
(1,917
Loss before benefit from income taxes
Cash flows from discontinued operations was as follows (amounts in thousands):
Operating activities of discontinued operations:
(4) Fair Value of Financial Instruments
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The FASB fair value measurement guidance established a fair value hierarchy that prioritizes the inputs used to measure fair value. The three broad levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
Level 3 – Unobservable inputs for which little or no market data exists, therefore requiring a company to develop its own assumptions
The carrying value of financial instruments reported in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses payable and other liabilities approximate fair value due to the immediate or short-term nature or maturity of these financial instruments. The carrying amounts and fair values of our other financial instruments subject to fair value disclosures as of June 30, 2023 and December 31, 2022 are presented in the table below (amounts in thousands).
CarryingAmount
FairValue
Manufacturer flooring plans payable with interest computed at 8.5% (Level 3)
2,129
Senior Unsecured Notes due 2028 with interest computed at 3.875% (Level 2)
1,085,625
December 31, 2022
Manufacturer flooring plans payable with interest computed at 7.75% (Level 3)
392
1,070,088
15
At June 30, 2023 and December 31, 2022, the fair value of our senior unsecured notes due 2028 (the “Senior Unsecured Notes”) was based on quoted bond trading market prices for those notes. For our Level 3 unobservable inputs, we calculate a discount rate for our manufacturing floor plans payable based on the U.S. prime rate plus the applicable margin on our Credit Facility. The discount rate is disclosed in the above table.
During the three and six months ended June 30, 2023 and 2022, there were no transfers of financial assets or liabilities in or out of Level 3 of the fair value hierarchy.
(5) Stockholders’ Equity
The following table summarizes the activity in Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022, respectively (amounts in thousands, except share and per share data):
Common Stock
Additional
Shares Issued
Amount
Paid-in Capital
Treasury Stock
Retained Earnings
Stockholders’ Equity
Balances at December 31, 2022
40,567,876
Stock-based compensation
2,990
Cash dividends declared on common stock ($0.275 per share)
(9,794
Issuance of common stock, net of forfeitures
132,501
Repurchase of 58,211 shares of restricted common stock
25,674
Balances at March 31, 2023
40,700,377
254,891
234,580
416,687
2,039
(10,046
Restricted stock forfeitures
(5,323
Balances at June 30, 2023
40,695,054
Balances at December 31, 2021
40,353,299
403
244,638
(68,294
126,635
303,382
1,678
(9,851
Issuance of common stock, net of restricted stock forfeitures
28,825
Repurchase of 8,938 shares of restricted common stock
16,296
Balances at March 31, 2022
40,382,124
246,316
(68,637
133,080
311,162
1,311
(9,964
(1,816
Balances at June 30, 2022
40,380,308
247,627
149,462
328,855
(6) Stock-Based Compensation
We account for our stock-based compensation plans using the fair value recognition provisions of ASC 718, Stock Compensation. Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, net of an estimated forfeiture rate, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). The estimated forfeiture rate is based on historical experience and revised, if necessary, in subsequent periods for actual forfeitures. There were 872,198 shares available for future stock-based payment awards under our 2016 Stock-Based Incentive Compensation Plan as of June 30, 2023.
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Non-vested Stock
The following table summarizes our non-vested stock activity for the six months ended June 30, 2023:
Number ofShares
WeightedAverage GrantDate Fair Value
Non-vested stock at December 31, 2022
560,456
30.02
Granted
27,726
35.53
Vested
(134,346
21.29
Forfeited
(7,168
30.70
Non-vested stock at June 30, 2023
446,668
32.97
As of June 30, 2023, we had unrecognized compensation expense of approximately $9.3 million related to non-vested stock that we expect to be recognized over a weighted-average period of approximately 1.6 years. The following table summarizes compensation expense related to non-vested stock, which is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income for the three and six months ended June 30, 2023 and 2022 (amounts in thousands):
Compensation expense
(7) Income per Share
Income per common share for the three and six months ended June 30, 2023 and 2022 is based on the weighted average number of common shares outstanding during the period. The effects of potentially dilutive securities that are anti-dilutive are not included in the computation of dilutive income per share. We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic and diluted EPS calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period. The number of restricted common shares outstanding was less than 1% of total outstanding shares for the three and six months ended June 30, 2023 and 2022 and, consequently, was immaterial to the basic and diluted EPS calculations. Therefore, use of the two-class method had no impact on our basic and diluted EPS calculations for the periods presented. The following table sets forth the computation of basic and diluted net income per common share for the three and six months ended June 30, 2023 and 2022 (amounts in thousands, except per share amounts):
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Weighted average number of common shares outstanding:
Effect of dilutive non-vested restricted stock
227
159
277
167
Income (loss) per share:
Basic:
Continuing operations
Discontinued operations
Net income per share
Diluted:
Common shares excluded from the denominator as anti-dilutive:
Non-vested restricted stock
(8) Senior Secured Credit Facility
On February 2, 2023, we amended, extended and restated the $750.0 million Credit Facility by entering into the Sixth Amended and Restated Credit Agreement by and among the Company, Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E Equipment Services (Mid-Atlantic), LLC, H&E Equipment Services (Midwest), LLC, the other credit parties named therein, the lenders named therein, Wells Fargo Bank, National Association, as administrative agent, the other credit parties named therein, the lenders named therein, and the joint lead arrangers, joint book runners, co-syndication agents and documentation agent named therein.
The Sixth Amended and Restated Credit Agreement, among other things, (i) extended the maturity date of the credit facility to February 2, 2028 and (ii) amended the interest rate to SOFR plus a credit spread adjustment plus an applicable margin of 1.25% to 1.75%, depending on the Average Availability (as defined in the Amended and Restated Credit Agreement).
As of June 30, 2023, we were in compliance with our financial covenants under the Sixth Amended and Restated Credit Agreement. At June 30, 2023, we had $127.8 million in borrowings outstanding under the Credit Facility and could borrow up to approximately $611.6 million, net of a $10.6 million outstanding letter of credit, and remain in compliance with the debt covenants under the Credit Facility.
(9) Senior Unsecured Notes
On December 14, 2020, we completed the offering of our $1.25 billion, 3.875% Senior Unsecured Notes due 2028. For further information related to significant terms of the Senior Unsecured Notes, see Note 9 to the Company’s Consolidated Financial Statements included as Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. As of June 30, 2023, we were in compliance with the covenants governing our notes.
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The following table reconciles our Senior Unsecured Notes to our Condensed Consolidated Balance Sheets (amounts in thousands):
Balance at December 31, 2021
1,239,967
Accretion of discount through December 31, 2022
1,172
Amortization of deferred financing costs through December 31, 2022
270
Balance at December 31, 2022
Accretion of discount through June 30, 2023
Amortization of deferred financing costs through June 30, 2023
136
Balance at June 30, 2023
(10) Leases
For a discussion of Topic 842 and related disclosures, see Note 2 and Note 11 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022.
At June 30, 2023, the weighted average remaining lease term for operating leases was approximately 7.8 years and for finance leases was approximately 9.0 years. The weighted average discount rate for operating leases and finance leases was approximately 6.2% and 5.0%, respectively at June 30, 2023.
The future minimum lease payments of operating leases executed but not commenced as of June 30, 2023 are estimated to be $0.5 million, $2.3 million, $2.6 million, $2.6 million and $2.7 million for the years ended December 31, 2023, 2024, 2025, 2026 and 2027, respectively, and $19.4 million thereafter. It is expected that these leases will commence during 2023 and 2024.
(11) Segment Information
We have identified five reportable segments: equipment rentals, used equipment sales, new equipment sales, parts sales and services revenues. These segments are based upon revenue streams and how management of the Company allocates resources and assesses performance. Our non-segmented revenues and costs relate primarily to ancillary charges associated with equipment repair services, and are not generally allocated to the 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):
Segment Revenues:
Total segmented revenues
359,130
292,957
680,414
563,937
Non-segmented revenues
Segment Gross Profit:
136,439
110,601
250,733
200,133
23,438
8,962
42,265
17,940
1,322
3,215
2,359
6,922
3,564
4,340
7,069
8,695
4,435
5,746
9,031
11,066
Total segmented gross profit
169,198
132,864
311,457
244,756
Non-segmented gross loss
(837
(530
(1,718
(842
Total gross profit
19
Segment identified assets:
Equipment sales
181,970
94,918
Parts and services
13,603
12,924
Total segment identified assets
1,792,838
1,526,793
Non-segment identified assets
767,360
764,906
The Company operates primarily in the United States. Our sales to international customers for both the three months ended June 30, 2023 and 2022 were 0.1% of total revenues and for the six months ended June 30, 2023 and 2022 were 0.1% and 0.5% of total revenues, respectively. No one customer accounted for more than 10% of our revenues on an overall or segment basis for any of the periods presented.
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ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion summarizes the financial position of H&E Equipment Services, Inc. and its subsidiaries as of June 30, 2023, and its results of operations for the three and six months ended June 30, 2023, 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, 2022. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties (see discussion of “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and in Item 1A – “Risk Factors” in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023.
Overview
Background
Founded in 1961 through our predecessor companies, we have been in the equipment services business for approximately 62 years and are one of the largest rental equipment companies in the nation. H&E Equipment Services L.L.C. (“ H&E L.L.C.”) was formed in June 2002 through the business combination of Head & Engquist, a wholly-owned subsidiary of Gulf Wide Industries, L.L.C., and ICM Equipment Company L.L.C. In connection with our initial public offering in February 2006, we converted H&E L.L.C. into H&E Equipment Services, Inc., a Delaware corporation.
H&E serves a diverse set of end markets in many high-growth geographies including branches throughout the Pacific Northwest, West Coast, Intermountain, Southwest, Gulf Coast, Southeast, Midwest and Mid-Atlantic regions. As of June 30, 2023, we operated 126 branch locations across 29 states throughout the United States.
While focusing primarily on equipment rentals, we additionally engage in used equipment sales, new equipment sales, parts sales and repair and maintenance services. The Company’s construction rental fleet is among the industry’s youngest with an equipment mix comprised of aerial work platforms, earthmoving, material handling, and other general and specialty lines. We are confident our operating experience and extensive infrastructure developed throughout our history as an integrated equipment services company qualified us to successfully transition to a pure-play rental company. This experience and infrastructure continues to provide us with a competitive advantage enabling us to broaden our industry expansion. Our workforce includes an outside and inside sales force for our rental operations and equipment sales, highly skilled service technicians, transportation drivers and regional and district managers. Our management, from the corporate level down to the branch store level, has extensive industry experience. We believe this allows us to provide specialized equipment knowledge, improve the effectiveness of our sales force and strengthen our customer relationships. In addition, we operate our day-to-day business on a branch basis, which allows us to more closely service our customers, fosters management accountability at local levels and strengthens our local and regional relationships.
Effective October 1, 2021, the Company sold its crane business to a wholly-owned subsidiary of The Manitowoc Company, Inc. for $130 million in cash (“the Crane Sale”). The Crane Sale met the criteria for discontinued operations presentation and as such, the results of operations of the Crane Sale are reported in discontinued operations in the Consolidated Statements of Income for the 2022 period presented. The financial results and information below are presented on a continuing operations basis and exclude the Crane Sale, unless otherwise noted specifically as discontinued operations.
Effective October 1, 2022, the Company completed the acquisition of One Source Equipment Rentals, Inc. (“OSR”), a privately-held equipment rentals company with 10 branch locations primarily in the Midwest.
Effective December 15, 2022, the Company sold its Komatsu distributorship in Louisiana. The sale included a branch location in Kenner, LA, a branch in Shreveport, LA and accompanying new equipment inventory, parts and supplies.
Critical Accounting Policies
Item 7, included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and cash flows, and which require complex management judgment and assumptions, or involve uncertainties. There have been no significant changes to these critical accounting policies and estimates during the three and six months ended June 30, 2023. Our critical accounting policies include, among others, useful lives of rental equipment and property and equipment, acquisition accounting, goodwill, long-lived assets and income taxes.
Information regarding our other significant accounting policies is included in Note 2 to our Consolidated Financial Statements in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 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 business activities: (1) equipment rentals; (2) used equipment sales; (3) new equipment sales; (4) parts sales; and (5) repair and maintenance services. Our primary segment is equipment rentals. In addition, we also have non-segmented revenues and costs that relate to equipment support activities. These segments are based upon how we allocate resources and assess performance.
Our non-segmented revenues and costs relate primarily to ancillary charges associated with equipment maintenance and repair services, and are not generally allocated to reportable segments.
For additional information about our business segments, see Note 11 to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Revenue Sources
We generate all of our total revenues from our five business segments and our non-segmented equipment support activities. Equipment rentals account for the majority of our total revenues. For the six months ended June 30, 2023, of our total revenues, approximately 81.1% were attributable to equipment rentals, 10.5% were attributable to used equipment sales, 2.4% were attributable to new equipment sales, 3.5% were attributable to parts sales, 2.1% were attributable to our services revenues and 0.4% were attributable to our non-segmented other revenues.
The equipment that we rent, sell 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, and in the petrochemical and energy sectors. As a result, our total revenues are affected by several factors including, but not limited to, the demand for and availability of rental equipment, rental rates and other competitive factors, the demand for used and new equipment, the level of construction and industrial activities, spending levels by our customers, adverse weather conditions, supply chain disruptions and general economic conditions.
Equipment Rentals. Our rental operation primarily represents revenues from renting owned equipment of our core types of construction and industrial equipment (aerial work platforms, earthmoving equipment, material handling equipment and other general and specialty lines). We primarily account for these rental contracts as operating leases. We recognize revenue from equipment rentals in the period earned, regardless of the timing of billing to customers. A rental contract includes rates for daily, weekly or monthly use, and rental revenues are earned on a daily basis as rental contracts remain outstanding. We have a well-maintained rental fleet and we actively manage the size, quality, age and composition of our rental fleet.
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Used Equipment Sales. We generate the majority of our used equipment sales revenues by selling equipment from our rental fleet.
New Equipment Sales. Our new equipment sales operation sells new equipment across all of our core categories of equipment, primarily in our earthmoving product category.
Parts Sales. We primarily generate revenues from the sale of parts for equipment that we rent or sell.
Services. We primarily derive our services revenues from maintenance and repair services for equipment that we rent or sell and from customers' owned equipment.
Our non-segmented revenues for the periods presented in this Quarterly Report on Form 10-Q relate primarily to ancillary charges associated with equipment maintenance and repair services, and are not generally allocated to reportable segments.
Principal Costs and Expenses
Our largest expenses are rental expenses, rental depreciation, the costs to purchase new equipment, the costs associated with the used equipment we sell, and costs associated with parts sales and services, all of which are included in cost of revenues. For the six months ended June 30, 2023, our total cost of revenues was $373.0 million. Our operating expenses consist principally of selling, general and administrative (“SG&A”) expenses. For the six months ended June 30, 2023, our SG&A expenses were $194.6 million. In addition, we have interest expense related to our debt instruments. Operating expenses and all other income and expense items below the gross profit line of our consolidated statements of income are not generally allocated to our reportable segments.
We are also subject to federal and state income taxes. Future income tax examinations by state and federal agencies could result in additional income tax expense based on potential outcomes of such matters.
Cost of Revenues
Rental Depreciation. Depreciation of rental equipment represents the depreciation costs attributable to rental equipment. Estimated useful lives vary based upon type of equipment. Generally, we depreciate aerial work platforms over a ten year estimated useful life, earthmoving equipment over a five year estimated useful life with a 25% salvage value, and material handling equipment over a seven year estimated useful life. Attachments and other smaller type equipment are depreciated over a three year estimated useful life. We periodically evaluate the appropriateness of remaining depreciable lives assigned to rental equipment.
Rental Expense. Rental expense represents the costs associated with rental equipment, including, among other things, the cost of repairing and maintaining our rental equipment, property taxes on our fleet and other miscellaneous costs of owning rental equipment.
Rental Other. Rental other expenses consist primarily of equipment support activities that we provide our customers in connection with renting equipment, such as hauling services, damage waiver policies, environmental fees and other recovery fees.
Used Equipment Sales. Cost of used equipment sold primarily consists of the net book value of rental equipment for used equipment sold from our rental fleet.
New Equipment Sales. Cost of new equipment sold primarily consists of the equipment cost of the new equipment that is sold.
Parts Sales. Cost of parts sales represents costs attributable to the sale of parts used in the maintenance and repair of equipment on-rent by customers and directly to customers for their owned equipment.
Services Support. Cost of services revenues represents costs attributable to service provided for the maintenance and repair of equipment on-rent by customers and of customer-owned equipment.
Our non-segmented other expenses include costs associated with ancillary charges associated with equipment maintenance and repair services.
Selling, General and Administrative Expenses
Our SG&A expenses include sales and marketing expenses, payroll and related benefit costs, including stock compensation expense, insurance expenses, professional fees, rent and other occupancy costs, property and other taxes, administrative overhead, acquisition costs, depreciation associated with property and equipment (other than rental equipment) and amortization expense associated with intangible assets. These expenses are not generally allocated to our reportable segments.
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Interest Expense
Interest expense for the periods presented represents the interest on our outstanding debt instruments, including aggregate amounts outstanding under our revolving $750.0 million senior secured credit facility (the “Credit Facility”), our $1.25 billion, 3.875% senior unsecured notes due 2028 (the “Senior Unsecured Notes”) and finance lease obligations. Non-cash interest expense related to the amortization cost of deferred financing costs and the accretion/amortization of note discount/premium are also included in interest expense.
Principal Cash Flows
We generate cash primarily from our operating activities and, historically, we have used cash flows from operating activities and available borrowings under the Credit Facility as the primary sources of funds to purchase inventory and to fund working capital and capital expenditures, growth and expansion opportunities (see also “Liquidity and Capital Resources” below). The management of our working capital is closely tied to operating cash flows, as working capital can be impacted by, among other things, our accounts receivable activities, the level of used and new equipment inventories, which may increase or decrease in response to current and expected demand, and the size and timing of our trade accounts payable payment cycles.
Rental Fleet
A substantial portion of our overall value is in our rental fleet equipment. The net book value of our rental equipment at June 30, 2023 was $1.6 billion, or approximately 62.4% of our total assets. Our rental fleet as of June 30, 2023 consisted of 59,355 units having an original acquisition cost (which we define as the cost originally paid to manufacturers) of $2.6 billion. As of June 30, 2023, our rental fleet composition was as follows (dollars in millions):
Units
% ofTotalUnits
OriginalAcquisitionCost
% ofOriginalAcquisitionCost
AverageAge inMonths
Aerial Work Platforms
27,036
45.5
%
883.9
33.9
53.1
Earthmoving
8,324
14.0
720.8
27.6
22.5
Material Handling Equipment
9,634
16.2
755.6
29.0
40.8
14,361
24.3
249.0
9.5
35.5
59,355
100.0
2,609.3
42.5
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 as part of our fleet management strategy. The mix and age of our rental fleet, as well as our cash flows, are impacted by sales of equipment from the rental fleet, which are influenced by used equipment pricing at the retail and secondary auction market levels, the demand for our rental fleet, the availability of new equipment and the capital expenditures to acquire new rental fleet equipment. In making equipment acquisition decisions, we evaluate current economic and market conditions, competition, manufacturers’ availability, pricing and return on investment over the estimated useful life of the specific equipment, among other things. As a result of our in-house service capabilities and extensive maintenance program, our rental fleet is well-maintained.
The original acquisition cost of our gross rental fleet increased by approximately $250.9 million, or 10.6%, for the six months ended June 30, 2023. The average age of our rental fleet equipment decreased by approximately 1.1 months for the six months ended June 30, 2023. Our average rental rates for the six months ended June 30, 2023 were approximately 7.6% higher than last year (see further discussion on rental rates in “Results of Operations” below).
The rental equipment mix among our core product lines for the six months ended June 30, 2023 was largely consistent with that of the prior year comparable period as a percentage of total units available for rent and as a percentage of original acquisition cost.
Principal External Factors that Affect our Businesses
We are subject to a number of external factors that may adversely affect our businesses. These factors, and other factors, are discussed below and under the heading “Forward-Looking Statements,” and in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 and in Item 1A—“Risk Factors” in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023.
Results of Operations
The tables included in the period-to-period comparisons below provide summaries of our revenues and gross profits for our business segments and non-segmented revenues for the three and six months ended June 30, 2023 and 2022. The period-to-period comparisons of our financial results are not necessarily indicative of future results. All financial results and metrics discussed below are on a continuing operations basis.
As discussed further in Note 1 and Note 3 to our Condensed Consolidated Financial Statements, on October 1, 2021 the Company sold its crane business and during the second quarter of 2022 the Company finalized closing adjustments. The results of operations of the Crane Sale are reported in discontinued operations in the Condensed Consolidated Statements of Income for the 2022 period presented. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations and accordingly, cash flow amounts for discontinued operations are disclosed in Note 3 “Acquisitions and Dispositions”.
Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Revenues.
Dollar
Percentage
Increase (Decrease)
Increase(Decrease)
(in thousands, except percentages)
Rentals
258,723
201,243
57,480
28.6
Rentals other
6,402
Total equipment rentals
63,882
28.1
20,820
110.6
(12,629
(58.8
)%
(4,144
(25.6
(1,756
(19.8
Non-Segmented revenues
(612
(35.7
65,561
22.2
Total Revenues. Our total revenues were $360.2 million for the three months ended June 30, 2023 compared to $294.7 million for the three months ended June 30, 2022, an increase of $65.6 million, or 22.2%. Revenues for all reportable segments and non-segmented other revenues are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the three months ended June 30, 2023 increased $63.9 million, or 28.1%, to $291.5 million from $227.6 million in the three months ended June 30, 2022. The increased equipment rental revenues was primarily due to our larger fleet and increased rental rates as compared to the prior year. See Rentals and Rentals Other below for additional information.
Rentals: Rental revenues increased $57.5 million, or 28.6%, to $258.7 million for the three months ended June 30, 2023 compared to $201.2 million for the three months ended June 30, 2022. Rental revenues from material handling equipment increased $18.0 million, aerial work platform equipment increased $15.8 million and earthmoving equipment increased $14.0 million. Rental revenues
25
on other equipment increased $9.6 million. Our average rental rates for the three months ended June 30, 2023 increased 6.4% compared to the same three months last year and increased 1.2% from the three months ended March 31, 2023. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the three months ended June 30, 2023 was 40.6% compared to 40.9% in the three months ended June 30, 2022, a decrease of 0.3%. The decrease in comparative rental equipment dollar utilization was the net result of the increase in equipment rental rates and a decrease in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was 69.3% for the three months ended June 30, 2023 compared to 73.2% in the three months ended June 30, 2022, a decrease of 3.9%. The decrease in rental equipment time utilization as a percentage of original equipment cost was largely reflective of the increase in fleet size and our expansion efforts.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues for the three months ended June 30, 2023 were $32.7 million compared to $26.3 million for the three months ended June 30, 2022, an increase of approximately $6.4 million, or 24.3%.
Used Equipment Sales Revenues. Our used equipment sales increased $20.8 million, or 110.6%, to $39.7 million for the three months ended June 30, 2023, from $18.8 million for the same three months in 2022. This increase is reflective of our fleet management strategy and our decision to capitalize on the high demand for used equipment. Sales of used earthmoving equipment, used material handling equipment and used aerial work platform equipment increased $11.1 million, $4.1 million and $4.0 million, respectively.
New Equipment Sales Revenues. Our new equipment sales for the three months ended June 30, 2023 decreased $12.6 million, or 58.8%, to $8.9 million from $21.5 million for the three months ended June 30, 2022. This decrease is primarily reflective of the sale of our Komatsu Earthmoving Distributorship during the fourth quarter of 2022 as sales of new earthmoving equipment decreased $13.5 million. Offsetting this decrease, sales of new aerial work platform equipment and material handling equipment increased $0.7 million and $0.4 million, respectively.
Parts Sales Revenues. Our parts sales revenues for the three months ended June 30, 2023 decreased $4.1 million, or 25.6%, to $12.0 million from $16.2 million for the same three months last year.
Services Revenues. Our services revenues for the three months ended June 30, 2023 decreased $1.8 million, or 19.8%, to $7.1 million from $8.9 million for the same three months last year.
Non-Segmented Other Revenues. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with new and used equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three months ended June 30, 2023, our other revenues were $1.1 million, a decrease of $0.6 million from the same three months in 2022.
Gross Profit.
Segment Gross Profit (Loss):
134,053
108,140
25,913
24.0
2,386
2,461
(75
(3.0
25,838
23.4
14,476
161.5
(1,893
(58.9
(776
(17.9
(1,311
(22.8
Non-segmented revenues gross loss
(307
(57.9
36,027
27.2
Total Gross Profit. Our total gross profit was $168.4 million for the three months ended June 30, 2023 compared to $132.3 million for the same three months in 2022, an increase of $36.0 million, or 27.2%. Total gross profit margin for the three months
26
ended June 30, 2023 was approximately 46.7%, an increase of 1.8% from the 44.9% gross profit margin for the same three months in 2022. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the three months ended June 30, 2023 increased $25.8 million, or 23.4%, to $136.4 million from $110.6 million in the same three months in 2022. Total gross profit margin from equipment rentals for the three months ended June 30, 2023 was 46.8% compared to 48.6% for the same period in 2022, a decrease of approximately 1.8%. See Rentals and Rentals Other below for additional information.
Rentals: Rental revenues gross profit increased $25.9 million, or 24.0%, to $134.1 million for the three months ended June 30, 2023 compared to $108.1 million for the same three months in 2022. The increased gross profit was due to increased rental revenues of $57.5 million for the three months ended June 30, 2023 compared to the same period last year, partially offset by a $23.6 million increase in rental equipment depreciation expense and a $7.9 million increase in rental expenses. The increase in depreciation expense is primarily due to a larger fleet size in the current year as compared to the prior period. Our fleet size, based on original equipment cost, at June 30, 2023 was $601.6 million, or 30.0%, larger than our fleet at June 30, 2022. Gross profit margin on equipment rentals for the three months ended June 30, 2023 was 51.8% compared to 53.7% for the same period in 2022, a decrease of 1.9%. Depreciation expense was 33.2% of equipment rental revenues for the three months ended June 30, 2023 compared to 31.0% for the same period in 2022, an increase of approximately 2.2%, resulting primarily from our OSR acquired fleet. As a percentage of revenues, rental expenses were 15.0% for the three months ended June 30, 2023 compared to 15.3% for the same period last year, a decrease of 0.3%.
Rentals Other: Our rentals other revenues consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues gross profit for the three months ended June 30, 2023 was $2.4 million, a decrease of $0.1 million as compared to the same period in 2022. The gross margin was 7.3% for the three months ended June 30, 2023 compared to a gross margin of 9.3% for the same period last year.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the three months ended June 30, 2023 increased $14.5 million, or 161.5%, to $23.4 million from $9.0 million in the same period in 2022, as used equipment sales revenues increased $20.8 million. Gross profit margin on used equipment sales for the three months ended June 30, 2023 was approximately 59.1%, up 11.5% from 47.6% for the same three months in 2022, primarily as a result of higher gross margins across all product lines. Our used equipment sales from the rental fleet, which comprised 99.5% and 88.0% of our used equipment sales for the three months ended June 30, 2023 and 2022, respectively, were approximately 245.8% and 203.7% of net book value for the three months ended June 30, 2023 and 2022, respectively.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the three months ended June 30, 2023 decreased $1.9 million, or 58.9%, to $1.3 million compared to $3.2 million for the same three months in 2022. Gross profit margin on new equipment sales was 14.9% for the three months ended June 30, 2023, compared to 15.0% for the same period last year, a decrease of 0.1%. The decreased gross profit was primarily due to decreased earthmoving equipment sales due to the sale of our Komatsu Earthmoving Distributorship.
Parts Sales Gross Profit. Our parts sales gross profit for the three months ended June 30, 2023 was $3.6 million, a decrease of 17.9%, from gross profit of $4.3 million for the same period last year on parts sales that decreased $4.1 million. Gross profit margin for the three months ended June 30, 2023 and 2022 was 29.6% and 26.8%, respectively.
Services Revenues Gross Profit. For the three months ended June 30, 2023, our services revenues gross profit decreased $1.3 million, or 22.8%, to $4.4 million from $5.7 million for the same three months in 2022 on service revenues that decreased $1.8 million. Gross profit margin for the three months ended June 30, 2023 was 62.2%, a decrease of 2.4% from 64.6% in the same three months in 2022.
Non-Segmented Other Revenues Gross Loss. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with used and new equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the three months ended June 30, 2023, our other revenues gross loss was $0.8 million compared to a gross loss of $0.5 million, in the same period in 2022, a decrease of $0.3 million.
Selling, General and Administrative Expenses. SG&A expenses increased $16.6 million, or 20.1%, to $99.3 million for the three months ended June 30, 2023 compared to $82.7 million for the three months ended June 30, 2022. Employee salaries, wages, payroll taxes and other employee related expenses increased $9.6 million due to increased commissions, wages, headcount and health insurance. Facility expenses increased $1.8 million, professional fees increased $1.4 million and liability insurance costs increased $0.7 million. Approximately $7.4 million of comparative incremental SG&A expenses in the three months ended June 30, 2023 was attributable to branches opened or acquired since January 1, 2022 with less than three months of comparable operations in either or
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both of the three months ended June 30, 2023 and 2022. SG&A expenses as a percentage of total revenues for the three months ended June 30, 2023 and 2022 were 27.6% and 28.1%, respectively, a decrease of 0.5%.
Gain on Sales of Property & Equipment (Net). We had net gains on sales of property and equipment of $0.4 million compared to $1.0 million for the same period last year, a decrease of $0.6 million. This decrease is due to fluctuations in the normal course of business.
Other Income (Expense). For the three months ended June 30, 2023, our net other expenses increased approximately $1.0 million to $13.6 million compared to $12.6 million for the same three months in 2022. Interest expense was $14.7 million for the three months ended June 30, 2023 and $13.5 million for the three months ended June 30, 2022.
Income Taxes. We recorded income tax expense of $14.7 million for the three months ended June 30, 2023 compared to an income tax expense of $10.2 million for the three months ended June 30, 2022. Our effective income tax rate for the three months ended June 30, 2023 was 26.3% compared to 26.8% for the same period in 2022. Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2023 are fully realizable through future reversals of existing taxable temporary differences and future taxable income. As of June 30, 2023, we have a valuation allowance of $5.9 million for certain state tax credits that may not be realized.
Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
490,799
378,425
112,374
29.7
14,291
29.5
126,665
31,409
77.8
(30,847
(64.9
(8,046
(25.0
(2,704
(15.9
(884
(27.8
115,593
20.4
Total Revenues. Our total revenues were $682.7 million for the six months ended June 30, 2023 compared to $567.1 million for the six months ended June 30, 2022, an increase of $115.6 million, or 20.4%. Revenues for all reportable segments and non-segmented other revenues are further discussed below.
Equipment Rental Revenues. Our total revenues from equipment rentals for the six months ended June 30, 2023 increased $126.7 million, or 29.7%, to $553.5 million from $426.8 million in the six months ended June 30, 2022. The increase in equipment rental revenues was primarily due to our larger fleet and increased rental rates as compared to the prior year.
Rentals. Rental revenues increased $112.4 million, or 29.7%, to $490.8 million for the six months ended June 30, 2023 compared to $378.4 million for the six months ended June 30, 2022. Rental revenues from material handling equipment increased $35.8 million, aerial work platform equipment increased $31.9 million, earthmoving equipment increased $27.3 million and other equipment increased $17.3 million. Our average rental rates for the six months ended June 30, 2023 increased 7.6% compared to the same period last year. Rental equipment dollar utilization (annual rental revenues divided by the average original rental fleet equipment costs) for the six months ended June 30, 2023 was 39.6% compared to 39.3% in the six months ended June 30, 2022, an increase of 0.3%. The increase in comparative rental equipment dollar utilization was the net result of an increase in equipment rental rates and a decrease in rental equipment time utilization. Rental equipment time utilization as a percentage of original equipment cost was 68.3% for the six months ended June 30, 2023 compared to 71.8% in the six months ended June 30, 2022, a decrease of 3.5%. The decrease in rental equipment time utilization as a percentage of original equipment cost was largely reflective of the increase in fleet size and our expansion efforts.
Rentals Other. Our rentals other revenue consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental
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other revenues for the six months ended June 30, 2023 were $62.7 million compared to $48.4 million for the six months ended June 30, 2022, an increase of $14.3 million, or 29.5%. The increase was primarily related to increased rental revenues discussed above.
Used Equipment Sales Revenues. Our used equipment sales increased $31.4 million, or 77.8%, to $71.8 million for the six months ended June 30, 2023 from $40.4 million for the six months ended June 30, 2022. This increase is reflective of our fleet management strategy and our decision to capitalize on the high demand for used equipment. Sales of used earthmoving equipment increased $16.4 million, sales of used material handling equipment increased $7.3 million and sales of used aerial work platform equipment increased $6.4 million.
New Equipment Sales Revenues. Our new equipment sales for the six months ended June 30, 2023 decreased $30.8 million, or 64.9%, to $16.7 million from $47.5 million for the six months ended June 30, 2022. This decrease is primarily reflective of the sale of our Komatsu Earthmoving Distributorship during the fourth quarter of 2022 as sales of new earthmoving equipment decreased $25.3 million. Additionally, sales of new other equipment and material handling equipment decreased $2.9 million and $2.7 million, respectively.
Parts Sales Revenues. Our parts sales revenues for the six months ended June 30, 2023 decreased $8.0 million, or 25.0%, to $24.2 million from $32.2 million for the six months ended June 30, 2022.
Services Revenues. Our services revenues for the six months ended June 30, 2023 decreased approximately $2.7 million, or 15.9%, to $14.3 million from $17.0 million for the six months ended June 30, 2022.
Non-Segmented Other Revenues. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with used and new equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the six months ended June 30, 2023 and 2022, our non-segmented other revenues were $2.3 million and $3.2 million, respectively, a decrease of $0.9 million.
246,390
196,542
49,848
25.4
4,343
3,591
752
20.9
50,600
25.3
24,325
135.6
(4,563
(65.9
(1,626
(18.7
(2,035
(18.4
(876
(104.0
65,825
27.0
Total Gross Profit. Our total gross profit was $309.7 million for the six months ended June 30, 2023 compared to $243.9 million for the six months ended June 30, 2022, an increase of $65.8 million, or 27.0%. Total gross profit margin for the six months ended June 30, 2023 was 45.4%, an increase of 2.4% from the 43.0% gross profit margin for the six months ended June 30, 2022. Gross profit and gross margin for all reportable segments and non-segmented other revenues are further described below.
Equipment Rentals Gross Profit. Our total gross profit from equipment rentals for the six months ended June 30, 2023 increased $50.6 million, or 25.3%, to $250.7 million from $200.1 million in the six months ended June 30, 2022. Total gross profit margin from equipment rentals for the six months ended June 30, 2023 was 45.3% compared to 46.9% for the same period in 2022, a decrease of 1.6%.
Rentals: Rental revenues gross profit increased $49.8 million, or 25.4%, to $246.4 million for the six months ended June 30, 2023 compared to $196.5 million for the six months ended June 30, 2022. The increased gross profit was the result of increased rental revenues of $112.4 million for the six months ended June 30, 2023 compared to the same period last year, which was partially offset by a $45.5 million increase in rental depreciation and a $17.1 million increase in rental expenses. The increase in depreciation expense is primarily due to a larger fleet size in the current period as compared to the prior period. Gross profit margin on rentals for the six
months ended June 30, 2023 was 50.2% compared to 51.9% for the six months ended June 30, 2022, a decrease of 1.7%. Depreciation expense was 34.2% of rental revenues for the six months ended June 30, 2023 compared to 32.3% for the same period in 2022, an increase of 1.9%. As a percentage of revenues, rental expenses were 15.6% for the six months ended June 30, 2023 compared to 15.7% for the same period last year, a decrease of 0.1%.
Rentals Other: Our rentals other revenue consists primarily of equipment support activities that we provide to customers in connection with renting equipment, such as hauling charges, damage waiver policies, environmental and other recovery fees. Rental other revenues gross profit for the six months ended June 30, 2023 was $4.3 million compared to $3.6 million for the same period in 2022, an increase of $0.8 million. Gross profit margin was 6.9% for the six months ended June 30, 2023 compared to 7.4% for the same period last year, a decrease of 0.5%.
Used Equipment Sales Gross Profit. Our used equipment sales gross profit for the six months ended June 30, 2023 increased $24.3 million, or 135.6%, to $42.3 million from $17.9 million in the same period in 2022 on increased used equipment sales of $31.4 million. Gross profit margin on used equipment sales for the six months ended June 30, 2023 was approximately 58.9%, up 14.4% from 44.5% for the six months ended June 30, 2022, primarily as a result of higher used equipment gross margins across all product lines. Our used equipment sales from the rental fleet, which comprised 99.1% and 89.9% of our used equipment sales for the six months ended June 30, 2023 and 2022, respectively, were approximately 245.1% and 191.5% of net book value for the six months ended June 30, 2023 and 2022, respectively.
New Equipment Sales Gross Profit. Our new equipment sales gross profit for the six months ended June 30, 2023 decreased $4.6 million, or 65.9%, to $2.4 million compared to $6.9 million for the six months ended June 30, 2022 on decreased new equipment sales of $30.8 million. Gross profit margin on new equipment sales was 14.1% for the six months ended June 30, 2023, compared to 14.6% for the same period last year, a decrease of 0.5%. The decreased gross profit was primarily due to a decrease of earthmoving equipment sales due to the sale of our Komatsu Earthmoving Distributorship.
Parts Sales Gross Profit. Our parts sales gross profit for the six months ended June 30, 2023 was $7.1 million, a decrease of $1.6 million, or 18.7%, from a gross profit of $8.7 million for the same period last year on decreased parts sales of $8.0 million. Gross profit margin for the six months ended June 30, 2023 and 2022 was 29.2% and 27.0%, respectively.
Services Revenues Gross Profit. For the six months ended June 30, 2023, our services revenues gross profit decreased $2.0 million, or 18.4%, to $9.0 million from $11.1 million for the six months ended June 30, 2022 on decreased services revenues of $2.7 million. Gross profit margin for the six months ended June 30, 2023 was 63.1%, a decrease of 1.9% from 65.0% in the six months ended June 30, 2022.
Non-Segmented Other Revenues Gross Loss. Our non-segmented other revenues relate to equipment support activities that we provide to customers in connection with used and new equipment sales and parts and services revenues and are not generally allocated to reportable segments. For the six months ended June 30, 2023, our other revenues gross loss was $1.7 million compared to $0.8 million in the same period in 2022, a decrease of $0.9 million.
Selling, General and Administrative Expenses. SG&A expenses increased $33.7 million, or 20.9%, to $194.6 million for the six months ended June 30, 2023 compared to $160.9 million for the six months ended June 30, 2022. Employee salaries, wages, payroll taxes and other employee related expenses increased $19.6 million, primarily as a result of increased incentive pay combined with higher headcount and commissions. Professional fees increased $3.1 million, facility expenses increased $2.9 million, intangible amortization expense increased $1.4 million and liability insurance costs increased $1.4 million. Approximately $14.4 million of the total increase in SG&A expenses was attributable to branches opened or acquired since January 1, 2022 with less than six months of comparable operations in either or both of the six months ended June 30, 2023 and 2022. SG&A expenses as a percentage of total revenues for the six months ended June 30, 2023 and 2022 were 28.5% and 28.4%, respectively.
Gain on Sales of Property & Equipment (Net). We had net gains on sales of property and equipment of $1.1 million for the six months ended June 30, 2023 compared to $2.4 million for the same period last year, a decrease of $1.3 million. This decrease is due to fluctuations in the normal course of business.
Other Income (Expense). For the six months ended June 30, 2023, our net other expenses were $25.6 million compared to $25.2 million for the six months ended June 30, 2022. Interest expense was $28.4 million for the six months ended June 30, 2023 compared to $26.9 million for the six months ended June 30, 2022.
Income Taxes. We recorded an income tax expense of $23.7 million for the six months ended June 30, 2023 compared to an income tax expense of $16.0 million for the six months ended June 30, 2022. Our effective income tax rate for the six months ended June 30, 2023 was 26.2% compared to 26.6% for the same period in 2022. Based on available evidence, both positive and negative, we believe it is more likely than not that our federal deferred tax assets at June 30, 2023 are fully realizable through future reversals of
30
existing taxable temporary differences and future taxable income. As of June 30, 2023, we have a valuation allowance of $5.9 million for certain state tax credits that may not be realized.
Liquidity and Capital Resources
Cash Flow From Operating Activities. For the six months ended June 30, 2023, the net cash provided by our operating activities was $134.9 million. Our reported net income of $66.9 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, impairment of goodwill, provision for inventory obsolescence, stock-based compensation expense and net gains on the sale of long-lived assets, provided positive cash flows of $248.5 million. These cash flows from operating activities were also positively impacted by a $61.7 million increase in accounts payable and a $2.1 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were a $154.7 million increase in inventories, a $3.2 million increase in accounts receivables, a $13.3 million increase in prepaid expenses and other assets and a $6.2 million decrease in accrued expenses payable and other liabilities.
For the six months ended June 30, 2022, the net cash provided by our operating activities was $104.2 million. Our reported net income of $42.6 million, when adjusted for non-cash income and expense items, such as depreciation and amortization, deferred income taxes, net amortization (accretion) of note discount (premium), provision for losses on accounts receivable, impairment of goodwill, provision for inventory obsolescence, stock-based compensation expense, loss on sale of discontinued operations and net gains on the sale of long-lived assets, provided positive cash flows of $189.1 million. These cash flows from operating activities were also positively impacted by a $41.3 million increase in accounts payable and a $0.6 million increase in manufacturing flooring plans payable. Partially offsetting these positive cash flows were an $87.6 million increase in inventories, a $27.3 million increase in accounts receivables, a $6.7 million increase in prepaid expenses and other assets and a $5.2 million decrease in accrued expenses payable and other liabilities.
Cash Flow From Investing Activities. For the six months ended June 30, 2023, our net cash used in our investing activities was $268.9 million. Purchases of rental and non-rental equipment were $341.5 million and proceeds from the sale of rental and non-rental equipment were $72.6 million.
For the six months ended June 30, 2022, our net cash used in our investing activities was $162.4 million. Purchases of rental and non-rental equipment were $199.2 million and proceeds from the sale of rental and non-rental equipment were $39.1 million. A $2.3 million payment related to the sale of discontinued operations was made upon the execution of the final closing statement.
Cash Flow From Financing Activities. For the six months ended June 30, 2023, our net cash provided by our financing activities was $99.6 million. Borrowings on our senior secured credit facility amounted to $876.4 million while payments on the facility amounted to $748.7 million for the six months ended June 30, 2023. Dividends paid totaled $20.0 million, or $0.55 per common share, and treasury stock purchases totaled $3.2 million. Payments on deferred financing costs related to the amended and restated credit facility totaled $4.9 million.
For the six months ended June 30, 2022, our net cash provided by our financing activities was exceeded by our cash used in our financing activities, resulting in net cash used in our financing activities of $20.3 million. We netted borrowings and payments under our Credit Facility for the six months ended June 30, 2022. Dividends paid totaled $19.9 million, or $0.55 per common share, and treasury stock purchases totaled $0.3 million.
Senior Unsecured Notes
On December 14, 2020, we completed the offering of our Senior Unsecured Notes of $1.25 billion. No principal payments on the Senior Unsecured Notes are due until their scheduled maturity date of December 15, 2028.
The Senior Unsecured Notes were issued by H&E Equipment Services, Inc. (the parent company) and are guaranteed by GNE Investments, Inc. and its wholly-owned subsidiaries Great Northern Equipment, Inc., H&E Equipment Services (California), LLC, H&E California Holding, Inc., H&E Equipment Services (Midwest), Inc., H&E Equipment Services (Mid-Atlantic), Inc. and H&E Finance Corp (collectively, the guarantor subsidiaries). The guarantees, made on a joint and several basis, are full and unconditional (subject to subordination provisions and subject to a standard limitation which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). There are no restrictions on H&E Equipment Services, Inc.’s ability to obtain funds from the guarantor subsidiaries by dividend or loan. There are no registration rights associated with the notes or the subsidiary guarantees.
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Senior Secured Credit Facility
We and our subsidiaries are parties to a $750.0 million Credit Facility with Wells Fargo Bank, National Association as administrative agent, and the lenders named therein. At June 30, 2023, we had $127.8 million in outstanding borrowings under the Credit Facility and we could borrow up to $611.6 million, which with cash and cash equivalents on hand amounted to a liquidity position of $658.5 million. We did not have any covenant violations related to the Credit Facility. At July 20, 2023, we had $599.4 million of available borrowings under our Credit Facility, net of a $10.6 million outstanding letter of credit.
Cash Requirements Related to Operations
Our principal sources of liquidity have been from cash provided by operating activities and the sales of used, new and rental fleet equipment, proceeds from the issuance of debt, and borrowings available under the Credit Facility. Our principal uses of cash and cash equivalents historically have been to fund operating activities and working capital (including used and new equipment inventories), purchases of rental fleet equipment and property and equipment, opening new branch locations, fund payments due under facility operating leases and manufacturer flooring plans payable, and to meet debt service requirements. In the future, we may pursue additional strategic acquisitions and seek to open new branch locations.
The amount of our future capital expenditures will depend on a number of factors including general economic conditions and growth prospects. 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. Our gross rental fleet capital expenditures for the six months ended June 30, 2023 and for both continuing and discontinued operations for the six months ended June 30, 2022 were approximately $375.1 million and $215.6 million, respectively, including $67.0 million and $40.8 million, respectively, of non-cash transfers from used and new equipment to rental fleet inventory. This increase in rental fleet capital expenditures reflects our branch expansion growth strategy. Our gross property and equipment capital expenditures for the six months ended June 30, 2023 and for both continuing and discontinued operations for the six months ended June 30, 2022 were $33.4 million and $24.5 million, respectively.
To service our debt, we will require a significant amount of cash. Our ability to pay interest and principal on our indebtedness (including the Credit Facility, the Senior Unsecured Notes and our other indebtedness) will depend upon our future operating performance and the availability of borrowings under the Credit Facility and/or other debt and equity financing alternatives available to us, which will be affected by prevailing economic conditions and conditions in the global credit and capital markets, as well as financial, business and other factors, some of which are beyond our control. Based on our current level of operations and given the current state of the capital markets, we believe our cash flow from operations, available cash and cash equivalents and available borrowings under the Credit Facility will be adequate to meet our future liquidity needs for the foreseeable future. At June 30, 2023, we had cash and cash equivalents on hand of $46.9 million. At June 30, 2023, we had available borrowings of $611.6 million, net of $10.6 million of outstanding letters of credit. At July 20, 2023, we had $599.4 million of available borrowings under the Credit Facility, net of $10.6 million of outstanding letters of credit.
Quarterly Dividend
On May 12, 2023, the Company announced a quarterly dividend of $0.275 per share to stockholders of record, which was paid on June 9, 2023, totaling approximately $10.0 million. The Company intends to continue to pay regular quarterly cash dividends; however, the declaration of any subsequent dividends is discretionary and will be subject to a final determination by the Board of Directors each quarter after its review of, among other things, business and market conditions.
Contractual and Commercial Commitments
There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Our earnings may be affected by changes in interest rates since interest expense on the Credit Facility is currently calculated based upon (a) the Base Rate plus an applicable margin of 0.25% to 0.75%, depending on the Average Availability (as defined in the Credit Facility), in the case of index rate revolving loans and (b) SOFR plus a credit spread adjustment and an applicable margin of 1.25% to 1.75%, depending on the Average Availability (as defined in the Credit Facility), in the case of SOFR revolving loans.
With the exception of the above, there have been no significant changes in our exposure to market risk during the three months ended June 30, 2023. For an additional discussion of our exposure to market risk, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Management’s Quarterly Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or furnishes under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10‑Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2023, our current disclosure controls and procedures were effective.
The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings.
From time to time, we are involved in various claims and legal actions arising in the ordinary course of our business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. We are exposed to various claims relating to our business, including those for which we retain portions of the losses through the application of deductibles and self-insured retentions, or self-insurance. Losses that exceed our deductibles and self-insured retentions are insured through various commercial lines of insurance policies.
We are also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these various matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A - “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results.
As of the date of this Quarterly Report on Form 10-Q and other than the risk factors set forth below, there have been no material changes with respect to the Company’s risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Credit Facility are at variable rates of interest, based on the U.S. prime rate and the Secured Overnight Financing Rate (“SOFR”), and expose us to interest rate risk. As such, our results of operations are sensitive to movements in interest rates.
There are many economic factors outside our control that have in the past impacted, and may in the future impact, rates of interest, including publicly announced indices that underlie our interest obligations related to borrowings under the Credit Facility based on SOFR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
Factors that also impact interest rates include, among others, governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our results of operations would be adversely impacted. Such increases in interest rates could have a material adverse effect on our financial conditions and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
32.1
Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS
Inline XBRL Instance Document (filed herewith).
101.SCH
Inline XBRL Taxonomy Extension Schema Document (filed herewith).
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith).
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
H&E EQUIPMENT SERVICES, INC.
Dated: July 27, 2023
By:
/s/ Bradley W. Barber
Bradley W. Barber
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Leslie S. Magee
Leslie S. Magee
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)